A most frequently raised question is that does GST paid, while acquiring goods or services, give rise to an input tax credit (ITC), such that the same may be claimed as a set off?
A related, and more important question is, whether CSR expense for the purpose of sec. 135 (5) be the amount net of the ITC, if the ITC is claimable, or the gross amount paid?
Section 135(5) of the Companies Act, 2013 requires every eligible company (as per section 135(1)) to spend at least 2% of the average of net profits of immediately preceding 3 financial years towards Corporate Social Responsibilities (‘CSR’) activities.
The CSR spending may sometimes include contributions made to NGOs or other beneficiaries, or money paid to implementing agencies.
However, quite often, the expense may relate to procurement of goods or services which are applied to one or more CSR activities. This procurement of goods or services comes with the tax cost, viz., GST.
Section 16(1) of the Central Goods and Service Tax (‘CGST Act, 2017’) prescribes the eligibility criteria for taking Input Tax Credit. It states that “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.”
The GST Act does not clarify that the amount to be contributed towards CSR activities should be inclusive or exclusive of taxes.
For instance, donations given by cash, cheque or through electronic transfer of money or even the donations in kind made voluntarily or gratuitously, cannot be construed as supply under GST as it is an activity without any quid pro quo.
The donations made without any benefit in return cannot be treated as a consideration against any supply (in case of cash donations) or supply for consideration (in case of donations in kind) since there is no consideration received for giving such in-kind donations. Further, money is excluded from the definition of goods and services and hence, cash donations are not subject to GST.
A company contributes a sum towards a beneficial organisation such as NGOs, Charitable Trusts and Section 8 Companies (‘implementing agencies’) towards fulfillment of CSR activities. However, these implementing agencies also need to hire services of vendors to complete these activities. These vendors charge GST on the services rendered by them. Since these implementing agencies often do not generate any output, the question raises can these organizations also claim ITC on the services rendered by them?
There is a concept of ‘pure agent’ in GST. Explanation to Rule 33 of CGST Rules, 2017 prescribes that a pure agent means a person who Enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both; Neither intends to hold nor holds any title to the goods or services or both so procured or provided as pure agent of the recipient of supply; Does not use for his own interest such goods or ser- vices so procured; and Receives only the actual amount incurred to procure such goods or services in addition to the amount re- ceived for supply he provides on his own account.
The important thing to note is that a pure agent does not use the goods or services so procured for his own inter- est and this fact has to be determined from the terms of the contract. In the illustration of importer and Customs Broker given above, let us assume that the contract was for clearance of goods and delivery to the importer at the price agreed upon in the contract.
In such a case, the Customs Broker would be using the transport service for his own interest (as the agreement requires him to deliv- er the goods at the importer’s place) and thus would not be considered as a pure agent for the services of trans- port so procured.
If an implementing agency avails any goods or services from a vendor to fulfil the CSR activities for a company, then the payment of any such amount to the vendor shall be treated as a supply made as a pure agent by the implementing agency on behalf of recipient of supply, i.e., the company. Thus, these expenses incurred by the implementing agencies shall be excluded from the value of supply and therefore, are not liable for payment of GST.
As per the current GST Rules, the key requirement to avail ITC on goods or services is that it should be utilised “in the course or furtherance of business”. Courts in some instances have interpreted this as “anything done towards assisting or promoting the interests of a business”.
Thus, any activity done towards the purpose of earning profit shall be in the ambit of “in the course or furtherance of business”. Considering the voluntary and philanthropic activities of the companies, Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai allowed the companies to avail CENVAT credit of service tax paid for carrying out CSR.
It opined that CSR being a mandatory social obligation for both public and private companies, must be deemed as a business activity. Thus, the view that companies may avail ITC on goods supplied as an act of fulfilling their CSR obligations and is in the course or furtherance of business can be considered valid.
However, the GST Rules allow ITC on the supply of goods that are used in the course or furtherance of business and provide cases where such credit cannot be availed. One such case where the credit cannot be availed is on goods that are disposed of as “gift” or “free samples”.
The applicant was a dealer in electrical goods, cables of all kinds including winding wires, pipes, etc. Applicant had supplied electrical items to Kerala State Electricity Board through their distributors in connection with reinstating connectivity in the flood ridden areas as part of the “mission reconnect”.
Thematerials were supplied free of cost as a CSR activity. To ascertain the impact of GST on the stated goods supplied free of cost, the applicant required advance ruling on the following:
The Kerala AAR ruled that to operationalize the commitment of the applicant to provide goods at free of cost to KSEB for flood renovation work, the applicant instructed its distributors to provide the goods. The distributors billed the goods to KSEB and paid GST to Government. In the invoice so issued, the distributor had valued the goods for the purpose of tax and value was shown as discount. In the above-stated supply, since the consideration was not wholly in money, Rule 27 of the CGST/KSGST Rules would apply for valuation.
Once the Goods were supplied to KSEB, the distributor would raise the claim to the applicant who would reimburse the value to the distributor. The distributor would be entitled to input tax credit on the goods supplied to KSEB.
For the items like cables, fans, switches, etc. to flood-affected people under CSR expenses on free basis, input tax credit will not be available as per Section 17(5)(h) of the KSGST and CGST Act.
The appellant Essel Propack Ltd manufactured multi-layer plastic laminates and was availing cenvat credit facility under the Cenvat Credit Rules 2004. Audit was conducted in the factory and it was detected that cenvat credit of service tax was availed towards such company’s commitment to CSR and audit pointed out the same to be inadmissible.
Appellant was put to notice on the ground that such input service did not fall under the definition of input services given in Rule 2(l) of Cenvat Credit Rules 2004 for manufacture of appellant’s final product. Upon reply, matter was adjudicated upon and holding the same to be inadmissible, Adjudicating Authority also had imposed interest and penalty on the appellant that was confirmed by the Commissioner (Appeals) GST & CE.
The CESTAT It was held that CSR is not a charity anymore since it has got a direct bearing on the manufacturing activity of the company which is largely dependent on the smooth supply of raw materials even from a remote location or tribal belts (that requires no resistance in the supply chain from the community) and the same also augments the credit rating of the company as well as its standing in the corporate world.
Further, the Court held that “CSR cannot be treated as a gift, as the delivery of the gift is made voluntarily, and therefore, cannot assume the character of gifts. As may be noticed from the Gift Tax Act, the definition of gift necessarily includes any transfer made voluntarily and without consideration. Since the activity is mandated on companies, and therefore, any CSR activities cannot be termed as a gift.”
The AAR ruled that CSR expenses qualify as being incurred in the course of business and eligible for input tax credit (ITC) in terms of Section 16 of the CGST Act, 2017 b) Section 17(5)(h) would not be applicable on free supply of goods as a part of CSR activities c) ITC on goods and services used for construction of school building would not be available to the extent of capitalisation.