AAR (Telengana) allows Input Tax Credit on CSR Expenditure

Authority for Advance Rulings (AAR), Telangana, in the case of M/s Bambino Pasta Food Industries Private Limited (a Private Limited Company engaged in making Vermicelli and pasta Products) has issued a Ruling regarding availability of Input Tax Credit on CSR expenses incurred by the applicant company. The Ruling is beneficial from a GST perspective. However, it could have a different impact on companies as also the CSR implementing agencies (NGOs) from an Income tax perspective. Read on …

The issue

The company had donated oxygen plant to AIIMS hospital, Bibinagar, Yadadri Bhongir District, for the benefit of patients suffering from low oxygen levels during the Covid-19 pandemic. For this purpose, the company had purchased PSA oxygen plant and spare parts for that oxygen plant for INR 62,74,200.00 which included IGST paid of Rs 9,16,200.

The issue before the AAR was whether Input Tax Credit (ITC) can be availed on CSR expenditure incurred by the company?

Company’s contention

The applicant company contended that it was eligible to claim Input Tax Credit on the CSR expenditure since it spent the same in accordance with the provisions laid down by Indian Companies Act, 2013.

The company argued that CSR expenses incurred were mandated under the Indian Companies Act, 2013 and the CSR expenditure was not incurred voluntarily and accordingly it does not  qualify as ‘gift’ and therefore its credit is not restricted under Section 17(5) of the CGST Act, 2017.

The company further argued that non-spending of CSR funds would definitely have an impact on the functioning of company as penal provisions under the Indian Companies Act 2013 would have financial impact as well as on how the brand is perceived by the customers.

In short, it was argued that a company incurs CSR expenditure under statutory compulsion and therefore such expenditure is neither voluntary nor can it be considered as a ‘gift’.

AAR’s observation

AAR noted that under the Indian Companies Act, 2013, Companies with a specified net worth, turn over or net profit are obliged to incur a minimum of two per cent of their net profit towards corporate social responsibility (CSR) and failure to do so attracts penalty under sub-section (7) of Section 135 of the said Act, which may go up to a maximum of One crore rupees and thus the running of the business of a company would be substantially impaired if they do not incur such expenditure on CSR activities.

AAR observed that the expenditure made towards corporate social responsibility under section 135 of the Indian Companies Act, 2013, is an expenditure made in the furtherance of the business.

AAR’s Ruling

Authority for Advance Rulings (AAR), Telangana has ruled that expenditure made towards corporate social responsibility under section 135 of the Indian Companies Act, 2013, is an expenditure made in furtherance of the business and hence the tax (GST) paid on purchases made to meet the obligations under corporate social responsibility shall be eligible for input tax credit under CGST and SGST Acts.

CAP’s Comments and Concerns

While the Ruling of AAR Telangana is good and beneficial from a GST perspective, this could potentially have consequence from an Income tax (deduction) perspective. As we all know, while GST is an indirect tax, Income Tax is a direct tax. Both are independent laws.

Most companies avail tax deduction on CSR grants u/s 80G of Income Tax. If CSR grant is given to a fund like PM CARES the company can claim one hundred per cent tax deduction while if a company gives a CSR grant to an NGO registered u/s 80G(5) of the Income Tax Act it can still enjoy fifty per cent tax deduction.

However, benefit of tax deduction u/s 80G can be availed only if the contribution is voluntary and in the nature of a ‘gift’.

It is a widely held belief that grant is in the nature of a gift. Both donations and grants are in the nature of a gift, albeit grants are more specific in terms of utilization under the donor’s specific directions.

Now, if a company more interested in Input Tax Credit claims that the CSR grant is neither voluntary nor a ‘gift’, it technically cannot claim tax deduction under Section 80G of the Income Tax Act.

Also, if CSR funds are not given as ‘gift’ would it not be deemed as “consideration” (for services) and fall under business or commercial income under Income tax Act 1961?

Advisory (for companies)

Companies need to decide whether benefit of Input Tax Credit under GST outweighs benefit of Income Tax deduction.

Advisory (for NGOs)

  1. Read the CSR Grant Agreement Carefully
  2. Ensure that it is a ‘grant agreement’ and not a ‘works contract’ or ‘service contract’ with TDS and GST implications.
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