INTERPLAY BETWEEN CSR AND GST

India is the first country to implement Corporate Social Responsibility (in short referred to as
CSR) mandated under the Companies Act, 2013. As per Section 135 of the said act, “Every
company having a net worth of rupees five hundred crores or more, or turnover of rupees one
thousand crores or more or a net profit of rupees five crores or more during immediately
preceding financial year shall constitute a Corporate Social Responsibility Committee of the
Board consisting of three or more directors, out of which at least one director shall be an
independent director".1 The basis will be an average net profit made during three immediately
preceding financial years. CSR is a sense of responsibility of voluntary contribution by
various companies towards a better society and a cleaner environment where a company
operates in the form of projects or programs aiming the same. The company qualifying the
above-mentioned requirement for CSR has to spend at least 2% of its average net profit
earned during the immediately preceding three financial years on CSR activities; which could
be carried out in different forms. For example, providing education, promoting gender
equality, healthcare or sanitation activities, projects related to rural development, contribution
towards the protection of environment or to PM Cares Fund, relief activities during some
disaster, etc. A specific example could be a contribution by way of cash donations towards
the corpus of a charitable trust or undertaking any project activity through its unit or group
entity or may undertake such activity through NGOs.2

The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 w.e.f. 22 nd
January 2021 has implemented provisions of 2019 Amendment to the Companies Act, 2013,
to study an interplay between the Companies Act, 2013 as amended CGST Act, 2017 3 which
will show that CSR is mandatory and failure to which can attract the wrath of penalties.
Mainly the changes include the mandatory requirement to disclose CSR projects and
activities and CSR Committee's composition on their website and if failed to spend 2% in
CSR then it should be disclosed in the report with the appropriate reason and in a scenario
where the unspent amount if not related to ‘ongoing project’ then it should be transferred to

1
Section 135 of Companies Act, 2013.
2
Nilesh Vasa and Ms. Anindita Sarkar, "A taxing 'Corporate Social Responsibility for Companies under GST?"
dated 14th May 2018 published on LSI LawStreetIndia.
3
The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 to the second proviso to
subsection 135.
government’s notified fund. The penal action against the company could be to pay twice the
amount which has to be transferred by the company to the fund specified in Schedule VII or
the unspent CSR Account, as the case may be, or 1 crore rupees, whichever is less; and, every
officer in default shall be liable to a penalty of 1/10 of the amount required to be transferred
by the company to such fund specified in Schedule VII, or the unspent CSR Account, as the
case may be, or two lakh rupees, whichever is less.

The Input Tax Credit (in short referred to as ITC) is available to the supplier for the inputs,
input services, and capital goods used to supply goods or services or both as part of such
offers. The provision for availing of ITC is provided under Section 16 of the GST Act, 2017
which provides that one would be entitled to take credit of input tax charged on any supply of
goods or services or both to him which are used or intended to be used “in the course or
furtherance of his business”.4 The eligibility is provided under various limbs of Section 16 of
the Act, per se, however a concept of blocked credit is provided simultaneously in Section
17(5)(h) of the Act,5 that ITC shall not be available in respect of goods lost, stolen, destroyed,
written off, or disposed of by way of gift or free samples. Further, Section 17(5)(g) forbids
ITC on goods or services procured for personal consumption.

Provision of GST law does not specifically provide any provision for the taxability of goods
or services provided by the companies as part of CSR activity. Cash Donations, for example,
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. The
contributions so made without any benefit in return cannot be treated as a consideration
against any supply (in case of cash donations) or supply for 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 services and hence, cash
donations are not subject to GST.

In the case of Corporate Social Responsibility activities, a company is providing outputs/

output services free of cost. Thus, by taking into consideration the definition of taxable
supplies and provisions of Section 17(2), input credit cannot be availed on CSR activities.
Additionally, even according to Section 37 of the Income Tax Act, 1961, any expenditure

4
Section 16 of CGST Act, 2017 as amended by 31 of 2018 and brought into force w.e.f. February 2019.
5
Section 17(5) of CGST Act, 2017 as amended by 31 of 2018 and brought into force w.e.f. February 2019.
incurred by the assessee with regards to CSR activities cannot be deemed by the assessee for
business or profession.6 Thus, it cannot be claimed as a business expenditure. If this is not a
business expenditure, then ITC cannot be claimed on such spending and thus resultant in
tantamount to an additional cost on account of CSR.

