The eligibility of claiming Input Tax Credit (ITC) for Corporate Social Responsibility (CSR) expenditure under the Goods and Services Tax (GST) regime has been a topic of ongoing debate. This debate holds significant importance due to the mandatory nature of CSR activities as outlined in Section 135 of the Companies Act.
1. The issue of claiming Input Tax Credit (ITC) for Corporate Social Responsibility (CSR) expenses has been a long-standing matter, dating back to the previous taxation system.
- CSR activities pertain to actions undertaken by a company in fulfilment of its statutory obligations as stipulated in Section 135 of the Companies Act.
- Under Section 135(5) of the Companies Act, it is obligatory for a company to allocate a specified amount towards CSR in each financial year. Failure to comply with this obligation can result in penalties.
2. Two distinct viewpoints have emerged regarding the eligibility of these expenses for ITC – one in favor of considering them as eligible ITC and the other categorizing them as ineligible.
- Taxpayers have sought clarification on this matter through advance rulings under the GST regime to establish a definitive tax stance. However, Advance Ruling Authorities (AAR) have expressed divergent opinions in different cases.
- AAR-UP ruled that ITC on CSR expenses is permissible, whereas the same authority, in the case of SHRIRAM PISTONS AND RINGS LIMITED, held ITC on CSR expenses to be ineligible.
- The Kerala Advance Ruling Authority (AAR) previously disallowed ITC on CSR activities, treating them as gifts.
- The Gujarat AAR held that CSR activities, being in accordance with statutory obligations and not part of regular business operations, render the respective ITC ineligible.
3. An amendment has been introduced via the Finance Act 2023, inserting a new clause (fa) after Section 17(5)(f) of the CGST Act.
- Section 17(5) of the GST Act outlines a list of items for which Input Tax Credit (ITC) is blocked or considered ineligible.
- According to Section 17(5)(fa) of the CGST Act, ITC is blocked for goods or services, or both, received by a taxable person when used or intended for use in activities related to Corporate Social Responsibility, as referred to in Section 135 of the Companies Act, 2013.
4. The effective date of this amendment is October 1, 2023, as notified by the CBDT through notification No. 28/2023 dated July 31, 2023.
5. The query arises as to whether ITC on CSR expenses would be permissible prior to the date of notification that introduced clause (fa), and whether ITC on CSR is explicitly blocked under Section 17(5)(fa) of the CGST Act.
6. Expert opinion suggests that the insertion of clause (fa) in Section 17(5) of the CGST Act is specifically intended to block ITC for CSR expenditure. This implies that prior to the notification date, i.e., October 1, 2023, such ITC was not blocked, and Input Tax Credit could be claimed for CSR expenditure incurred.
7. Several unanswered issues persist due to the prospective nature of the amendment:
- Whether companies can claim credit for procurements made before the new provision is notified.
- Whether ITC on CSR that was voluntarily reversed by taxpayers or under department instruction can be reclaimed.
- Whether taxpayers who did not claim ITC for CSR activities can now do so, taking into account the timelines outlined in Section 16.
- Let’s Conclude : It is imperative that the government provides clarity on the eligibility of past-period claims and resolves these outstanding issues definitively. A comprehensive circular addressing all aspects of this matter is eagerly awaited to mitigate unnecessary litigation.
Author Disclaimer: This article is for educational purposes only. For practical issues, consult a practicing Chartered Accountant or Tax Consultant in India.
