GST and Corporate Social Responsibility: Provisions and Challenges

Mode (a): Direct Contributions to Statutory / Government Funds

Contributions made directly to various funds such as Swachh Bharat Kosh, PM CARES Fund, Clean Ganga Fund, etc. The contributions to such funds are made in the form of pure monetary donations.

Mode (b): Providing Funds to Registered Trusts, Societies, or Section 8 Companies

Usually, under this scenario, a Memorandum of Understanding (MOU) is entered into between the company and the recipient trust or society. By implementing such an MOU, the corporate discharges its CSR requirement. Although the corporate is not directly performing any CSR activity and such activities are provided by the trust or society to the ultimate beneficiaries, the trust or society may need to charge GST on the funds received by it.

Pivotal Drafting Requirement: Drafting the terms and clauses of the MOU plays a pivotal role. Any direct nexus between the amount paid and the supply of taxable service towards a specified project makes the activity leviable to GST. Conversely, if funds are granted without any reciprocal obligation or direct nexus, they represent pure financial grants.

Mode (c): Providing Manufactured / Traded Goods or Services Directly to Beneficiaries

Under this mode, companies provide their own manufactured or purchased goods such as masks, sanitizers, PPE kits, food products, etc. directly to beneficiaries. Alternatively, services such as providing temporary shelter, COVID-19 education, medical camps, or awareness programmes may be provided by the company to discharge its CSR.

GST on Supply of Goods for CSR Activities: The Schedule I Trigger

To explore the GST implications on supply of goods given free of cost for CSR activities, it is important to examine Schedule I read with Section 7(1)(c) of the CGST Act, 2017, which specifies activities to be treated as supply even if made without consideration:

“1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.”

Since the registered person’s own products, viz. manufactured or traded goods, are distributed free of cost for CSR activities, these constitute “finished goods” in the business, and are characterized as business assets. Hence, if the registered person has availed ITC on the said goods (business assets), the permanent transfer of these goods amounts to a deemed supply under Schedule I, even though given without any consideration, thereby attracting GST!

GST on Supply of Services for CSR Activities

Services supplied free of cost for CSR activities are NOT covered under any entry of Schedule I to the CGST Act:

• Entry No. 1 on “Permanent transfer or disposal of business assets” particularly covers goods (business assets) but not services;
• Entry No. 2 on “Supply of goods or services between related persons or between distinct persons” is inapplicable, as CSR services are directed towards independent societal beneficiaries, not related or distinct persons.

Hence, any services provided without consideration for CSR activities do not constitute a supply, thereby not attracting GST. On the contrary, CSR activities executed through external agencies for consideration may constitute a supply, unless specifically exempt under Notification No. 12/2017-Central Tax (Rate) as amended.

a. Section 16(1) of the CGST Act, 2017 (Eligibility and Conditions for Taking ITC)

“16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in Section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”

b. Section 2(17) of the CGST Act, 2017 (Broad Definition of ‘Business’)

“2. (17) Business includes –
(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
(c) ……”

c. Section 135 of the Companies Act, 2013 (Mandatory CSR Governance & Spending)

“135. (1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

………

(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

……..

(7) If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.”

a. CESTAT Mumbai: Essel Propack Ltd. v. Commissioner of CGST [[2020] 117 taxmann.com 409]

The Hon’ble CESTAT Mumbai delivered a landmark ruling establishing the commercial character of CSR:

“CSR is not a charity anymore since it has got a direct bearing on the manufacturing activity of the company which is largely dependent on smooth supply of raw materials and the same also augments the credit rating of the company as well as its standing in the corporate world. Therefore, sustainability is dependent on CSR without which companies cannot operate smoothly for a long period as they are dependent on various stakeholders to conduct business in an economically, socially and environmentally sustainable manner. It was further observed that CSR, which was a mandatory requirement for the public sector undertakings, has been made obligatory also for the private sector and unless the same is treated as input service in respect of activities relating to business, production and sustainability of the company itself would be at stake.”

b. Karnataka High Court: CCE v. Millipore India (P) Ltd. [[2011] 16 taxmann.com 363]

The Hon’ble Karnataka High Court held that the discharge of corporate social responsibility represents the discharge of a statutory obligation. When an employer incurs expenditure to maintain premises in an eco-friendly manner, the tax paid on such services forms an integral component of the cost of final products. The High Court upheld that taxes paid on such services fall squarely within the ambit of ‘input services’ and the assessee is fully entitled to the benefit of credit.

