In the upcoming Budget 2023-24, the government may limit Input Tax Credit on CSR expenditure.

► Date : Jan 23, 2023


The government is expected to amend the Goods and Services Tax (GST) law through the Finance Bill, 2023, denying businesses credit for taxes paid while procuring goods and services for the community as part of their corporate social responsibility (CSR) obligations.


According to two people familiar with discussions in the Central government, this means that taxes on goods and services used in CSR activities cannot be offset against the company's overall GST liability. "This would be a significant change to the GST law," one of the participants stated. Sections of the GST Act (16 and 17) dealing with input tax credit, or ITC, will be amended.


One of the pillars of GST is the availability of credit to businesses for taxes paid on purchases, so that tax only applies to value addition at each stage of the supply chain and there is no tax on tax. Credit for GST paid while purchasing goods and services to meet CSR obligations, on the other hand, has been a grey area, with different advance ruling authorities issuing contradictory orders. According to the first person quoted above, this has necessitated clearing the air through legislative amendments. Changes to various tax laws, such as the Income Tax Act, Customs Act, CGST Act, and IGST Act, are implemented through the annual Finance Bill.


The advance ruling authorities in Uttar Pradesh, Telangana, Gujarat, and Kerala have examined whether taxes paid as part of CSR activities are "in the course or furtherance of his business," the criteria for credit to be available for taxes paid on purchases, and have reached diametrically opposed conclusions. While the Telangana State Authority for Advance Ruling and the Uttar Pradesh Authority for Advance Ruling stated that GST on inputs purchased for CSR is available as credit, the authorities in Gujarat and Kerala ordered otherwise, according to public domain orders.


The Telangana State Authority for Advance Ruling noted in its 20 October 2022 order that CSR spending mandated under Companies Act is an expenditure made in the furtherance of the business. “Hence the tax paid on purchases made to meet the obligations under corporate social responsibility will be eligible for input tax credit under Central GST and State GST Acts,” said the order. The UP Authority explained in its January 2020 ruling that CSR spending is not voluntary, but is a statutory obligation under company law and hence tax credit on it is not restricted. However, the Gujarat Authority for Advance Ruling in its August 2021 order explained that CSR activities are excluded from normal course of business and therefore not eligible for input tax credit.


The move to specify in the CGST Act that input tax credit will not be available to businesses on CSR is relevant for large companies like Reliance Industries, TCS, Tata Sons, HDFC Bank Ltd. and ONGC, the highest CSR spenders as per official data. In FY21, Reliance Industries spent ₹922 crores on CSR, followed by TCS with a spending of ₹674 crore and Tata Sons with ₹546 crores, while HDFC Bank Ltd. spent ₹534 crores and ONGC Ltd. spent ₹531 crores. India Inc. spent more than ₹25,700 crore on CSR in FY21.


Spending on corporate social responsibility by the industry has seen a sharp jump in recent years, up from over ₹14,300 crore spent in FY17. In January 2021, the government gave effect to a penalty provision for defaulting on CSR spending obligation and allowed businesses to spend more than their obligation which could be adjusted against their future spending requirement.


Companies with a net worth of ₹500 crore or more, or a turnover of ₹1,000 crore or more, or net profit of ₹five crore or more, are required to spend 2% of their average net profit of the preceding three years on CSR activities. Companies have to spend the amount computed in this way on CSR whether or not they get tax credits. The advantage of getting input tax credit is that it could be used to pay off at least part of the GST liability on the company’s sales.


Queries emailed to the spokesperson for the finance ministry and to the GST Council Secretariat on Friday seeking comments for the story remained unanswered at the time of publishing.


► Tags : #tax #taxcredits #gst

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