By Koushal Sonthalia
One of the major advantages under the GST regime is the unlocking of tax credits, a lot of which was not available in the erstwhile Indirect tax regime. While the earlier legislations imposed numerous restrictions on credits, such conditions are now a lot relaxed with Section 17(5) of the CGST Act mentioning a list of supplies for which credit is not available.
ITC provisions under CGST Act
We will now discuss ITC implications of expenses incurred for meeting obligations under certain other laws. According to Section 16(1) of the CGST Act, every registered person is entitled to take input tax credit on supplies of goods or services or both used in the course or furtherance of business. This is unlike the erstwhile Cenvat credit regime where credit was available only if the goods/ services were covered by the definition of inputs, input services or capital goods. Further, according to Section 17(5) of the CGST Act, input tax credit is not available in respect of supplies listed therein, notwithstanding anything contained in Section 16(1) of the CGST Act.
Therefore, based on the above-mentioned provisions it can be said that input tax credit is available for any inward supply which is used in the course or furtherance of business, unless it is covered by the negative list mentioned under Section 17(5) of the CGST Act. The expression ‘course or furtherance of business’ appears to be very wide in scope and therefore, it is said that the a lot of tax credits are now available under GST which were not available earlier. Let us now discuss whether credit can be availed for expenses incurred in meeting various statutory obligations.
Mandatory nature of CSR and business purpose
One such obligation is that of corporate social responsibility (‘CSR’). According to Section 135 of Companies Act, 2013, every company subject to a specified threshold has to spend atleast 2% of its net profit for CSR. Companies may incur expenses either on procurement of goods or services for distribution. Given that GST regime is that of minimum exemptions, most of such procurements involve a GST component as well. Therefore, if credit is not available for any such expense, it will amount to an additional cost on account of CSR.
Advance ruling on CSR in GST regime
CSR is mandatory under Companies Act, 2013 and accordingly, non-compliance with such requirements can have implications for businesses. Therefore, one may argue that such expenses are incurred in the course or furtherance of business.
Cenvat credit on CSR under earlier regime
In the case of Essel Propack v. Commissioner [2018-TIOL-3257-CESTAT-Mumbai], CESTAT observed that CSR is not in the nature of charity as it has got a direct bearing on the manufacturing activity of the company which is largely dependent on smooth supply of raw materials. Further, it augments the credit rating of the company and its standing in the corporate world. The Tribunal thus held that such expenses are incurred to win the confidence of the stakeholders and shareholders. It also noted that CSR which was a mandatory requirement for the public sector undertakings, has been made obligatory also for the private sector and unless the same is to be treated as input service in respect of activities relating to business, production and sustainability of the company itself would be at stake. Hence, Cenvat credit was allowed to the appellant.
The authorities have however not been so generous under GST. In the case of Polycab Wires Pvt Ltd
reported at 2019-VIL-100-AAR, the applicant had distributed electrical goods to people affected by flood in Kerala against discharge of its CSR obligations. The Kerala AAR held that the applicant distributed electrical items on free basis without collecting any money and for these transactions input tax credit would not be available as per Section17(5)(h) of the KSGST Act and CGST Act. Therefore, it can be seen that the provisions of Section 17(5)(h) of the CGST Act are invoked to deny ITC of goods distributed free of cost for meeting CSR obligations.
ITC on services used for CSR
Let us now discuss the provisions of Section 17(5)(h) of the CGST Act. According to this sub-section, ITC is not available for “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples”. It is to be seen that the said sub-section merely places ITC restriction on free distribution of goods and does not restrict ITC on provision of services for free. In the case of CIT v. Ajax products Ltd reported at (1965) 55 ITR 741, the Apex Court had held that there was no scope for intendment where the words used by the legislature were clear and unambiguous. Therefore, the restriction under Section 17(5)(h) cannot be made applicable on free provision of services.
Therefore, two different tax treatments appear to apply for the very same nature of expense - goods and services. The scope of ITC was already wide in GST and has been further widened under the CGST (Amendment) Act. It is time that the government brings in benevolent amendment to ensure that ITC is allowed for distribution of goods and services alike for CSR. This will encourage the industry to come forward for taking up similar projects of CSR which otherwise requires government support.
[The author is a Senior Associate, GST Practice, Lakshmikumaran & Sridharan, New Delhi]