✓ First Test Cleared: A company is compulsorily mandated by statute to undertake CSR activities to run its operations. ‘In the course or furtherance of business’ encompasses all incidental and ancillary activities incurred in business processes. CSR is an essential statutory component of the enterprise as a whole and therefore passes the business test under Section 16(1).

“17(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—
……
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;
…..”

The Adverse Ruling: Polycab Wires Private Limited [2019 (24) G.S.T.L. 103 (A.A.R. - GST)]

The Authority for Advance Ruling (AAR), Kerala denied ITC on CSR expenses by characterizing them as ‘disposal by way of gift’. The applicant had distributed electrical cables and goods to flood victims in Kerala towards discharging its mandatory CSR obligations.

The Kerala AAR held that because the applicant distributed electrical goods on a free basis without collecting consideration, ITC would be blocked under Section 17(5)(h). However, the Kerala AAR failed to examine the statutory jurisprudence of what constitutes a ‘gift’ and delivered a summary rejection without plausible legal reasoning.

What is the Legal Meaning of the Term ‘Gift’?

The term ‘Gift’ is not defined under the GST statutes. However, established legal lexicons and judicial precedents establish that a gift is inherently voluntary, gratuitous, and occasional:

• The Gift Tax Act, 1958 (18 of 1958): Defined gift as the transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money’s worth.
• Black’s Law Dictionary (4th Edition): “A voluntary transfer of personal property without consideration. A parting by owner with property without pecuniary consideration. A voluntary conveyance of land, or transfer of goods, from one person to another made gratuitously, and not upon any consideration of blood or money.”
• Webster’s Third New International Dictionary (Unabridged): “Something that is voluntarily transferred by one person to another without compensation; a voluntary transfer of real or personal property without any consideration or without a valuable consideration—distinguished from sale.”
• Supreme Court of India in Ku. Sonia Bhatia v. State of UP [AIR 1981 SC 1274]: Citing Corpus Juris Secundum (Vol. 38), the Apex Court ruled: “A ‘gift’ is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation therefor. A ‘gift’ is a gratuity and an act of generosity and not only does not require a consideration, but there can be none.”

The Authoritative Ruling: Dwarikesh Sugar Industries Ltd [[2021] 125 taxmann.com 329] (AAR Uttar Pradesh)

Distinguishing the erroneous reasoning in Polycab, the Authority for Advance Ruling, Uttar Pradesh drew an explicit legal demarcation between voluntary gifts and mandatory CSR disbursements:

“…we are in unison with the applicant that a clear distinction needs to be drawn between goods given as ‘gift’ and those provided/supplied as a part of CSR activities. While the former is voluntary and occasional, the latter is obligatory and regular in nature. CSR expenses incurred by the applicant have been mandated under the Companies Act, 2013. It is the applicant’s obligation to incur such expenses in order to be in compliant with the law. Since CSR expenses are not incurred voluntarily, accordingly, we are of the opinion that they do not qualify as ‘gifts’ and therefore its credit is not restricted under section 17(5) of the CGST Act, 2017.”

Legal Principle: Gifts stem from love, affection, and volition. CSR expenditure is an involuntary, non-negotiable statutory obligation imposed under Section 135 of the Companies Act, default of which triggers severe financial and penal liabilities under sub-section (7). Consequently, CSR procurements cannot be categorized as gifts, and ITC cannot be barred under Section 17(5)(h).

Literal Rule of Interpretation: Section 17(5)(h) Covers Only Goods, Never Services

Section 17(5)(h) restricts credit solely on “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples”. It places no restriction whatsoever on the free distribution of services! Where the language enacted by the legislature is explicit and unambiguous, there is no scope for intendment. Consequently, even if services are supplied free of cost for CSR activities, ITC on inward service procurements is completely unhindered and fully available.