CORPORATE SOCIAL RESPONSIBILITY: A CURSE OR CREDIT

[YOGESH HARJAI]

COVID-19 has created a much of an unprecedented situation not only in India but across the globe. Each and every nation is going through the impact of COVID-19 pandemic (emergency situations). Indian Government has been coming-up with its best efforts periodically to fight COVID-19 and to overcome the destructions caused by it.

Not only the governmental agencies but various business houses and individuals have also come forward to extend aid in their own ways i.e. by providing free food, medicine and other daily supplies to various classes of people i.e. daily wage workers and poor people deprived of daily essentials during the lockdown phase.

Apart from above expenses, there has been an overall increase in the expenditure towards office sanitisation, employee’s health care etc. Such expenses have gradually increased over the past few months. Moreover, most of the companies are bearing special consideration for their employees who had travelled from outside India.

Now, the question arises whether input tax credit is admissible on account of the expenses incurred in the event facilitating the above during the last few months. Expenses on COVID-19 can be broadly categorised as:

1. Expenses towards Office sanitisation and making special arrangements to ensure proper hygiene to avoid spread of COVID-19

2. Expenses towards health care of employees

3. Expenses towards distribution of Goods (medicines, PPE Kits, masks etc) free of cost during COVID-19

Before proceeding further, we would like to draw attention towards Section 16(1) of the CGST Act,

16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person

From the above it is clear that every registered person is entitled to take input tax credit on supplies of goods or services or both used in the course or furtherance of business, other than the ones restricted by the virtue of Section 17(5) of the CGST Act. Therefore, it can be held that input tax credit is not available in respect of supplies prescribed under section 17(5), notwithstanding anything contained in Section 16(1) of the CGST Act.

One of the major challenges under GST regime is unblocking (admissibility) of credits blocked by virtue of section 17(5). An attempt has been made under this article to understand as to what blockages have been created under law that restrict the credit allowance in above mentioned cases, and how to overcome those restrictions duly abiding by the law.

1. Expenses towards Office sanitisation, etc.

The words ‘in course or furtherance of business’ appears to be very wide in scope and assumes a lot of importance. Walking under the shadow of these words, lot of credit, which was not available in erstwhile regime, become eligible under GST regime.

Section 16(1) read with section 17(5) states that, unless and until the input tax credit is blocked by virtue section 17(5), the registered person will be eligible to claim such credit where it has been used “in course or furtherance of business”

Therefore, ITC on any expense incurred towards maintenance or up keep of office premises or towards its hygiene, whether or not during COVID-19, was always an eligible ITC and will continue to remain so in the absence of any specific restrictions being provided in section 17(5) of the Act.

2. Expenses towards health care of employees

Expenses towards health care of employees during COVID-19 can be further classified as under:

1. Expenses towards Medical Insurance

2. Expenses towards providing safety kits like masks, sanitizers etc

3. Expenses towards medical treatment

Restrictions with respect to ITC on health services are contained in section 17(5)(b)(i) of the act as under:

“food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance”

However, proviso to section 17(5)(b)(i) provides that ITC on for above services will be allowed where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

In this regard reliance is placed on MHA’s order dated 15.04.2020 and 01.05.2020, passed in exercise of the powers, conferred under section 10(2)(I) of the Disaster Management Act, 2005. Herein, MHA had issued certain guidelines/national directives/SOP’s being a mandate to be followed at all work places, offices, factories or any other establishments. Further, these directives have been issued with specific penal provisions wherein any violator would be prosecuted under Disaster Management Act.

These SOP’s/Directives issued by MHA clearly enumerated that following facilities must be ensured to employees:

1. Adequate arrangements for temperature screenings

2. Provision of sufficient quantity of hand wash and sanitizers

3. Medical Insurance of workers made mandatory

4. Adequate stock of face covers

5. Training Programmes on good hygiene practice

In addition to above, MHA also issued various other directives to ensure healthy working environment for the employees in order to secure employees health. Such directives were made mandatory under Disaster Management Act, 2005.

Therefore, once the said expenses have been incurred by the authority of law the ITC on account of such expenses i.e. health insurance of employees, safety kits, sanitizers etc or conducting any training sessions to maintain their health during COVID-19 or preventive health services will be rightly admissible as all these expenses are incurred as per MHA’s order for the time being in force under Disaster Management Act, 2005.

As regard, the expenses on medical treatment/tests is concerned, the same has been made exempt by virtue of notification 12/2017 Central Tax (Rate) entry no. 74.

