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GST on Supplies made under Corporate Social Responsibility

CSR or Corporate Social Responsibility is the sense of responsibility towards the society and environment where the business carries out day to activities.

Is it mandatory to comply with CSR Policy?

As per Section 135(5) of the Companies Act, the following company needs to comply with the CSR policy:

(i) Any company whose net worth is 500 crore INR or more

(ii) Any company whose turnover is 1,000 crore INR or more

(iii) Any company whose net profit is 5 crore INR or more

How much contribution has to be made by the company under the CSR Policy?

Under the CSR policy, the company has to contribute at least 2% of its net profit earned during the last three financial years. The majority of the CSR fund is utilized on any of the following activities:

(i) Promoting awareness of gender equality

(ii) Providing education

(iii) Rural development

(iv) Contribution towards PM Cares Fund

(v) Contribution towards the environment protection

(vi) Promotion of medicinal services, health care and sanitation regarding novel coronavirus

(vii) Disaster management and relief activities

Is ITC available on CSR activities

A) The first way of thinking: No ITC accessible on CSR activities

As per Section 17(2) of the CGST Act, the taxes paid on inputs can be availed when the outputs are taxable.

Under CSR policy, the company is providing goods or services free of cost. So, ITC cannot be availed on CSR activities.

Moreover, according to Section 37 of the Income Tax Act, any expenditure made by the assessee with respect to CSR activities can’t be deemed as expenditure on the business profession. Hence, Input Tax Credit can’t be availed on such spending.

Famous Advance Ruling

Polycab Wires Private Limited – For this situation, the organization had dispersed electrical merchandise to the flood-influenced individuals in Kerala throughout its CSR exercises. The AAR held that the organization had conveyed electrical items free of cost and hence ITC would not be accessible according to Section 17(5) of the SGST and CGST Act. In this way, section 17(5) was conjured to deny ITC on products distributed under the CSR policy.

B) The second way of thinking – ITC is accessible on CSR activities

The second way of thinking is that ITC is accessible on CSR activities since they are made in the course of furtherance of business. CSR exercises highly affect the organization’s image and are likewise necessary according to the Companies Act, 2013. It upgrades the organization’s reputation in the market and along these lines also helps in creating the goodwill of the organization. In this way, it can be said that Corporate Social Responsibility activities are caused in the course of furtherance of business. Hence, ITC can be claimed on CSR activities.

Well known Case Law

Essel Propack Limited versus Commissioner of CGST – Mumbai CESTAT held that ITC could be availed for the consumption made for CSR activities. The Tribunal held that CSR activities improve the reputation of the organization, and along these lines, they can be considered as business activities.

Henceforth, the government should come out with an explanation in regard to permitting ITC on CSR activities.