No input tax credit for CSR activities, says Gujarat AAR

Shishir Sinha New Delhi | Updated on September 15, 2021

However, there are contrary rulings by other AARs

Amidst increasing spends for Covid relief, input tax credit (ITC) on goods or services for corporate social responsibility (CSR) has got tangled in contrary rulings by Authority for Advance Rulings (AAR).

Recently, the Gujarat Authority for Advance Ruling (GAAR) said, “CSR activities, as per Companies (CSR Policy) Rules, 2014 are those activities excluded from normal course of business of the applicant and therefore, not eligible for ITC.”

The applicant, Adama India, sought rulings on two questions — First, whether the inputs and input services procured by the applicant, in order to undertake mandatory CSR activities as required under the Companies Act, 2013, qualify as being in the course and furtherance of business, and therefore, be counted eligible for ITC.

Second question is whether inputs and input services for providing notebooks and course materials for schools, construction of cement bench at public places, public urinals, auditoriums etc. at educational institutions, procurement and installation of oxygen generating plant at hospitals, water filter plants, solar water heaters, masks, sanitisers, oxygen concentrator and chairs and tables in schools and hospitals be eligible for ITC.

Setback for corporates

Harpreet Singh, Partner, Indirect taxes at KPMG in India said that this ruling may come as a setback for lot of corporates who were keen on reducing their overall tax burden by claiming input GST credit on Covid initiatives as part of their CSR. “Lot of countries have provided for VAT exemptions/input tax benefits on Covid-related expenses (as part of CSR) in order to encourage participation by corporates. Evaluating some of these best practices, may augur well for our country as well,” he said.

According to experts, the moot question which arises here is whether the CSR expenditure incurred by a company, can be construed as in the course or furtherance of business for being eligible to avail credit or will be barred in terms of specific provision (Section 17(5) - blocked credits on gifts/personal consumption) under the GST law.

GAAR’s ruling on August 11 is contrary to the ruling by the Uttar Pradesh AAR which said, in the matter of Dwarikesh Sugar Industries, that ITC shall be available on expenses incurred to comply with the requirements of CSR under Companies Act, 2013. However, GAAR ruling is in line with the Kerala AAR’s ruling in the matter of Polycab Wires which held that ITC shall not be available on free distribution of electrical items like, switches, fan, cables etc. to flood affected people under CSR expenditure.

Companies Act says every company having a net worth of ₹500 crore or more, or turnover of ₹1,000 crore or more or a net profit of ₹5 crore or more will mandatorily incur corporate social responsibility (CSR) expenditure in every financial year, to the extent of minimum 2 per cent of the average net-profits of the company made during the three immediately preceding financial years, in pursuance of CSR policy.

Money can be spent on education, rural development, contribution to PM Cares Fund, events related to disaster management including relief activities, beside others. Spending of CSR funds on creating health infra, manufacturing and supplying oxygen etc. are also eligible CSR activities.

Published on September 15, 2021

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