3. Expenses towards distribution of Goods (medicines, PPE Kits, masks etc) free of cost during COVID-19

Ministry of Corporate Affairs vide general circular no. 10/2020 dated 23.03.2020 clarified that spending of CSR (Corporate Social Responsibility) funds for COVID-19 is admissible under CSR Activity.

One of the well disputed issue under GST is, whether GST paid on expenses incurred towards CSR activity is eligibility as ITC or not?

CSR is more of a statutory obligation as per the provisions laid down under section 135 of Companies Act, 2013, every company subject to a specified threshold has to spend at-least 2% of its net profit for CSR.

Now, coming towards eligibility of the GST paid in the event of CSR expenses to be admissible ITC to any company, two broad requirements are to be firmly complied with, among others. Firstly, such expense should be in course or furtherance of business, secondly, it must not be otherwise blocked or restricted u/s 17(5) of the Act.

As stated above, CSR is mandate under Companies Act, 2013 and accordingly, non-compliance with such requirements can land the company in trouble. One can always argue that these expenses are always incurred in the course or furtherance of business and that too via statutory force of law.

Such goods distributed free of cost to comply with CSR requirement under Companies Act 2013 surely qualifies the first pre-requisite to be eligible as ITC.

Now coming to the provisions of section 17(5) of the Act, clause (h) puts restriction on availment of ITC on goods distributed free of cost. Clause (h) is reproduced as under:

“(5) 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:-

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;”

In case of M/s. Polycab Wires Pvt. Ltd. [ 2019 (4) TMI 111 - AUTHORITY FOR ADVANCE RULINGS, KERALA], the AAR held that distribution of goods under CSR expenses without collecting money, for these transactions ITC will not be available by the virtue of section 17(5)(h) of CGST Act, 2017.

However, after careful analysis of section 17(5)(h), we want to highlight following points in favour claim of ITC against CSR expenses:

1. CSR expenses or goods distributed free of cost under CSR activity cannot be said to be goods lost, stolen, destroyed, written off or goods disposed of by way of free samples.

2. CSR expenses cannot also be said in nature of Gift.

The term gift is not defined under CGST Act. Hence reference needs to be made to other statutes or jurisprudence available on the same.

The Gift-Tax Act (18 of 1858) had defined the word gift to mean transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money's worth.

The Honorable Supreme Court cited the definition of 'gift' from Corpus Juris Secundum, Volume 38 in the case of Sonia Bhatia v. State of UP 1981 (3) TMI 250 - SUPREME COURT as follows:

"A 'gift' is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation therefore. A 'gift' is a gratuity and an act of generosity and does not require a consideration, but there can be none; if there is a consideration for the transaction, it is not a gift."

From above it can be inferred that a gift is always made voluntarily and out of generosity and not by the force of law.

When an act is done by force of law or to comply with the provisions of law for the time being in force, such force or the driving principle inherits the role of consideration and once the element of consideration is involved it cannot be called as a Gift. Similarly, expenses incurred of account of CSR are driven by principles casted under the Companies Act, 2013. Thus, these expenses are not incurred voluntarily or out of generosity but in order to meet the obligation so prescribed.

Clearly, the goods distributed under CSR activity cannot be classified as “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples” and hence does not fall under the purview of section 17(5)(h).

Similar view has been adopted by Mumbai CESTAT in the case of ESSEL PROPACK LTD. VERSUS COMMISSIONER OF CGST, BHIWANDI [2018 (9) TMI 247 - CESTAT MUMBAI], where CESTAT observed that CSR is not in the nature of charity as it has got a direct bearing on the manufacturing activity of the company which is largely dependent on smooth supply of raw materials. Further, it augments the credit rating of the company and its standing in the corporate world. The Tribunal thus held that such expenses are incurred to win the confidence of the stakeholders and shareholders. It also noted that CSR which was a mandatory requirement for the public sector undertakings, has been made obligatory also for the private sector and unless the same is to be treated as input service in respect of activities relating to business, production and sustainability of the company itself would be at stake. Hence, Cenvat credit was allowed to the appellant.

Conclusion

Business entities who have come forward to extend a helping hand to aid the society in such an unprecedented time might not be actually seeking to avail any such credit of the taxes paid at present juncture, as the intention behind such an aid is compassion and not really business. However, this is just a question from tax perspective.

In our unbiased opinion, such business entities shall not worry about eligibility conditions of input tax credit as the expenses incurred are statutory compliance of CSR activities or have be imposed by virtue of MHA’s orders i.e. enforced by law. Thus, credit can be rightly claimed based on above discussions.

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By CA Yogesh Harjai and Co-Author - Adv. Siddarth Malhora

Contact us:-

Yogeshharjai_ca@yahoo.co.in                                       9582444281

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