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India Inc braces for CSR cost blow

Mumbai, Feb 3, 2023

The Budget proposals provide that input tax credit under the Goods and Services Tax (GST) provisions, will not be available in respect of goods or services acquired by a company for use to meet its Corporate Social Responsibility (CSR) obligations.

Divergent views have been taken by various benches of the Authority for Advance Rulings (AAR), which TOI has reported upon, from time to time. The Uttar Pradesh bench in the case of Dwarikesh Sugar Industries had held that CSR expenditure is a legal obligation, thus GST paid by the company on the products it purchased for its CSR related expenditure, could be set-off against its GST liability (this is referred to as input tax credit).

On the other hand, the Kerala bench had denied input tax credit (ITC) to Polycab Wires, a dealer of electrical items which had distributed free of charge switches, cables, fans etc to flood impacted people as its CSR activity. A similar denial was given by the Gujarat AAR in the case of Adama India, as the bench held that CSR activities are excluded from the normal course of its business.

Sanket Desai, partner, Indirect taxes, at EY-India points out that public limited entities, including listed companies are statutorily obligated to incur a certain amount towards CSR initiatives. Many private companies also participate in such activities. “Denial of ITC in respect of GST incurred on CSR related expenditure would, to this extent, dent the bottom line of such companies.”

“This proposal comes as a significant blow to the industry as it inflates CSR spend by the rate of tax applicable on relevant procurements (typically in range of 12-18%) thereby reducing the funds available/allocated for actual CSR spend,” states Adarsh Somani, partner, Economic Laws Practice.

“This amendment is also likely to expose previous ITC claims made by corporates to litigation. However, the taxpayers can now argue that a specific prospective restriction would mean that ITC was available for the period prior to amendment,” says Somani.

[The Times of India]

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