Concerns for Businesses: GST ITC Restriction on CSR Spend

Introduction:
Concerns for Businesses: GST ITC Restriction on CSR Spend highlights the crucial role of a robust VAT system in maintaining a seamless flow of Input Tax Credit (ITC). However, businesses face challenges in determining the eligibility of ITC, particularly regarding the Goods and Services Tax (GST) paid for fulfilling Corporate Social Responsibility (CSR) obligations. This article focuses on the debate surrounding whether CSR expenditure can be considered as “in the course or furtherance of business” and therefore eligible for ITC.

Uncertainty in Rulings:
Taxpayers actively sought advanced rulings to gain clarity on this matter. While some rulings deemed CSR spending as “in the course or furtherance of business” due to its mandatory nature under the Companies Act, others denied ITC benefits, arguing that CSR activities fall outside the normal course of business. This lack of consensus has created uncertainty, which is further exacerbated by the significant CSR expenditure by businesses in the post-pandemic world.

Proposed Amendment and Business Concerns:
The Union Finance Minister proposed an amendment that aims to restrict ITC on goods or services used to meet CSR obligations under Section 135 of the Companies Act, 2013. This proposal intends to align CSR activities with existing direct tax laws, which do not allow deductions for CSR expenses. However, businesses have expressed concerns about the potential challenges that this amendment may pose.

Considerations for Businesses:
Section 135 of the Companies Act mandates CSR obligations for businesses that exceed a prescribed threshold of average net profits. Non-compliance with CSR obligations can lead to legal consequences and negatively impact businesses. The requirement to incur CSR expenditure as part of business operations raises questions about the classification of such spending as a “gift,” which is traditionally considered voluntary and disconnected from business purposes.

Limitations and Recovery Measures:
The proposed ITC restriction specifically targets mandatory CSR spending under Section 135 of the Companies Act. However, there is room to argue that any expenditure exceeding the mandatory limit should still be allowed for ITC. Additionally, while the restriction is expected to be prospective, concerns are raised regarding potential recovery measures for past availed ITC. It is crucial for the government to provide clarification to address these concerns and prevent disputes.

Implications for CSR Activities:
Considering the government’s focus on inclusive and sustainable growth goals, businesses are expected to contribute significantly through CSR activities. Denying ITC on CSR spending could restrict the extent of these activities and increase their cost, potentially impacting the intended beneficiaries. Therefore, it is important to reconsider the proposal and its impact on the overall effectiveness of CSR