About this, two schools of thought prevail, first advocates that since CSR is a responsibility
that is mandatory under the Companies Act, and therefore, any non-compliance of such
provisions would necessarily have implications in furtherance of business. Therefore, CSR
expenses must be treated as expenses incurred for inward supply in course of or furtherance
of businesses. While on the other hand, the second theory explicates that the principle of GST
shall be made applicable only if outwards supplies are taxable. Since, CSR is made free of
cost, and not with the intention of profitability but to foster its commitments towards the
society, environment, and other measures, and hence, expenses incurred shall not be treated
in course of or furtherance of business.

In the case of Polycab Wires (P.) Ltd., In re (2019),7 where the applicant, who is a dealer in
electrical goods, had supplied electrical items to Kerala State Electricity Board (KSEB)
through its distributors spread across the State in connection with reinstating connectivity in
the flood-ridden areas as part of the 'mission reconnect' free of cost'. In addition to this supply
to KSEB, the applicant had distributed electrical items like switches, fans, cables, etc. to
flood-affected people under CSR expenses on a free basis without collecting any money. In
the invoice so issued, the distributor had valued the goods for tax and the value was shown as
100% discount. Advance ruling sought that “determination of GST liability for goods
provided free of any cost by the distributors of the applicant to KSEB for reinstating
connectivity in flood-ridden areas; and admissibility of input tax credit concerning such
goods. Thus, according to the applicability of section 17(5)(h) of KGST Act, and CGST Act
on CSR expenses, ITC cannot be claimed as a matter of entitlement”.

As evident from the interpretation of GST provisions, the expenses incurred in place of CSR
shall not be considered in “furtherance of business”. However, there is an ample number of
research studies that advocate that CSR increases business profitability, and increase
corporate financial performance. Thus, it can be implied that CSR expenses are “in
furtherance of business”. However. As derived from the Government’s intentions, CSR

6
Section 17(2) of the Income Tax Act, 1961.
7
Polycab Wires (P.) Ltd., In re (2019) 104 taxmann.com 36 (AAR - KERALA).
expenses are still treated as a noble concept and not seen from, the lens of business
profitability.

The second school of thought advocates that the ITC is available on CSR activities because
they are incurred in the course or furtherance of business. CSR activities have a high impact
on the image of the company and are also mandatory as per the provisions of the Companies
Act, 2013. It enhances the reputation of the company and thus forms the goodwill of the
company. Therefore, it can be ascertained that Corporate Social Responsibility activities are
incurred in the course or furtherance of business. So, ITC can be claimed for such events

In the case of Essel Propack Ltd. V. Commissioner of CGST, Bhiwandi (2020),8 where M/s.
Essel Propack Ltd. manufactures multi-layer plastic laminates and is subjected to CENVAT.
An Audit was shown in the factory and it was found that the CENVAT credit of service tax is
amounting to Rs. 12,12,772 /- which was availed towards such company's commitment to
corporate social responsibility (CSR) and audit stated the same to be in-admissible. The
appellant had made payment to a Charitable Trust for imparting training to students of an
underprivileged section of society in the discharge of corporate social responsibility. It
treated this payment towards CSR under the definition of input services. According to Rule
2(l) of Cenvat Credit Rules, 2004 which has defined input services and that is for the
manufacture of an assessee final product. The appellant argued that the said expenditure was
incurred by the company within the definition of the concerned rule. Because through this
training program students learn the nature of the job that made them eligible to become future
workers in factories. The appellant contends that it had engaged youth from the lower strata
of the society in its factory to provide them on the floor exposure to the production activities
of the company and in so doing, it has engaged them in preparation of data sheet, updating
production logbook, preventive maintenance of the machine and assistance in the production
operation as well as the transfer of raw materials, etc. So the same is counted within the
manufacturing activities besides the fact that the purpose was to discharge CSR obligations.

