GST-ITC on CSR Expenses before Sec 17(5)(fa) of CGST Act is notified

[Vivek Jalan]

ITC on CSR expenses are such that it has made the same AAR (although with different officers) Rule against itself. Hence while the AAR-UP in the case of Dwarikesh Sugar held that ITC on CSR expenses are allowable, the same AAR in the case of SHRIRAM PISTONS AND RINGS LIMITED, held that ITC on CSR expenses is not allowed. And we are not even talking about challenging Section 17(5)(fa) but are talking of the period before notification of Sec 17(5)(fa).

Section 17(5)(fa) of CGST Act 2017 was Inserted vide The Finance Act, 2023, dated: 31.03.2023. However it will be notified only when more than 50% of the State Legislatures pass the same. It provides that Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

 (fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013);

The question is whether the ITC on CSR expenses would be allowed before the notification of Section 17(5)(fa). The Ministry of Finance and Taxpayers are divided on this and which we analyse as below in a crisp manner -

Taxpayers stand –

1. GST charged on the supplies received by the Applicant for discharging its CSR obligations is in the course or furtherance of his business and thus eligible for Input Tax Credit under Section 16(1) of the CGST Act. Any activity which is quite essential for the purpose of running a business or which has been performed with the sole object of furthering the trade or business interest of the assessee is an activity performed 'in the course or furtherance of business'

2. The term 'Business' is defined under Section 2(17) of the CGST Act As per clause (b) the term 'business' includes an activity or transaction 'in connection with or incidental or ancillary to' the primary business activity. The definition is thus an inclusive one and is wide enough to cover within its scope a broad range of activities. The word 'includes' is used to enlarge the meaning of the words or phrases occurring in the body of the statute. When it is so used, these words and phrases must be construed as comprehending not only such things as they signify according to their nature and import, but also those things which the interpretation clause declares that they shall include", has been explained by the Hon'ble Supreme Court in COMMISSIONER OF INCOME-TAX, AP VERSUS TAJ MAHAL HOTEL - 1971 (8) TMI 2 - SUPREME COURT.

3. In terms of Section 135 (5) of the Companies Act, it is mandatory for a Company (as applicable to the Applicant in the present case) to spend in every financial year a specified amount towards CSR . Incase the Company fails to spend any such amount, the unspent has to be transferred to a specified fund too in certain cases. Also there are penal clauses for failing to fulfil the obligation. Thus, non-compliance of these provisions may lead to business disruptions.

4. In IN RE: M/S. DWARIKESH SUGAR INDUSTRIES LIMITED -  2020 (1) TMI 1430 - AUTHORITY FOR ADVANCE RULING, UTTAR PRADESH, the Hon'ble AAR-UP dealt with the same issue and held that CSR expenses are 'incurred in the course of business' and thus eligible for availment of ITC in terms of Section 16 of the CGST Act. 

5. CSR is not charity as same has direct bearing on activities of the company that is largely dependent on the eco-system. CSR also augments credit rating of company as well as its standing in corporate world - Hence, sustainability of company dependent on CSR without which companies cannot operate smoothly for long period as they are dependent on various stakeholders to conduct business in economically, socially and environmentally sustainable manner. These expenses thus are an essential part of the business process as a whole.

Further, Section 17(5)(h) of the CGST Act, 2017, blocks ITC on goods disposed of by way of gift. In terms of The decision of The Hon'ble Supreme Court of India, in the case of SONIA BHATIA VERSUS STATE OF UP. - 1981 (3) TMI 250 - SUPREME COURT, gift is voluntary and occasional, but CSR expenditure is obligatory and regular in nature and hence CSR is not gift.

Department’s stand:

1.  Rule 4(1) of the said CSR Rules reads as follows:  The CSR activities shall be undertaken by the company, as per its stated CSR policy, as projects or programs or activities (either new or ongoing), excluding activities undertaken in pursuance of it's normal course of business." Further, vide Companies (CSR policy) Amendment Rules 2021, even the definition of CSR, itself, excluded activities undertaken in pursuance of normal course of business of the company. Hence CSR expenses are not in furtherance of the business and ITC of the same shall not be allowed.

Our view –

If the ITC on CSR expenditure was blocked since the very beginning then a question would be asked as to the reason of specifically blocking it by introduction of Section 17(5)(fa) of The CGST Act 2017. Infact since Section 17(5)(fa) has been introduced, it does lead to the conclusion that earlier such ITC was not blocked. The rule ‘expressio unis est exclusion alterius’ means that, the express mention of one thing is the exclusion of other. Hence, when Section 17(5)(fa) blocks ITC on CSR specifically it means that it is not blocked anywhere else. This means that before the provision is notified, ITC on CSR expenses shall not be blocked.

A corollary could be drawn from the Income Tax Act wherein CSR expenses was not allowed as a deduction only after amendment of Section 37(1) vide Finance Act 2014.