Understanding GST on CSR Spending: A Focus on Gujarat

Corporate Social Responsibility (CSR) is not just a legal mandate but a powerful tool to foster sustainable development, particularly in states like Gujarat, known for its vibrant industries and robust economic framework. However, when it comes to CSR spending under the Goods and Services Tax (GST) regime, companies must navigate complex rules concerning Input Tax Credit (ITC).

Under GST, businesses can claim ITC on goods or services used in the course or furtherance of business. However, when these expenses are for CSR activities, their eligibility for ITC becomes ambiguous due to specific exclusions under Section 17(5) of the CGST Act, 2017.

• Eligibility of ITC on CSR Expenditure:

  • CSR spending is considered an obligation under the Companies Act, 2013. Some courts and tribunals have recognized CSR activities as connected to the business’s sustainability and reputation, allowing ITC claims on certain expenses.
  • However, expenditures on gifts, free samples, or personal use, even under CSR, are explicitly excluded from ITC under the GST framework.

• Gujarat’s Perspective:

  • Gujarat, with its industrial prominence, sees significant CSR initiatives. These range from educational sponsorships to healthcare programs. Companies operating in Gujarat must ensure compliance with both state-specific GST rules and CSR mandates.

  • In FY2022-23, Gujarat received CSR funds amounting to Rs. 2,008.42 Cr. CSR experts have attributed this growth to the substantial number of large industries setting up and expanding in Gujarat over the past decade. In addition to the strong presence of large companies there has been a significant growth of MSMEs in the state which has further driven the trend of increased spending. Pankaj Kamliya, chief operations officer at Gujarat CSR Authority, has said, “Better awareness among industries, a responsible governance structure, and dedicated CSR project implementation teams have led to a substantial rise in CSR spending. The increasing sense of responsibility among corporates towards social impact and community uplift is evident. With growing businesses, overall spending has also risen.

• Key Rulings and Circulars:

  • The Karnataka Authority for Advance Rulings (AAR) has allowed ITC on goods distributed under CSR initiatives, considering them as integral to the business's corporate image and stakeholder relations.

  • The GAAAR also referred to the amendments in Section 17 of the CGST Act, introduced through the Finance Act, 2023, effective from October 1, 2023 which clarified the legislative intent to disallow ITC on goods or services used for CSR activities.Consequently, the GAAAR upheld the AAR, Gujarat ruling that the CSR activities are excluded from the normal course of business of the company, and therefore, they are not eligible for ITC as per Section 16(1) of the CGST Act

  • However, if CSR involves construction (e.g., building schools or hospitals), ITC may not be available for goods and services classified under "works contracts" or immovable property construction​.

Importance of CSR in Gujarat

The emphasis on CSR is vital in Gujarat, which has a history of entrepreneurial spirit. CSR investments can bridge socio-economic gaps and enhance brand reputation, leading to long-term business benefits.While CSR remains a critical corporate function, businesses in Gujarat must carefully analyze their GST obligations and ITC eligibility to ensure compliance. Consulting professionals and staying updated on GST amendments is essential for optimizing CSR-related expenditures under GST laws.We are a dedicated team of CSR consultants based in Gujarat, offering comprehensive solutions to help your organization achieve impactful and compliant Corporate Social Responsibility initiatives. If you're looking for expert guidance to align your CSR efforts with meaningful outcomes, feel free to reach out to us today. Together, we can make a difference!