Section 135(5) of the Companies Act, 2013 requires CSR spending in any fiscal year, to the amount of at least 2% of the Company’s average net profits made in the three immediately preceding fiscal years, in accordance with CSR regulation. The above laws require the corporation to conduct and report on the same in their Board reports. Furthermore, based on the concept of “Business” under GST, CSR operations could have been protected by Sec 2(17)(b) of the GST Act, 2017.
If we argue that CSR operations are ineligible for ITC under section 17(5)(h), then CSR expenditures cannot be claimed to be products missing, robbed, wasted, written off, or disposed of by free samples. Further CSR costs are not of the form of gifts. CSR action is not in the form of a gift and a “gift” is something that cannot be forced on others. CSR operation, on the other hand, is mandated by the Companies Act.
Cenvat credit on CSR under earlier regime
In the case of Essel Propack v. Commissioner, CESTAT determined that CSR is not charity because it has a significant impact on the company’s production operation, and is heavily reliant on the timely delivery of raw materials. Furthermore, it improves the company’s credit record and its reputation in the business community. As a result, the Tribunal determined that such costs be expended in order to gain the confidence of creditors and shareholders. It was also observed that CSR, which was formerly a mandatory obligation for public sector undertakings, has now been made mandatory for the private sector, and that whether it is handled as an input service in relation to business operations, the company’s efficiency and viability will be jeopardised. As a result, the appellant was granted Cenvat credit.
When we equate GST to pre-GST taxation, we can see that GST has a much broader reach of ITC. As a result, if cenvat credit was permitted on CSR prior to GST, it would be allowed after GST.
CSR in GST regime
The government, on the other hand, has not been so generous with GST. In the case of Polycab Wires Pvt Ltd (2019-VIL-100-AAR), the claimant donated electrical goods to flood victims in Kerala in order to fulfil its CSR obligations. The Kerala AAR determined that the claimant distributed electrical goods for free without receiving any revenue, and that input tax credit would not be applicable for these transactions under Section 17(5)(h) of the KSGST Act and the CGST Act. As a result, the terms of Section 17(5)(h) of the CGST Act are invoked to refuse ITC for products sold for free in order to satisfy CSR obligations.
Furthermore, if we consider the concept of “consideration” under GST, we are gaining the confidence of owners, the public, or community, and maintaining a social role in the corporate as a consideration (not in monetary terms) of CSR operations. As a result, it cannot be considered free of charge. According to Section 2(31) of the CGST Act, consideration may or may not be monetary.
Furthermore, according to Section 17(5)(h) of the CGST Act, ITC is not eligible for “goods missing, stolen, wasted, written off, or disposed of as a present or free sample.” It can be seen that the said sub-section only places ITC restrictions on free sale of goods and does not impose ITC restrictions on free provision of services.
CSR practises are ones that provide indirect advantages to an organisation and help it manage its operations. ITC on CSR operation is a legal obligation, and companies are required to do so; thus, it is one of the reasons to recognise it as eligible ITC before and until transactions expressly protected under Sec 17(5), i.e. Block Credit. Furthermore, according to interpretation, CSR behaviours should not be considered under Section 17(5). (h). The government is yet to clarify. However, the government’s goal in instituting GST is to broaden the reach and flow of ITC. GST allows you to assert ITC for all inputs or input resources except those protected by Section 17. (5). As a result, we can assert ITC on CSR transactions that are not protected by section 17(5).