Budget 2023 : Input Tax Credit (ITC) no longer permitted on CSR expenditures

The allowance of Input Tax Credit (ITC) for expenses related to Corporate Social Responsibility (CSR) under GST has been a contentious issue, with conflicting opinions and rulings. The 2023 Union Budget has resolved this debate by proposing changes to the Goods and Services Tax (GST) Act, stating that ITC will no longer be allowed for goods or services used for CSR obligations outlined in section 135 of the Companies Act, 2013.

Clause 130 of the Finance Bill, 2023 proposes to add a new clause (fa) to Section 17 of the Central Goods and Services Tax (GST) Act :

“(fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013;”.

Q Which companies fall in the ambit of mandatory CSR provisions?

A According to Section 135(1) of the Companies Act 2013, companies (including its holding company and subsidiary company) that meet any of the following criteria during the preceding financial year must spend a specified amount on CSR activities:

• Annual turnover of at least INR 1000 crores;
• Net worth of at least INR 500 crores;
• Net profit of at least INR 5 crores or more.

Q What is the Minimum CSR Spending Requirement?

A The Companies Act, 2013 requires companies to allocate 2% of their average net profits from the last 3 financial years towards socially responsible activities outlined in their CSR policy. The calculation of net profits is specified in Section 198 of the Act.

Q Was Input Tax Credit available for CSR Expenditure prior to this amendment?

A Prior to the 2023 Union Budget amendment, ITC was not specifically disallowed for CSR expenditure. This meant that companies could incur expenses for CSR activities and claim ITC for taxes paid, as long as the expenditure was considered incurred for business purposes.

Now, since the amendment has been proposed prospectively, it means that ITC for CSR expenditure incurred before the amendment may still be eligible, subject to other conditions being met.

In certain cases, the honorable tribunal has approved the CENVAT credit for service tax paid on CSR expenses and many Advance Rulings during the GST era have also allowed ITC for such expenses.

Q Are CSR expenditure allowed under Income Tax?

A The Income Tax Act, 1961 does not permit a deduction for CSR expenditure. As per Explanation 2 of Section 37(1) of the Income-tax Act, 1961, any expenses incurred by a taxpayer for activities related to Corporate Social Responsibility, as described in the Companies Act, 2013, are not considered as expenses incurred for the purpose of business or profession. However, CSR expenditure falling under the categories described in Sections 30 to 36 of the Income Tax Act, 1961 may be deductible.

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