A. Understanding the Transactions Involved:
If we analyse the transactions involved in the process of
contribution made by any organisation towards corporate social
responsibility, it can be broken in two parts:
a) Procurement of the facility/Asset
b) Spending that facility/ Asset
For any contribution to be made available, firstly procurement of
such contribution has to be done which can be done either by
directly procuring from the available source or it can be selfgenerated within the organisation and once the facility/ asset is
procured, the same is spent as per the dedicated objective.
Let us understand this with some examples:
Example 1: ABC Ltd incurs expenditure by way of sanitisation in
the society and expenses off the same under CSR contribution.
To make this contribution, ABC Ltd makes arrangements for
sanitisation facilities like spray vehicles, disinfectant material,
labour etc which is the first part of the transaction i.e procurement
of the facility/Asset and then further supplying the sanitation
service is the second part i.e Spending that procured facility/Asset
towards social responsibility.
Example 2: ABC Ltd donates amount in PM cares fund and
expense off the same under CSR contribution.
To make this contribution, ABC Ltd has self-generated reserves in
the form of money which is the first part of the transaction i.e
procurement of the facility/Asset and then further donating the
said funds is the second part i.e spending that procured
facility/Asset.
Example 3: ABC Ltd procures and distributes essential goods like
inspection kits, food, apparels etc as CSR contribution.
To make this contribution, ABC Ltd makes procurement of the
essential goods which is the first part of the transaction i.e
procurement of the facility/Asset and then further supplying the
said procured goods under CSR contribution is the second part i.e
spending that procured facility/Asset.
Example 4: ABC Ltd supplies the own manufactured goods/
services free of cost under CSR contribution.
To make this contribution, ABC Ltd has self-generated stock of
goods/services in which the company is already dealing, which is
the first part of the transaction i.e procurement of the facility/Asset
and then further supplying the said goods/ services free of cost is
the second part i.e spending that procured facility/Asset.
B. Understanding the Taxability of Transactions:
To analyse the Taxability of the complete set of Transactions, we
need to understand that applicability of provisions of the
applicable law on both the parts of the Transactions i.e
Procurement of Facility/ Asset (Inward Supply) and Spending the
Facility/ Asset (Outward Supply).
As far as the first part of the transaction is concerned, we need to
check whether the Input Tax credit is eligible on the inward
supply subject to conditions prescribed under Section 16 and 17
of the Central Goods and Services Tax Act, 2017.
As per Section 17(2) of the ibid Act,
Where the goods or services or both are used by the registered
person partly for effecting taxable supplies including zero-rated
supplies under this Act or under the Integrated Goods and Services
Tax Act and partly for effecting exempt supplies under the said
Acts, the amount of credit shall be restricted to so much of the
input tax as is attributable to the said taxable supplies including
zero-rated supplies.
Hence, Eligibility of inward supply is incidental to the nature of
transaction in second part.
Now Let us understand the Taxability of Second Part i.e spending
of Facility/Asset (outward supply) and to judge its chargeability,
the transaction should qualify to be a “Supply” under the ibid
Act.
Whether the Second part of the transaction shall be treated
as a Taxable Supply under GST:
As per Section 7, Supply includes:
All forms of supply of goods or services or both such as sale,
transfer, barter, exchange, license, rental, lease or disposal made
or agreed to be made for a consideration by a person in the course
or furtherance of business
Hence to qualify a transaction as a taxable Supply, following
conditions must be satisfied:
Condition 1: Item being supplied must be either a Good or
Service.
As per Section 2(52), “goods” means every kind of movable
property other than money and securities but includes actionable
claim, growing crops, grass and things attached to or forming part
of the land which are agreed to be severed before supply or under
a contract of supply;
As per Section 2(102), “services” means anything other than
goods, money and securities but includes activities relating to the
use of money or its conversion by cash or by any other mode, from
one form, currency or denomination, to another form, currency or
denomination for which a separate consideration is charged;
Condition 2: Item must be supplied in the course or furtherance
of business.
As per Section 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);
(g) services supplied by a person as the holder of an office which
has been accepted by him in the course or furtherance of his trade,
profession or vocation;
Analysis: Reading clause (a) and (b) of Section 2(17) of the CGST
Act which provides that Business includes any trade, commerce,
manufacture etc and also any activity or transaction in
connection with or incidental or ancillary to such trade,
commerce, or manufacture. Hence interpreting from the
definition of “Business”, any activity done to keep the business
on-going is within the scope of business or we can say in the
course of business.