A representation has been received seeking clarification whether donations and grants-in-aid
received from different sources by a charitable Foundation imparting free livelihood training
to the poor and marginalized youth, will be treated as “consideration” received for such
training and subjected to service tax under “Commercial Training or Coaching Service”. The
important point here is regarding the presence or absence of a link between “consideration”
8
Essel Propack Ltd. V. Commissioner of CGST, Bhiwandi (2020) 117 Taxmann.com 409 (Mumbai- CESTAT).
and taxable service. It is a settled legal position that unless the link or nexus between the
amount and the taxable activity can be established, the amount cannot be subjected to service
tax.9 Between the provider of donation/grant and the trainee, there is no relationship other
than universal humanitarian interest. In such a situation, service tax is not leviable, since the
donation or grant-in-aid is not linked to a specific trainee or training.

Appellant argued that the concept of business is not stagnant and “over the period”, the
expression consists of complete care and concern for the society at large and the people of the
locality in which business is located in particular for which the term activities relating to
business is of wider ramification and corporate social responsibility is within its ambit that
would cover Rule 2(1) of the Cenvat Credit Rules for which he prays for purposive
interpretation to be imported to the Rule governing cenvat credit. Whereas the department
argued that there was no correlation of input services with the business activity of the
appellant since CSR activities are welfare activities and not pertinent to business/production-
related activities. That the service of imparting training has been provided by the trust to the
students of the weaker section of society and not by the appellant company itself and
therefore there was no service provided by the Trust against which cenvat credit is claimed
by the appellant.

It was held that “CSR is not a charity anymore since it has got a direct bearing on the
manufacturing activity of the company which is largely dependent on the smooth supply of
raw materials even from a remote location or tribal belts (that requires no resistance in the
supply chain from the community) and the same also augments the credit rating of the
company as well as its standing in the corporate world”.

Section 7 of the Act defines the scope of “supply”, which contains the transactions
undertaken without consideration. It should be argued that CSR is an activity that indulges
the supply of goods and services without any consideration, and in furtherance of business as
observed from the above, and thus, must not be made eligible under the GST
regime and ITC shall be made available. Moreover, on the judicial frontier, the tribunal has
also supported this position and reiterated that CSR is eligible to GST, as it is furtherance of
business, and therefore, ITC should be made available. In the case of the Indian Institute of
Corporate Affairs, IN RE AAR-Delhi (2019), 10 the court reiterated that “the amount paid by

9
Circular No. 127/9/2010-ST, dated 16.08.2010.
10
Indian Institute of Corporate Affairs, IN RE AAR-Delhi (2019) 107 Taxmann.com 413.
the companies to external agencies for CSR Activities to undertake specified projects, would
be considered as 'Consideration', and activities undertaken on company's instruction or
direction shall be deemed to Supply within the GST Act”.

Further, held that “CSR cannot be treated as a gift, as the delivery of the gift is made
voluntarily, and therefore, cannot assume the character of gifts. As may be noticed from the
Gift Tax Act, the definition of gift necessarily includes any transfer made voluntarily and
without consideration. Since the activity is mandated on companies, and therefore, any CSR
activities cannot be termed as a gift”. Thus accordingly, CSR is not falling under the purview
of Section 17(5) of the Act, thus ITC can be availed in CSR cases.

There is no empirical evidence that shows that expenses on CSR would necessarily increase
the performance of a company. As the term “furtherance of businesses” is interpreted that an
activity must be undertaken for business stability and profitability. However, it is not clear,
whether CSR shall be treated in furtherance of business.

Now, as the country with all over the world is facing the unprecedented circumstances set by
COVID-19 Pandemic and in such time, we have encountered the end number of companies
which have been providing COVID-19 related equipment like oximeters, PPE Kits,
sanitizers, medicines, oxygen canisters, etc. to the employees are working at their home to
ensure their wellbeing as they were workforce which was working from home. As these
goods are not procured for use in office premises of taxpayers, it may be comprehended by
tax officers that taxpayers are not eligible to avail ITC on such procurements under Section
17(5)(g) as these are used for personal consumption of employees. Thus an exemption from
customs under Notification No. 32/2021-Customs, dated May 31, 2021 11 or Ad-hoc
Exemption Order No. 4/2021-Customs dated May 3, 2021 12 for extending exemption from
Integrated Goods and Services Tax (IGST) on import of COVID-19 related equipment on
payment of considerations but based on considering the certain situation, certain taxpayers
may not be able to fulfill the said procedural conditions and end up paying IGST on such
procurements.

