Is GST Input (ITC) Available on CSR Expenses?
Understanding the implications of the GST amendment and what businesses must know.
1. Setting the Stage: CSR and GST Overview
Corporate Social Responsibility (CSR) became mandatory for certain Indian companies under Section 135 of the Companies Act, 2013, requiring them to spend at least 2% of their average net profit over the preceding three years. These expenditures—whether in education, healthcare, infrastructure, or environmental causes—are essential but come with GST implications. The crucial question: Can companies claim Input Tax Credit (ITC) for GST paid on CSR-related expenses?
2. GST Input Tax Credit: The Core Rulebook
As per Section 16 of the CGST Act, 2017, companies can claim ITC on goods or services used in the “course or furtherance of business.” Yet, Section 17(5) lists exceptions, disallowing ITC on items like gifts or personal consumption. Whether CSR qualifies hinges on whether it’s deemed a business expense or a statutory obligation.
3. The Tug of War: CSR as Business or Not?
·
Pro–ITC View:
CSR is a statutory obligation—non-compliance
risks legal penalties and business disruption. Hence, it’s in
the course of business, justifying ITC.
· Con–ITC View: CSR serves social welfare goals—not directly tied to business output. That “distance” from revenue-generating activity challenges the ITC claim.
4. Before the Amendment: What Courts Said
Favorable judicial precedents in earlier
settings include:
·
Essel Propack Ltd.
(CESTAT Mumbai, 2018): Ruled CSR is a statutory duty—not
charity—thus eligible for CENVAT credit.
·
Dwarikesh Sugar
Industries (AAR UP, 2020): Confirmed ITC availability for
CSR-related expenses as they support business continuity.
· Bambino Pasta (Telangana AAR, 2022): Allowed ITC for CSR servicesBut there were setbacks too, such as rulings that denied ITC, considering CSR as post-output and not part of business input. (SCC Online)
5. The Turning Point: Finance Bill 2023 Amendment
A major shift occurred with the Finance Bill, 2023,
which specifically amended the GST law to disallow ITC on CSR
expenses. This came via new clause (fa)
under Section 17(5):
Implications:
·
From the date of notification, GST paid on
CSR-related goods or services is blocked from ITC.
·
It reverses earlier interpretations that had
allowed ITC treating CSR as business-related.
Crucial nuance: This amendment became law but awaits official notification to take effect.
6. What Was the Situation Before Notification?
Before the notification of Section 17(5)(fa):
·
The lack of explicit blocking implied that ITC
on CSR was technically permissible,
especially given judicial backing.
·
Some practitioners argue that adding a specific
disallowance suggests it wasn’t previously disallowed—a principle of expressio
unius est exclusio alterius. (TaxTMI)
Thus, ITC was arguably available until the clause came into force.
7. Real-World Scenarios: Before vs. After Amendment
Before Clause (fa) Notification:
·
CSR Health Camp
Example: Buying medicines with GST—eligible for ITC because CSR
was mandatory and seen as business-related.
·
CSR Classroom
Construction: Claim made sense under business continuity
arguments.
After Clause (fa) Notification:
· SGST/CGST Paid on CSR Supplies: Cannot claim ITC. GST becomes a real cost of CSR, raising overall spending.
8. Accounting and Compliance Ramifications
For businesses:
· ITC Denial:
Post-amendment, GST on CSR becomes part of the cost—not recoverable.
·
Documentation:
Still essential—especially for pre-notification claims.
·
Strategic Shifts:
Businesses may rethink CSR planning due to increased expense.
·
Need for Clarity:
Watch for exact date of notification and
retrospective handling.
9. Strategic Thoughts for Businesses
1. Monitor
the official notification of Section 17(5)(fa) to understand
when ITC becomes blocked.
2. Consider
timing CSR spends—expenses before notification may allow ITC.
3. Plan
budgets cautiously—GST may add to the effective CSR burden
post-amendment.
4. Maintain
meticulous records—to justify ITC claims before the amendment
takes effect.
5. Reassess
CSR strategy if cost pressures mount—possibly shift focus to
initiatives with indirect benefits or seek exemptions elsewhere.
10. Wrapping It Up
·
Historically, ITC on CSR expenses was
allowed in many cases, backed by court rulings and the logic
that CSR was statutory.
·
The Finance Bill, 2023
introduced Section 17(5)(fa), explicitly blocking ITC
on CSR-related goods and services—no rebates allowed post-notification.
·
Before the law officially kicks in, there’s
potential to claim ITC—if supported by documentation and sound legal argument.
·
Businesses must now recalibrate CSR budgeting,
monitor litigation or further clarifications, and ensure compliance
precision going forward.