Further, Expenses incurred towards corporate social
responsibility is within the moral duties of any organisation to
pay back the society and such activity is mandated for certain
categories of corporates under Section 135 of the Indian
Companies Act, 2013.
Hence, supply of goods/ services under corporate social
responsibility mandate is a compliance requirement which is
required to keep the business running and hence supplies of
goods/services made for CSR is in the course of business.
Condition 3: There must be consideration involved against the
item supplied.
As per Section 2(31), “consideration” in relation to the supply of
goods or services or both includes––
(b) the monetary value of any act or forbearance, in respect of, in
response to, or for the inducement of, the supply of goods or
services or both, whether by the recipient or by any other person
but shall not include any subsidy given by the Central Government
or a State Government:
Further, as per legal dictionary, the inducement is a pledge or
promise that causes an individual to enter into a particular
agreement.
Also further, As per Section 2(84), “person” includes—
(g) any corporation established by or under any Central Act, State
Act or Provincial Act or a Government company as defined in
clause (45) of section 2 of the Companies Act, 2013;
Hence reading the above provisions in conjunction, any monetary
value of an act of supply of goods/ services under a pledge or
mandate shall be its consideration which can be received by any
person also other than the recipient.
To put the above interpretation in simpler terms, a consideration
is not just increase in assets but also decrease in liability, and in
this scenario the decrease in liability vis a vis CSR mandate is the
consideration incidental to the goods/ services supplied under
this arrangement.
Condition No 4: The said supply is taxable under GST
As per Section 11(1) of the ibid Act,
Where the Government is satisfied that it is necessary in the public
interest so to do, it may, on the recommendations of the Council, by
notification, exempt generally, either absolutely or subject to such
conditions as may be specified therein, goods or services or both of
any specified description from the whole or any part of the tax
leviable thereon with effect from such date as may be specified in
such notification.
As per the powers given under Section 11(1), Notification No
2/2017 and Notification No 12/2017 CGST (Rate) have been
issued with list of exempt goods and services respectively,
Hence, the goods/ services supplied has to be seen individually
so decide whether the Supply is taxable supply or an exempt
supply and based on same, the chargeability of GST shall be
judged.
Now, let us apply the above conditions in all the scenarios and
judge whether the transaction under the scenarios fall within the
ambit of Taxable Supply:
Example 1: ABC Ltd incurs expenditure by way of sanitisation in the society and expense off the same under CSR contribution.
Condition 1: Process of Sanitisation is a Service as per the
definition
Condition 2: The activity incurred is to fulfil the mandate of CSR
as per the prevailing laws and hence it is in the course of
business
Condition 3: As discussed above, the consideration in this
transaction by way of decrease in liability vis a vis CSR mandate
which is incidental to the goods/ services supplied under this
arrangement.
Condition 4: Taxability of the goods/Services supplied needs to
checked specifically, but for understanding, let us assume it to
be a taxable supply.
Since all the conditions are fulfilled, the transaction qualifies to
be a Taxable Supply within the interpretation of law.
Example 2: ABC Ltd donates amount in PM cares fund and
expense off the same under CSR contribution.
Condition 1: Money is neither a Goods nor services as per the
definition and hence the condition 1 is not fulfilled.
Since the condition 1 is not satisfied at the outset, the
transaction fails to be a Taxable Supply
Example 3: ABC Ltd procures and distributes essential goods like
inspection kits, food, apparels etc as CSR contribution.
Condition 1: Inspection kits, Foods etc is a movable asset and
hence is a Goods as per the definition
Condition 2: The activity incurred is to fulfil the mandate of CSR
as per the prevailing laws and hence it is in the course of
business
Condition 3: As discussed above, the consideration in this
transaction by way of decrease in liability vis a vis CSR mandate
which is incidental to the goods/ services supplied under this
arrangement.
Condition 4: Taxability of the goods/services supplied needs to
checked specifically, but for understanding, let us assume it to
be taxable supply.
Since all the conditions are fulfilled, the transaction qualifies to
be a Taxable Supply within the interpretation of law.
Example 4: ABC Ltd supplies the own manufactured goods/
services free of cost under CSR contribution.
