Can you claim input tax credit on CSR expense ⁠— three authorities have two different rulings

• Corporate entities will not be able to reduce their tax burden by claiming input tax credit on corporate social responsibility activities.
• This could also lead to confusion amongst corporate entities since AARs of different states have given contrary rulings in this regard.
• Earlier, Uttar Pradesh AAR had allowed ITC on CSR activities, while Kerala AAR took the contrary position.

Input tax credit allows registered entities under GST to claim credit on the goods and services tax (GST) that they have paid while purchasing goods or services, which can be offset from the GST that they have to pay after making sales.

However, input tax credit (ITC) can’t be claimed on expenses made towards corporate social responsibility (CSR) activities, according to a new order from the Authority for Advance Rulings (AAR) ruling in Gujarat.

There are two other rulings from the same authority and one of those allows the input tax credit on CSR.

According to the provisions of Companies Act, 2013, companies with a net worth of ₹500 crore or more, or turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more, will have to mandatorily spend on CSR activities. The spend should be a minimum of 2% of the average net profit of the past three years.

The root of the problem

The primary issue here is whether CSR activities can be construed as “in course or furtherance of business”, that is, whether they are fundamental for a company to continue its business activities. However, the GST provisions do not define what exactly that would entail.

For this purpose, the applicant in this case, Adama India Pvt. Ltd., relied on the provisions of Companies Act, 2013, to state that CSR activities are mandatory as per law, and not undertaking them would cause harm to the business. This, the applicant says, entitles it to take ITC on CSR activities.

However, the Gujarat AAR referred to the Companies (CSR Policy) Rules, 2014, to state that CSR activities are not covered in activities “in the course or furtherance of business”.

It also cited the provisions of Companies (CSR Policy) Amendment Rules, 2021, which provide a definition of CSR that excludes it from normal business activities.

Essentially, the GAAR ruled that since CSR is specifically excluded from the scope of normal business activities, the applicant cannot take ITC on CSR activities.

According to Ayush Mehrotra, one of the partners at Khaitan & Co., this is likely to further increase litigation in GST.

“The GST framework is wide enough to inter alia include activities without pecuniary benefits and those which are incidental or ancillary to main business. As such, the present ruling will only cause further litigation on GST which was otherwise expected to be a simpler and straightforward framework,” he told Business Insider.

Contrary AAR rulings put corporates in a bind

Gujarat AAR’s ruling is in contrast to that of the Uttar Pradesh AAR, which allowed the applicant to take the credit of Goods and Services Tax (GST) paid by the company while purchasing goods to be used for CSR activities.

However, it is in line with the Kerala AAR, which passed a similar ruling in the matter of Polycab Wires donating flood relief items.

“It is also noteworthy to highlight that since this ruling is in contradiction to prior rulings issued by competent authorities in other states, the urgent need for a national authority is once again being felt to ensure certainty of legal position,” Khaitan added further.

The exclusion of ITC on CSR activities will mean that corporate entities will not be able to reduce their tax burden by claiming GST input credit.

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