Indian companies, especially public and listed companies are actively engaged in Corporate Social Responsibility (“CSR”) activities. Moreover, since the introduction of Companies Act, 2013, the law has mandated compulsory CSR expenditure for a specific class of companies. In the recent months, with the advent of GST, life of corporates has experienced all sorts of challenges in terms of operational flexibility and cost. One such aspect that has not been shed much light on, is the impact of GST on CSR activities and expenditure thereon by the companies. To understand this better, we take a scenario of donating water purifiers as part of a Company’s CSR policy. In this article, we try to detail out the analysis of such scenario by studying the provisions of GST and Companies Act, 2013.
A Company purchases water purifier with the sole intent of donating such items as part of its CSR program.
CSR as taxable supply and Input Tax Credit
Under the GST regime only taxable supplies are charged to tax. The term “taxable supply” is a defined term and section 2(108) of the Central Goods and Services Tax Act, 2017 (CGST Act) defines the term in the following manner:
(108) “taxable supply” means a supply of goods or services or both which is leviable to tax under this Act;
As is understood from the definition, there are two aspects of the term “taxable supply”, first, there must be a supply of goods or services or both and second, the same must be leviable to tax.
Meaning of the term “supply” has been discussed at length under section 7 of the CCST Act. As per the said section supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
In the present case, the water purifiers supplied as part of CSR program are supplies without consideration and cannot be treated as taxable supplies since they are not made in the course or furtherance of business.
The Company would pay GST on the purchase of water purifiers. Generally, it would want to claim credit of tax paid on purchases (“ITC”). However, ITC can be claimed by an entity subject to the provisions of Section 17 of the CGST Act, pertaining to apportionment of credit and blocked credits.
Section 17(2) of the Act reads as follows:
“(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”
In light of the above provision, ITC shall be restricted to the amount of taxable supplies supplied by the registered person. In our scenario, the Company supplies goods and/services, which are both taxable and exempt. However, credit against input tax/GST already paid on purchases or inputs/services, can only be availed in respect of taxable supplies. In other words, credit cannot be claimed by the Company on the amount of tax paid on purchase of water purifiers which are donated as CSR expenditure; such donation being an exempt supply.
|Case||Type of Goods/Service||Input cost||Tax paid (18% GST) (in Rs.)||Output||Consideration||ITC claimed (in Rs.)||Output liability||Net Cost|
|I||Water purifier||100||18||Donated to low-income households||No consideration was paid as the same was part of CSR activity||–||18||118|
|II||100||18||Sold to a wholesaler||Consideration equivalent to the amount of cost plus taxes was paid, i.e. Rs. 118||18||–||100|
** Figures above are imaginary.
Water purifier in Case II was sold to a wholesaler for a consideration, including taxes of Rs. 18. Output tax liability shall be reduced by tax already paid. ITC shall be available and claimed upto Rs. 18.
In Case I, however, tax paid on inputs cannot be set-off against tax collected and hence output liability shall be Rs. 18 without any reduction.
Treatment of tax paid on CSR expenditure
Taxes paid on inputs/input services can be taken credit of in case output/services are taxable. In Case I above, output services are exempt and thus tax paid on water purifier purchased shall not be taken credit of. Since, the Company is not claiming ITC, net spending in real terms, including the taxes shall be taken into consideration.
Calculation of CSR expenditure as per Companies Act, 2013
Section 135(5) of the Companies Act, 2013 mandates CSR expenditure in every financial year, to the extent of minimum 2% of the average net-profits of the Company made during 3 immediately preceding financial years, in pursuance of CSR policy.
Rule 7 of Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Policy Rules”)
“CSR Expenditure. CSR expenditure shall include all expenditure including contribution to corpus for projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee, but does not include any expenditure on an item not in conformity or not in line with activities which fall within the purview of Schedule VII of the Act”
In case, such donation of water purifiers has been made to an NGO, instead of direct beneficiaries, further usage and set-off by such NGO shall be ignored. Rule 4(2) of CSR Policy Rules allows the Company to undertake CSR activities through another entity registered under Section 8/a trust/ an NPO/an NGO.
Tax, credit of which is not available shall become part of total cost for the Company. Therefore, in Case I, the same shall also be part of CSR expenditure and shall be included for the purpose of calculating CSR expenditure. If credit cannot be availed by the Company, the intent should be to benefit the Company otherwise in terms of reduced compliance burden, by including GST paid as part of total CSR expenditure for the purpose of compliance of minimum such expenditure in one Financial Year as given under Companies Act, 2013. Obviously, the intent cannot be to discourage CSR activities by Companies. Further, the Company shall ensure that CSR activity is as per the CSR Policy and Schedule VII of the Companies Act, 2013.