A taxing 'Corporate Social Responsibility' for Companies under GST?
Nilesh Vasa (Associate Partner, Tax & Regulatory Services, EY India)
Anindita Sarkar (Senior Tax Professional)
CSR and the Companies Act: A snapshot
As a part of Corporate Social Responsibility (CSR), companies have been diligently contributing towards the economic, social and environmental development of the country. The concept differs from basic philanthropy and charity which may lack accountability or responsibility. The inclusion of CSR has been an attempt by the Government to engage the businesses with the national development agenda.
In terms of the CSR Policy, Rules and Schedule VII of the Companies Act, the activities of CSR mainly relate to health, education, skill building, sanitation, rural upliftment, promoting environmental sustainability etc.
CSR as per the Companies Act, applies to a company fulfilling any one of the following criteria:
1. has net worth of INR 500 crore;
2. has a turnover of INR 1,000 crore;
3. earns net profit of INR 5 crore
Indian Company, whether private limited or public limited or a branch or project office of any foreign company in India, qualifying for CSR, has to spend on CSR activities at least 2% of its average net profit earned during immediately preceding 3 financial years.
CSR activities that are carried out by the organisations could be in different forms, including
- Contribution by way of cash donations towards corpus of Charitable Trust
- Contribution in kind – by way of goods or services.
- Undertaking any project activity through its own unit or group entity or may undertake such activity through NGOs.
CSR and GST: an overview
GST law does not specifically address taxability of goods or services provided by the companies as part of CSR activity.
Cash Donations (i.e. donations given by cash, cheque or through electronic transfer of money) or even the donations in kind (giving away goods or services) made voluntarily or gratuitously, cannot be construed as supply under GST as it is an activity without any quid pro quo or reciprocity. The contributions so made without any benefit in return cannot be treated as consideration against any supply (in case of cash donations) or supply for a consideration (in case of donations in kind) since there is no consideration received for giving such in-kind donations. Further, money is excluded from the definition of goods and service and hence, cash donations are not subject to GST.
Donations in kind can be of business assets or third party procurements.
GST Act does not define business assets. The term business assets in legal parlance encompasses current and non-current, short-term and long-term, operating and capitalized, and tangible and intangible. By such definition, stock is also a business asset.
The question arises whether giving away of assets of the entity by way of donation can be treated as deemed supply in terms of entry 1 of Schedule I to the CGST Act.
While one can take a view that donations do not amount to supply (nor even deemed supply) under GST as it is without consideration and hence not attract GST, there could be yet another view to suggest that if Input tax credit (ITC) has been availed in respect of business assets so transferred or disposed permanently, though without consideration, it could be treated as supply and thus exigible to GST. As a corollary, if input tax credit is not availed in respect of such business assets, the same would not be treated as supply and as such not liable to GST.
Donation of gifts and ITC:
The question remains whether ITC can be availed in respect of goods donated. Can such donations be treated as ‘Gift’ and thereby restriction on availment of ITC may get triggered in view of the provisions of section 17(5)(h) of the CGST Act. GST law does not define the term ‘Gift’.
CSR activities in case of companies have been mandated under the Statute and any failure to perform such activities, without proper reasons, could invite punitive action. Any spent on such activity should, therefore, be treated as “in the course or furtherance of business” to make the company eligible for ITC. This argument may however not hold good in case of entities other than companies.
As per the Income Tax Act 1961, gift is the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration. It can be argued that donation is a gift given for a charitable purpose or to benefit a cause. It may thus follow that the restriction on claiming ITC may trigger in such scenario.
As per Sec 17(2) of CGST Act, ITC can be claimed only in respect of goods or services used for effecting taxable supplies and zero rated supplies and not exempt supplies. This provision, however, may not apply if such contributions are not treated as supply per se. Contrary to this, a view, perhaps by the revenue authority that it is non-taxable or exempt supply, for denial of ITC cannot be totally ruled out.
Sponsorship and ITC:
Often companies arrange and sponsor events as a part of CSR activities. Sponsorship includes naming the event after the sponsor, displaying logo, sponsoring prizes but does not include any financial or other support in the form of donations or gifts subject to the condition that the receiver is not under obligation to provide anything in return to such donors.
Services by way of sponsorship of certain specified sporting events are exempt from GST. ITC in such cases would not be eligible.
If any event is sponsored without benefit in return, for instance, the recipient merely acknowledges the contribution or donation in some form, it may still not take a colour of supply. Also, a position could be taken that mere handing out of pamphlets or goodie bags bearing company name should not be considered as a benefit in return for such distribution.
On the other hand, if the companies sponsor charities and receive advertisement space, signage etc. it could amount to benefit received in lieu of donation, making it a supply triggering GST. Such cases may be considered as barter transaction attracting GST in the hands of both the parties on their respective supplies.
Under the Income tax Act, CSR expenditure is not allowed as deductible business expenditure. It seems, allowing the deduction under income tax would mean sharing or subsidising the social responsibility of the company by the Government, which may not be the intent for such mandate.
If one looks at judicial pronouncements under the indirect tax regime, some of the rulings suggest that if the money is spent for procuring tax suffered goods to be further used for meeting social or environmental obligation mandated under a Statute, ITC may be eligible. There is however also a contrary ruling holding that despite there being statutory requirement if there is an express provision under law denying the tax credit, the latter should prevail. It is apparent that conflict on the subject issue could continue in the GST regime and a final word on eligibility of credit in such cases could see light in the GST regime.
Facts of each case / transaction will need to be analysed taking into consideration relevant provisions of GST law, before taking a call on claiming benefit of ITC qua such transactions. Unless specifically clarified by the Department, there could be an exposure to litigation if credit is availed in such cases where output is not subject to GST. ITC becoming cost to company due to its inadmissibility might lead to curtailment of benefit to the society at large unless company prefers taking additional hit on its profits.
The article has been co-authored by Ms. Anindita Sarkar, Senior Tax Professional