Condition 1: Own goods/ services shall be treated as Goods or
services as per the definition
Condition 2: The activity incurred is to fulfil the mandate of CSR
as per the prevailing laws and hence it is in the course of
business
Condition 3: As discussed above, the consideration in this
transaction by way of decrease in liability vis a vis CSR mandate
which is incidental to the goods/ services supplied under this
arrangement.
Condition 4: Taxability of the goods/services supplied needs to
checked specifically, but for understanding, let us assume it to
be taxable supply.
Since all the conditions are fulfilled, the transaction qualifies to
be a Taxable Supply within the interpretation of law.
C. Understanding the Transaction value of Taxable Supply:
As per Section 15(1) of the ibid Act,
The value of a supply of goods or services or both shall be the
transaction value, which is the price actually paid or payable for
the said supply of goods or services or both where the supplier and
the recipient of the supply are not related and the price is the sole
consideration for the supply.
As per Rule 27 of the Central Goods and Service Tax Rules, 2017
(as amended time to time):
Value of supply of goods or services where the consideration is not
wholly in money.-
Where the supply of goods or services is for a consideration not
wholly in money, the value of the supply shall,-
(a) be the open market value of such supply;
(b) if the open market value is not available under clause (a), be the
sum total of consideration in money and any such further amount
in money as is equivalent to the consideration not in money, if such
amount is known at the time of supply;
(c) if the value of supply is not determinable under clause (a) or
clause (b), be the value of supply of goods or services or both of like
kind and quality;
(d) if the value is not determinable under clause (a) or clause (b) or
clause (c), be the sum total of consideration in money and such
further amount in money that is equivalent to consideration not in
money as determined by the application of rule 30 or rule 31 in
that order.
As per Rule 30 as per ibid Rules:
Value of supply of goods or services or both based on cost.-
Where the value of a supply of goods or services or both is not
determinable by any of the preceding rules of this Chapter, the
value shall be one hundred and ten percent of the cost of
production or manufacture or the cost of acquisition of such goods
or the cost of provision of such services.
Rule 31 as per ibid Rules:
Residual method for determination of value of supply of goods or
services or both.-
Where the value of supply of goods or services or both cannot be
determined under rules 27 to 30, the same shall be determined
using reasonable means consistent with the principles and the
general provisions of section 15 and the provisions of this Chapter:
Provided that in the case of supply of services, the supplier may
opt for this rule, ignoring rule 30.
Analysis: As per the provisions of Section 15 of the ibid Act,
where both the two conditions are satisfied i.e Supplier and
Receiver are not related and price is the whole consideration,
then the price actually paid or payable shall be the value of the
transaction else one has to rely on the prescribed rules to
evaluate the transaction value.
Now, there are two schools of thoughts to decide whether the
reduction in liability in terms of the monetary value by way of
expenditure made is to be treated as “Price” as per Section 15.
a) Since the consideration of the outward supply is reduction of liability in monetary value, the same may be treated as price and the actual amount of reduction in liability shall be treated as Transaction value and taxed accordingly.
b) Since the consideration of the outward supply is not directly paid by the recipient and hence it does not satisfy the conditions prescribed in Section 15 and hence applicable Rules in this regards has to be applied and accordingly value of outwards supply shall be calculated.
Notes:
1. Applicability of CSR Mandate:
CSR mandate is applicable on every Company including its
holding or subsidiary having:
- Net worth of Rs. 500 Crore or more, or
- Turnover of Rs. 1000 crore or more, or
- Net Profit of Rs. 5 crore or more during the immediately preceding financial year
2. Treatment of CSR Expenditure in Books:
The General Instructions for Preparation of Statement of
Profit and Loss under Schedule III (Both Division I & II)to
the Companies Act, 2013, requires that in case of companies covered under Section 135, the amount of
expenditure incurred of ‘Corporate Social
Responsibility Activities’ shall be disclosed by way of a note
to the statement of profit and loss.
As per Guidance Note on Accounting of CSR Expenditure
“The notes to Financial Statements may disclose followings
with regard to CSR:
a) Gross amount required to be spent by the company
during the year.
b) Amount spent during the year on:
S.No | Particulars In Cash Yet to be paid in Cash Total
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1 Construction/
Acquisition of
any asset
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2 On Other
purposes
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