Disallowing input tax credit may increase CSR cost, impact beneficiaries

CSR activities were not treated as a business expenditure

The corporate social responsibility (CSR) cost of companies is likely to increase with the restriction on availability of goods and services tax (GST) input tax credit proposed by the government.
 

The Budget, on Wednesday, sought to amend a section of the CGST Act to the effect that input tax credit will not be available in respect of goods or services used for CSR activities under Section 135 of the Companies Act, 2013.
 

The move may bump up the cost of CSR for companies. But more importantly, beneficiaries could be at the receiving end.
 

R Shankar Raman, whole-time director and chief financial officer (CFO), Larsen & Toubro (L&T), said, “India Inc will have to grin and bear it. Two per cent of a company’s profit over the preceding three years has to be spent as CSR, according to the Companies Act, 2013.”
 

He added, “The new budgetary proposal will make the effort more expensive for organisations. The impact of input taxes under GST is anywhere between 15 and 18 per cent for a company. To that extent, it will become more expensive for a company since the concession of input tax credit to meet CSR obligations will not be available now.”
 

The logic, he said, was that CSR activities were not treated as business expenditure.

 

“So, the expenditure that companies incur on CSR will not be allowed as a deduction under GST provisions. While companies will not like it, they will accept it and move on.” 
 

Experts echoed the views. MS Mani, partner, Deloitte India, said that the overall CSR costs for corporates covered by Section 135 would increase now, despite CSR activity remaining the same.
 

He added, “The denial of input tax credit on CSR activities imposes an additional cost despite the same being both a statutory requirement and a social necessity.” 
 

According to law firm Economic Laws Practice, it’s a significant blow to the industry.
 

It inflates CSR spend by the rate of tax applicable on relevant procurements (typically in the range of 12-18 per cent), thereby reducing the funds available/allocated for actual CSR spend. 
 

However, Praveer Sinha, chief executive officer (CEO) & managing director (MD), Tata Power, said, “I don’t see it moving the needle much.”
 

Some experts said that companies spending two per cent may not be impacted by the government move. Also, there were also companies not availing the input tax credit.
 

Before the Budget, input tax credit for CSR expenses was not specifically disallowed. Companies claiming it relied on favourable Advance Rulings. But there have been contrary rulings as well. 
 

Now, the amendment proposed in the Budget makes CSR expenses specifically ineligible for input tax credit.
 

While the impact on companies was one aspect, there were concerns about the last-mile impact. The head of a pharma firm said that the amendment would not affect the CSR budget or sectoral allocations. But the beneficiary may be getting less, he said. The company runs several health and education projects in rural parts of a state in Western India.
 

An executive of a steel company said that so far the cost of input tax credit was not part of the CSR budget. But now, it would have to be factored in.
 

“So, the outlay for beneficiaries will be less if the CSR budget remains the same.”
 

Amarnath Halember, executive director and CEO of business consulting firm, NextG Apex India Pvt Ltd, said that the new amendment proposed will become inequitable for companies spending on CSR activities.
 

“In fact, the government should promote more CSR activities and all companies should voluntarily engage in CSR. Input credit should be eligible with respect to where the money is spent,” he said.
 

The ministry of corporate affairs had made it mandatory for companies covered under Section 135 to spend two per cent of their profits on CSR projects effective 2014-2015. 
 

Data available on the National CSR Portal shows that CSR expenditure by 18,012 companies had stood at Rs 25,714.7 crore in FY21.