Afterward, the reply from the key GST Officials and Group of Ministers through the
representation made by NASSCOM to clarify the eligibility of ITC on COVID-19 related
procurements. Thus in the further notification, the clarification was sought that “all amount
11
Notification of Customs, Cs32/2021, New Delhi dated 31st May 2021.
12
Ad hoc Exemption from IGST, Order No. 4/2021 dated 3rd May 2021.
spend by taxpayers on COVID 19-related gear like PPE kits, oximeters, medicines towards
ensuring the wellbeing of employees/ their family should not be construed as personal
consumption under S. 17(5)(g) of CGST Act rather it would be eligible for credit in terms of
S. 16 of CGST Act, as the amount as CSR was spent for providing relief to people suffering
from COVID-19 pandemic or giveaways provided to employees to ensure their safety”.13

The mechanism of ITC and Blocked Credit concerning CSR can be understood from the
standpoint of business. The expression business requires no discussion as it is already defined
under Section 2(17)(b) of the Act and it has to be seen from the framework of supply as
defined under Section 7 of the Act. The three-way test for ITC on CSR can be summarised
that firstly, the moment the test of business of rending taxable supply is passed, one needs to
see the eligibility and compliances under Section 16 of the Act, per se. Secondly, on having
crossed the first barrier, the second test would be passing the blocked credit under Section
17(5)(h) of the Act. Thirdly, to get rid of the clutches of blocked credit, one needs to see if
any activity say CSR is mandated by law, if the answer is yes, then it will be said to have
passed the third test to make the ITC as an accrued and vested right under the ecosystem of
GST.

Applicability of ITC on COVID supplies

The outbreak of the deadly Corona Pandemic created an abnormal situation in the entire
world. The need for medical and health resources increased exponentially and in such
circumstances, even the government witnessed shortages in supplying resources to normalize
the health situations. In such crucial times, many corporate houses and companies entered
into the realm and extended their support by providing medical resources and monetary
contributions. By extending such support, many companies fulfilled their social responsibility
of CSR. However, the legal position regarding the eligibility of companies to avail ITC for
such activities is still ambiguous and the confusion lies between the fact that whether these
companies have the option to avail ITC or bear the additional burden created thereof.

As per the current GST Rules, the key requirement for a person to avail ITC on goods or
services is that it should be utilized "in the course or furtherance of business". Courts in some
instances have interpreted this as "anything done towards assisting or promoting the interests
of a business". Thus, any activity done towards the purpose of earning profit shall be in the
13
GST: Representation to Address Concern Of Input Tax Credit On Procurement Of Covid-19 Related Goods |
NASSCOM Community | The Official Community of Indian IT Industry.
ambit of “in the course or furtherance of business”. Considering the voluntary and
philanthropic activities of the companies, CESTAT Mumbai allowed the companies to avail
CENVAT credit of service tax paid for carrying out CSR. It opined that CSR being a
mandatory social obligation for both public and private companies, must be deemed as a
business activity. Thus, the view that companies may avail ITC on goods supplied as an act
of fulfilling their CSR obligations and is in the course or furtherance of business can be
considered valid. However, the GST rules allow ITC on the supply of goods that are used in
the course or furtherance of business and provide cases where such credit cannot be availed.
One such case where the credit cannot be availed is on goods that are disposed of as "gift" or
"free samples".

Here the conundrum lies, the difficulty faced by companies in availing credit on goods
supplies donated during the dire need of pandemic times. The question here arises that
whether such donations should be ascertained as "voluntary" or "gift" when distributed under
CSR obligations. Whether the companies can argue that this benefaction should not be barred
from ITC availment, considering its nature is “mandatory” as opposed to “voluntary”.
Haryana and Gujarat state governments introduced certain policies to avoid this ambiguity
from becoming a challenge for the companies disposing of their CSR duties. As per the
notifications issued, the applicable SGST and IGST will be reimbursed to the companies
engaged in distributing essentials. However, despite such incentivization by the state
government, the interplay between goods and services provided to fight the outbreak and
their eligibility for ITC remains an ambiguous aspect on broader terms and needs an urgent if
not a permanent address.