The Finance Bill 2023 proposed an amendment to section 17 of the Central Goods and Services Tax (CGST) Act, which would disallow input tax credit ( ITC ) for goods or services used in Corporate Social Responsibility ( CSR ) activities.
The proposed amendment aims to provide that ITC will not be available for activities relating to a taxable person’s obligations under section 135 of the Companies Act 2013, which requires companies to spend at least 2% of their average net profit in the preceding three years on CSR activities.
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. Additionally, companies do not spend CSR money on activities related to their businesses, so there is no reason for ITC to be available for such expenses.
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 Bill. The circular will provide clarity on the implementation of the provision, but the official has confirmed that there will be no date of implementation. The official also clarified that companies will not have to deposit any ITC claimed for CSR expenses since the implementation of GST.
Suggestions have been made to the Finance Ministry that ITC should be allowed for any amount paid over and above 2% of profits. However, the official has rejected this suggestion, stating that it will be difficult to segregate expenditure between 2% and more than 2%. The provision will also apply to companies that fulfill the conditions of Section 135 of the Companies Act, which includes companies with a net worth of ₹500 crore or more, a turnover of ₹1,000 crore or more, or a net profit of ₹5 crore or more during any financial year.
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.
In 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.
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