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GST Implications for Corporate Social Responsibility Expenditures

This article details the Goods and Services Tax implications for Corporate Social Responsibility (CSR) expenditures in India. It outlines the types of companies mandated to undertake CSR activities under the Companies Act and provides examples of eligible spending. Crucially, it clarifies that Input Tax Credit is generally disallowed on goods and services used for CSR initiatives, a position reinforced by recent Finance Bill amendments and advance rulings. Companies must therefore understand these provisions to ensure GST compliance regarding their social contributions.

📖 2 min read read🏷️ Corporate Social Responsibility (CSR) and GST

Corporate Social Responsibility (CSR) encompasses voluntary initiatives undertaken by specific companies to contribute positively to society and the environment through various projects and programs.

Latest Updates from Budget 2023

Several important updates emerged from Budget 2023 regarding GST regulations:

  • Section 16 Amendment: Buyers who fail to remit the invoice value, including GST, to their suppliers within 180 days from the invoice date must repay the claimed Input Tax Credit (ITC) along with interest as per Section 50.
  • Filing Restrictions: Amendments to Sections 37, 39, 44, and 52 now prevent taxpayers from filing GSTR-1, GSTR-3B, GSTR-9, and GSTR-8 for a tax period beyond three years from its respective due date.
  • ITC on CSR: A revision to Section 17(5) explicitly added expenditures on Corporate Social Responsibility initiatives as items ineligible for Input Tax Credit.
  • High Sea Sales: High sea sales and comparable transactions, which are neither considered supplies of goods nor services, are now classified as exempt, meaning proportionate ITC cannot be claimed, in line with the revised Section 17(3).
  • Schedule III Retrospective Effect: Schedule III received amendments to paragraphs (7) and (8) and explanation (2), which are effective retrospectively from July 1, 2017.
  • Composition Scheme for E-commerce: An amendment to Section 10 of the CGST Act now permits businesses supplying goods via e-commerce operators to choose the composition scheme.

These changes will become effective upon notification by the CBIC.

Understanding Corporate Social Responsibility Activities

Under Section 135(5) of the Companies Act, all eligible companies are mandated to adhere to Corporate Social Responsibility obligations. The companies subject to these requirements include those meeting any of the following criteria in the immediately preceding financial year:

  • A net worth equal to or exceeding Rs 500 crore
  • A turnover of Rs 1,000 crore or more
  • A net profit of Rs 5 crore or more

Annually, companies must allocate a minimum of 2% of their average net profits from the preceding three fiscal years towards CSR activities, in accordance with their established CSR Policy.

Key expenditures typically recognized under Corporate Social Responsibility activities include:

  • Educational initiatives
  • Advancement of gender equality
  • Rural development projects
  • Contributions to the PM Cares Fund
  • Environmental protection efforts
  • Healthcare promotion, including preventive care and COVID-19 related sanitation activities
  • Disaster management and relief operations

For more details about the applicability, importance, and latest updates on the permitted activities under CSR, read – Corporate Social Responsibility.

Input Tax Credit on CSR Initiatives

The Finance Bill 2023 introduced an amendment to the Central Goods and Services Tax (CGST) Act, explicitly stating that Input Tax Credit (ITC) cannot be claimed on goods or services utilized for Corporate Social Responsibility activities. This amendment awaits official notification from the CBIC to take full effect.

Popular Advance Ruling

In the prominent Advance Ruling involving Polycab Wires Private Limited, the company had distributed electrical items to individuals impacted by floods in Kerala as part of its CSR endeavors. The Authority for Advance Rulings (AAR) determined that since these electrical products were distributed without charge, ITC was unavailable under Section 17(5) of both the KSGST and CGST Acts. Consequently, Section 17(5) provisions were applied to disallow ITC for goods provided under CSR obligations.

Further Reading

Frequently Asked Questions

What is the primary objective of GST in India?
The primary objective of Goods and Services Tax (GST) in India is to simplify the indirect tax structure by subsuming multiple central and state taxes into a single, unified tax, thereby creating a common national market.
How many types of GST are applicable in India?
In India, there are four main types of GST: Central GST (CGST), State GST (SGST), Integrated GST (IGST), and Union Territory GST (UTGST). CGST and SGST/UTGST are levied on intra-state supplies, while IGST applies to inter-state supplies and imports.
What is the annual turnover threshold for mandatory GST registration?
The mandatory GST registration threshold varies based on the type of goods/services and the state. Generally, it is Rs. 40 lakh for suppliers of goods (with some exceptions) and Rs. 20 lakh for suppliers of services. For special category states, these limits can be lower.
Are all business expenses eligible for Input Tax Credit under GST?
No, not all business expenses are eligible for Input Tax Credit (ITC) under GST. Section 17(5) of the CGST Act specifically lists certain blocked credits, such as personal consumption, food and beverages, membership fees, and now, expenses related to Corporate Social Responsibility (CSR).
What distinguishes CGST from SGST?
CGST (Central Goods and Services Tax) is a tax levied by the Central Government on intra-state supplies of goods and services. SGST (State Goods and Services Tax) is a parallel tax levied by the State Government on the same intra-state supplies. Both are collected simultaneously, with the revenue going to the respective governments.

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