The proposed amendment will be applicable to all companies that spend on CSR activities, and a detailed clarificatory circular will be released post-enactment of the Finance Bill 2023
Introduction
The proposed amendment to the Central Goods and Services Tax Act (CGST) 2017, disallowing Input Tax Credit (ITC) for Corporate Social Responsibility (CSR) expenses, has raised concerns among some stakeholders. The amendment aims to disallow ITC for expenses related to a taxable person’s obligation under section 135 of the Companies Act, which requires companies to spend at least 2% of their average net profit in the preceding three years on CSR activities. In this article, we will explore the proposed amendment and its potential impact on companies.
Proposed Amendment to the CGST Act
The proposed amendment to the CGST Act 2017 aims to provide that ITC will not be available for expenses related to a taxable person’s obligation under section 135 of the Companies Act. The proposed amendment has been criticized by some, who argue that it could discourage companies from engaging in CSR activities. However, a senior Finance Ministry official has clarified that the proposed amendment is in line with the Income Tax Act, which does not allow deductions for CSR expenses.
Clarificatory Circular by CBIC Anticipated
The proposed amendment will be applicable to all companies that spend on CSR activities, and a detailed clarificatory circular will be released post-enactment of the Finance Bill 2023. The circular will provide clarity on the implementation of the provision, but the official has confirmed that there will be no date of implementation. Companies will not have to deposit any ITC claimed for CSR expenses since the implementation of GST.
The Issue of ITC on CSR
The issue of ITC on CSR has been a subject of controversy, with various companies seeking clarification from the Authority for Advance Rulings (AAR). The rulings have been contradictory, with some AARs favoring ITC on CSR-related purchases, while others have ruled against it. For instance, the Telangana AAR favored ITC on CSR-related purchases of a PSA oxygen plant and spare parts by Hyderabad-based Bambino Pasta Food Industries. Similarly, the Uttar Pradesh AAR ruled in favor of Dwarikesh Sugar Industries. However, the Kerala AAR held that ITC shall not be available on free distribution of electrical items like switches, fans, cables, etc., to flood-affected people under CSR.
Impact of the Proposed Amendment
The proposed amendment to the CGST Act, disallowing ITC for CSR expenses, is likely to have a significant impact on companies. While some have criticized the proposed amendment, a senior Finance Ministry official has clarified that it is in line with the Income Tax Act, and companies do not spend CSR money on activities related to their businesses. However, the detailed clarificatory circular to be released post-enactment of the Finance Bill 2023 will provide clarity on the implementation of the provision.
Conclusion
The proposed amendment to the Central Goods and Services Tax Act, disallowing Input Tax Credit for CSR expenses is likely to have a significant impact on companies. While some have criticized the proposed amendment, a senior Finance Ministry official has clarified that it is in line with the Income Tax Act, and companies do not spend CSR money on activities related to their businesses. However, the detailed clarificatory circular to be released post-enactment of the Finance Bill 2023 will provide clarity on the implementation of the provision.
(India CSR)
