Corporate law changes: small steps towards procedural simplification 

– Anushka Vohra, Manager | corplaw@vinodkothari.com

The Budget 2023, proposes certain amendments, partly towards ease of doing business, and partly for certain rationalization measures.

The major amendments proposed are as follows:

1. CSR expense not to result into GST set off

We had in our previous article, dealt with the question whether,GST paid, while acquiring goods or services for CSR activities would give rise to an input tax credit. Section 17(5)(h) of the CGST Act excludes “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples” for the purpose of availing ITC on payment of GST. The term ‘gift’ is not defined anywhere in the CGST Act. However, in layman’s language, gift means a thing given willingly to someone without payment.

While, there isn’t any explicit clarification to say whether input tax credit will be available or not, we relied on certain judicial pronouncements, some of which confirmed the availability of ITC benefit, and some denied it.

The Budget 2023, proposes that section 17(5) of the CGST Act shall be amended to the effect that input tax credit shall not be available in respect of goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013.

Hence, in case of the company being subjected to the obligation of spending on CSR, the GST benefit will be denied to the company. The expression is clearly related to the obligation under CSR in terms of sec. 135 – therefore, this denial of ITC benefit will be applicable only in case of the company.

The effective date of the amendment will be 1st April, 2023. Hence, once the Budget proposals are passed, any acquisition of goods or services for CSR purposes will be denied the benefit of GST set off.

Three different modes of CSR spending:

It is important to understand that CSR expense may be done in three different ways: (a) CSR expenditure incurred directly by the company; (b) The expenditure is incurred through an implementing agency; (c) The expenditure is incurred by the ultimate beneficiary where the CSR project resides, and the company merely contributed money.

Obviously, there is no question of any GST benefit in case of contribution of money- hence, the question of any set off in case of expenses incurred by IAs or beneficiaries would not have arisen. The company could have claimed a set off only in case of goods or services acquired on the company’s GSTIN, and therefore, that would now stand denied.

It is important to note that there is no question of denying GST benefit to the  IA or the end beneficiary. That is, if the company simply contributes the money, and it is the IA or the beneficiary who acquires the goods or services, the IA or the beneficiary, as the case may be, may claim a set off against any of the output tax liabilities paid by them.

To give an illustration, if a company incurs Rs. 100 for procuring goods for the purpose of carrying CSR activity, the company pays GST at 18% i.e. Rs. 18, making the total cost to be Rs. 118. Let us understand the three different scenarios i.e. where CSR is being carried out by company in each of the three modes discussed above:

	Existing practice, expense incurred by the company	Directly by company	Through IA	By the end beneficiary
Amount spent for purchase of goods	100	100	100	100
GST	18	18	18	18
ITC	18	cannot be claimed	IA, may not be GST registered, and hence, cannot claim ITC	Mostly GST registered, can claim
Cost incurred by company, net of the set off	100	118	118	100 – beneficiary can claim ITC on GST incurred
CSR contribution	100	118	118	100
Total spending on CSR	118	118	118	118
Of which contribution of ITC	18	Nil	Nil	18

Now, the question that arises is what will be the amount of CSR contribution by the company, whether it will be Rs. 100 or Rs. 118? Clearly, in case a., the company has incurred Rs.118 for purchase of goods, the GST of Rs. 18 cannot be availed by the company at the time of output tax liability, therefore, the actual cost incurred by the company is Rs. 118.

In case b. above, the CSR is being implemented through an IA. IAs are the facilitators for carrying CSR activities on behalf of the company and may not be carrying GST registration, in such a case the IA will not have any output tax liability and therefore, GST paid by the IA will not be there for set-off. The actual cost incurred by the company here again would be Rs. 118.

In case c., where beneficiary is carrying out CSR activity, eg. any school, hospital, the beneficiary being GST registered- can claim ITC. In such a case, the actual cost incurred by the company would be Rs. 100 as the GST paid by beneficiary for purchase of goods will be available by beneficiary at the time of paying output tax liability.

The Table above shows the practice prevailing right now, as shown in the first column, may still be achieved by moving the expense to the end beneficiary. This, however, works only if the end beneficiary (a) is a supplier of GST-taxable supplies; (b) has sufficient GST liability to set off the ITC completely.

In case the output supplies are tax exempted

As per section 17 of the CGST Act, 2017, ITC cannot be availed if the output tax supplies are tax exempted. Therefore, if the output supplies are tax exempted at the beneficiary level, then the GST paid at the time of purchase of goods will be a sunk cost. It may be taken as a part of CSR spending, but surely not claimable as set off.

1. Reclaiming unclaimed / unpaid dividend and shares from IEPF to become easier:

The Hon’ble Finance Minister in her speech stated that an integrated IT portal will be set up for the purposes of easing investors to claim back their shares and dividend thereon from the IEPF. Currently, the investors have to file e-Form IEPF-5 for claiming back their shares and dividend thereon.

2. Unified Filing Process:        

A unified filing process would ease the requirement of sending the same information to different government agencies. The excerpt from the Budget speech aims to provide for filing of a form on a common platform from where information will be disseminated to other government agencies. The details of the proposal need to be seen.

3. Central Data Processing Centre:

It is proposed to set up a Central Data Processing Centre for the purposes of faster processing of forms filed by the companies with the MCA.

Currently, there is Central Registration Centre (CRC), which is an initiative of MCA with the specific objective of providing speedy incorporation related services. While CRC is tasked with name approval and incorporation related services, the proposed Central Data Processing Centre would be set up for the purpose of fast processing of other e-Forms.

4. Filing of returns of income in case of retrospective business reorganization:

Section 170A of the Income Tax Act, 1961 was inserted by way of Finance Act, 2022, to be effective from April 1, 2022. Section 170A provides that in case any of the entity is undergoing business reorganization and has filed any return, the successor entity shall file modified return of income for any assessment year to which such order of business reorganization is applicable.

Business reorganization has been defined to mean reorganization of business involving amalgamation or de-merger or merger of business of on or more persons.

The current section 170A uses the word ‘successor entity’ but since business reorganization could be in a form which does not entail dissolution of former entity, the Budget proposes substitution of section 170A to provide clarification that a modified return shall be furnished by an ‘entity to whom the order of the business reorganisation applies.’

5. Relief for start-ups:

• certain start-ups if incorporated before April 1, 2024 can avail tax benefits, as applicable to them, as against April 1, 2023 in the current provision
• Section 79 of the Income Tax Act, 1961, provides for a condition for availing the benefit of carry forward of losses. In case of eligible startups, the Budget proposes to provide the benefit of carry forward of losses on change of shareholding of start-ups from seven years of incorporation to ten years.

6. Decriminalization of offence – 276A of IT Act:

Section 276A has provision for imprisonment of the liquidator of a company which is undergoing winding up, in case the liquidator fails to comply with section 178(1) and (3) of the IT Act. Section 178(1) requires the liquidator to give notice of his appointment as such to the tax authority and 178(3) requires the liquidator to set aside amount, as notified by the assessing officer, before parting with any of the assets of the company which is into liquidation.