Top Stories Availment of Blocked Input Tax Credit on CSR Expenses before 01.10.2023: How to Reply to GST SCN [Find Draft Format Here] In this article, we provide clarity on the eligibility of ITC for CSR expenses and address the key points raised by the authorities By Avinash Kurungot – On October 5, 2024 4:25 pm – 3 mins readBy Manu Sharma – On 4:25 pm – 3 mins read

The controversy around the availment of Input Tax Credit ( ITC ) on Corporate Social Responsibility ( CSR ) expenses under the Goods and Services Tax ( GST ) regime has been an ongoing issue for many businesses. Show Cause Notices (SCN) has raised concerns regarding the eligibility of ITC claims on CSR expenses, alleging that such credits are blocked under Section 17(5)(h) of the Central Goods and Services Tax (CGST) Act, 2017. Understanding the Background of CSR and ITC Corporate Social Responsibility ( CSR ) is a mandatory obligation for certain companies under Section 135 of the Companies Act, 2013. Companies with a net worth exceeding a specific threshold are required to spend at least 2% of their average net profits on CSR initiatives, as specified under Schedule VII of the Act.

These activities include initiatives such as building educational infrastructure, promoting healthcare, and other social welfare programs. Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here The Input Tax Credit ( ITC ) mechanism under GST allows businesses to claim credits on the tax paid for the procurement of goods or services used in the course of business. However, Section 17(5)(h) of the Central Goods and Services Tax Act, 2017, places restrictions on ITC for goods that are disposed of by way of gifts or free samples, which has led to confusion regarding the eligibility of ITC on CSR-related expenses. Key Arguments Supporting ITC on CSR Expenses CSR Activities as a Statutory Obligation: Unlike voluntary donations or gifts, CSR expenses are mandated by law. These expenses are undertaken to fulfill statutory obligations under Section 135 of the Companies Act.

Therefore, CSR expenses cannot be categorized as gifts, which makes them eligible for ITC. Business Nexus of CSR Activities CSR activities contribute to the company’s reputation, brand goodwill, and long-term business sustainability. They have a direct nexus with business operations, as they help create a positive image and ensure smooth business continuity, which is essential for sustaining stakeholder relationships. Legal Precedents and Clarifications

The Authority for Advance Ruling (AAR) in the Dwarikesh Sugar Industries Limited case has recognized CSR expenses as part of business operations, thereby making them eligible for ITC. Additionally, the Ministry of Corporate Affairs has issued various clarifications, underlining the mandatory and statutory nature of CSR activities. Recent Amendments and Clarifications An important amendment introduced by the Finance Act, 2023, added Clause (fa) to Section 17(5) of the Central Goods and Services Tax Act, specifically restricting ITC on CSR expenses from October 1, 2023. However, this amendment is not retrospective, which means that ITC claimed for CSR expenses incurred before this date remains valid. This interpretation aligns with the principle that amendments affecting taxpayers’ rights should not have retrospective applicability.

Conclusion The availment of Input Tax Credit on CSR expenses continues to be a subject of debate, with authorities alleging that such credits are restricted under Section 17(5)(h) of the Central Goods and Services Tax Act, 2017. Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here However, considering the statutory nature of CSR obligations, their direct connection to business operations, and the legal clarifications available, it can be argued that ITC on CSR expenses is eligible up until the recent amendments. Businesses must stay updated on the latest regulations and consult experts to ensure compliance while making the most of available credits. Draft Reply By clicking the blue button below, subscribers can access a draft format of the reply to GST Show Cause Notice against Availment of Blocked Input Tax Credit on CSR Expenses before 01.10.2023.