APRIL 25, 2020

By Rahul Tangri, Joint Partner & Shreyash  Agrawal, Associate , Lakshmikumaran & Sridharan

CORPORATE Social Responsibility (CSR) refers to the activities undertaken by a company for the betterment and development of the society and at present, finds its parentage in the Companies Act, 2013 wherein, under Section 135, certain companies are mandatorily required to expend (at least 2% of the average net profit of preceding 3 financial years) on certain specified activities (commonly known as CSR Activities).

Recently, the Ministry of Corporate Affairs, in order to encourage the companies to help the society to recover from the COVID-19 pandemic, has declared that all expenditure/grants given by companies towards the fight against COVID-19 pandemic would also be counted towards CSR Activities.

GST Implications:

Unlike the Income Tax Act, 1961 wherein such CSR expenditure is specifically disallowed as deduction ¹, the GST law does not provide for any such specific provision relating to CSR activities. Thus, the implications of GST on such activities have to be ascertained by interpreting the legal provisions and could be analyzed under the following heads -

1) Levy of GST on CSR activities; and

2) Admissibility of ITC to the companies on CSR expenditure.

The following modalities of undertaking CSR activities are usually employed by the Corporates:

- Cash Donation: Companies donate money to society, association, NGO, Government fund etc. with instructions about its usage and application. At times, the payments may be in milestones in cases where usage of funds spans over a large period of time.

- In-kind Expenditure: Companies do not give money, rather use the amount to provide certain goods or services to the society. For example: distribution of goods to BPL families, in flood relief, building hospitals & schools, arranging social events etc.

Analyzing the levy of GST on CSR Activities

GST is leviable on "supply" which includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business and also includes activities specified in Schedule I, which are supplied without consideration.

The definition of "goods" and "services" ² specifically excludes money. Hence, monetary donations by companies, without any quid pro quo , cannot be considered as supply of any goods or services. Hence, monetary donations would not attract GST.

It is pertinent to note that, in certain situations, where donation is given for a specific expenditure, the donor and donee agree to display the name of the company or its logo at a prominent place highlighting the fact of CSR expenditure done by the donor. Such cases are amenable to dispute by the Department, which may treat such arrangement as a sponsorship services or advertisement services provided to the company. However, in view of the inherent distinction between the sponsorship/ advertisement and CSR activities, such stand (even if taken by the department) should not be able to stand the judicial scrutiny in courts of law.

The in-kind expenditures are in the nature of making available goods/services procured from third-parties, to the donee.

In case of free distribution of goods, if the same are recorded as assets in its books of accounts and ITC is availed thereon, then the provisions of S No. 1 of Schedule I of the CGST Act would get attracted, which provides "permanent transfer or disposal of business assets where input tax credit has been availed on such assets" is deemed to be supply even though made without consideration. Hence, such free distribution of goods of the company would attract GST. Alternatively, if the company reverses or does not avail the credit on such goods, then the aforesaid entry would not apply and GST would not be payable.

In case CSR funds are expended on the services procured for the society like engaging a contractor for construction/repair of a school building, engaging an event manager for organizing a community event etc., the services rendered by the contractor or an event manager to the company (donor) would attract GST in the hands of such contractor/ event manager.

Analyzing the admissibility of ITC on CSR Activities.

The provisions of clause (h) of Section 17(5) inter alia restrict the availability of ITC on goods disposed off by way of gift or free samples. Hence, credit of goods distributed free of cost is not available. The said provision has been applied by the Hon'ble Advance Ruling Authority ³ to deny the ITC on CSR expenditure, in flood-affected areas in the state of Kerala.

However, it is pertinent to note that the said clause applies to goods only, and thus, the CSR expenditure on services procured for the benefit of the society (for e.g. engaging works contractors/ event managers etc., as discussed above) would not be covered by the said restriction.

Accordingly, ITC on such services would be available only if, "CSR activities can be said to be in the course or furtherance of business" as per Section 16 of the CGST Act.

Whether CSR Activity can be said to be in the course or furtherance of business has still to be analyzed by the courts/ authorities under the GST regime. However, under the erstwhile Central Excise regime, a view was taken by the Hon'ble Tribunal, Mumbai ⁴ that the CSR expenditure is covered within the ambit of the phrase "activities relating to business". The Hon'ble Tribunal observed that sustainability of a company is dependent on CSR without which companies cannot operate smoothly for a long period as they are dependent on various stakeholders to conduct business in an economically, socially and environmentally sustainable manner i.e. transparent and ethical.

The above principle should hold good even under the GST law and the expenditure on services procured for undertaking the mandatory CSR expenditure should be considered to be in the course or furtherance to business. Further, since there is no express exclusion of such services under Section 17(5) of the CGST Act (unlike clause (h) thereof, for goods), ITC on such services should be available. However, the view may not be acceptable to the department and this issue may also be eventually settled in courts.

Authors' view:

- The CSR activities are the benevolent acts statutorily mandated on the Corporates. The GST implications on CSR activities cannot be generalized and depend on the modalities of the transactions undertaken. The government should be reasonable in the tax treatment on such activities.

- Particularly in the current scenario where the entire world and, in particular, India is battling COVID-19, the contributions from Corporates towards their CSR assumes greater significance and importance. At this stage, the need of the hour is far greater contributions from the Corporates in this battle. Taxing such contributions or leaving it open to the tax authorities to come up their own interpretation may not be the appropriate way forward.

- The government should come up with a Circular clearing the air surrounding the levy of GST as well as admissibility of ITC on such expenditures. ITC on goods distributed free under CSR activities should be specifically allowed and such transaction should also be excluded from the purview of S. No. 1 of Schedule I of CGST Act.

- The Corporates should devote time and resources to structure their CSR activities in a tax effective manner, to minimize the overall output and input tax costs on such activities as well as the disputes with the department.

[The views expressed are strictly personal.]

¹ Refer Explanation 2 to Section 37(1) of the Income Tax Act, 1961

²Refer Sections 2(52) and 2(102) of the CGST Act, respectively

³Polycab Wires Pvt. Ltd. - 2019-TIOL-107-AAR-GST

⁴Essel Propack Ltd. Vs. Comm. Of CGST - 2018-TIOL-3257-CESTAT-MUM