Contradictory AAR verdicts on CSR under GST regime baffle companies

Contradictory corporate social responsibility (CSR) verdicts by the Authorities for Advance Ruling (AARs), under the goods and services tax (GST) regime, have created confusion among private players, who clearly appear unhappy with the rulings. 

Recently, the Uttar Pradesh AAR had held that CSR spend by companies is eligible for input tax credit. This is contradictory to the Kerala AAR, which earlier noted that such transactions are not eligible for input tax credit refund.

In the case of Dwarikesh Sugar Industries, engaged in the business of manufacture and sale of sugar and allied products, the company undertook various CSR activities. They include construction of school buildings, free supply of furniture and free supply of electrical goods for use in school.

For procurement of these goods, the applicant claimed that GST was charged by the supplier and wanted to know if it was eligible for input tax credit.

The UP AAR noted that CSR expenses have been mandated by the Companies Act 2013 and is an obligation of the applicant to incur such an expense in order to be compliant with the law.

It said that since CSR expenses are not incurred voluntarily, they would not qualify as gifts. Hence, credit will not be restricted under Section 17(5) of the Central GST (CGST) Act. According to Section 17(5) of the CGST Act, input tax credit is not available for goods lost, stolen or given as free samples or gifts.

The UP AAR has ruled that the company will be eligible for input tax credit for incurring CSR spend.

Meanwhile, in another case of Polycab Wires, which distributed electrical items like switches, fans and cables to flood-affected people under CSR expenses for free, the Kerala AAR ruled that “for these transactions input tax credit will not be available...”

Distributors of the company had provided the goods free of cost to the Kerala State Electricity Board (KSEB) for reinstating connectivity in flood ridden areas as part of the ‘mission reconnect’ a CSR activity.

The distributors had issued tax invoices to KSEB, showing sale value, GST and total amount with 100 per cent discount.

However, the GST liability was paid to the government.

The applicant pointed out that since GST liability was completely paid, free supplies are eligible to avail full input tax credit claim.

According to the Companies Act, a company having net worth of Rs 500 crore or more, or a turnover of Rs 1,000 crore or more or a net profit of Rs 5 crore or more during any financial year will mandatorily spend at least two per cent of the average net profits for CSR activities every financial year.

The CSR advance ruling is among several contradictory rulings by AARs.

Moreover, classification issues, revenue biases in rulings, delays in disposing of applications and lack of senior officers in AARs have made the advance ruling mechanism under GST unpopular among industry players.

Abhishek Jain, partner, EY, said, the contrary AARs on whether input tax credit will be eligible on the CSR spent by companies has created confusion among industry players.

“Considering that most companies provide free goods under their CSR agenda to ensure compliance under the Companies Act and is clearly a business expense, the government should provide explicit clarity if input tax credit would be available in case of procurement of goods for CSR. It should align the GST law accordingly,” said Jain.

AARs comprise joint commissioners or additional commissioners of state governments and the central government.