In the course of a year, time has changed and we have journeyed from a sense of normalcy to absolute anomaly. The outbreak of the pandemic has rendered the entire world to a grinding halt. During such dire circumstances, when even the Government is falling short of resources to support the ceaseless needs of people, corporate houses have stepped up to extend their support by establishing interim relief facilities, making monetary contributions, setting up oxygen plants and distributing essentials to assuage the situation. By the same token, numerous eligible companies are disposing their CSR responsibilities through the medium of such activities. Currently, the legal position regarding the eligibility of companies to avail ITC for such activities treads in a grey area and the conundrum lies between any existence of the option to avail ITC or bear the additional burden.
However, on the brighter side, to incentivize such companies, the states of Haryana and Gujarat have recently issued notifications, which intend to reimburse the applicable SGST and IGST for companies engaged in distributing essentials. Although, a commendable initiative, a pertinent question that ensues is, whether these notifications are the saving grace of the companies or can they fall back on the available benefits under the GST framework.
Covid relief activities falling under the purview of ITC or falling through?
Under the current GST framework, the prime requirement for a person to avail ITC on goods or services is that it should be used “in the course or furtherance of business”. Although this term lacks statutory interpretation, Courts have opined that this phrase is to be interpreted as anything done towards assisting or promoting the interests of a business. Therefore, it can be said that any activity undertaken towards the purpose of earning profit shall come within the “course or furtherance of business”. However, it need not be vice-versa as the terminology has a wider scope.
Addressing the treatment of services rendered by companies to battle the pandemic, the benevolent and voluntary nature of the act unprompted by any authority has cast a doubt upon the availment of ITC on the same.
In this regard, CESTAT Mumbai while allowing the company avail CENVAT credit of service tax paid for undertaking CSR activities, held CSR to be a mandatory obligation for both public and private companies alike, and opined that in light of such a mandate, any activity undertaken towards fulfilling the obligation shall be designated as a business activity. Therefore, it is possible to take a view that companies may avail ITC on services supplied in the course or furtherance of businesses and fulfilling their CSR obligations as long as it is not barred otherwise.
The position in case of goods donated, however, becomes increasingly complex. As discussed above, although the GST law allows credit on the supply of goods used in the course or furtherance of business, it also enumerates a number of cases where such credit cannot be availed. In particular, it debars ITC where the goods are disposed off by way of gifts, or free samples. In light of this prerequisite, a challenge faced by companies is whether they would be debarred from availing ITC on goods donated by them in these dire straits. From the perspective of the companies, it is important to ascertain if such a donation could be deemed as a “gift”. The property law defines a “gift” as a ‘voluntary’ transfer of property. Further, even the judicial pronouncements in this regard have time and again associated the term “gift” with voluntariness.
It is therefore a vitally important question, whether such donations can actually be termed as ‘voluntary’ when they are undertaken for fulfilling CSR obligations. Can such companies argue that this benefaction should not be barred from ITC availment, considering its nature is ‘mandatory’ as opposed to ‘voluntary?
However, in case of companies that fall outside of the CSR mandate, any donation of goods made by them, would be voluntary in nature, thereby amounting to a gift. For such companies, the bar under the GST law would apply and would preclude them from availing ITC. Nevertheless, to their benefit, policies introduced by the states of Haryana and Gujarat would come into the picture and allow them incentives in the way of SGST/IGST reimbursement on such donated goods.
Concluding Remarks
The interplay between goods and services supplied towards fighting against the pandemic and their eligibility for availing ITC remains a grey area, requiring an urgent if not a permanent addressal. The policies introduced by the Haryana and Gujarat state governments are indeed a welcome step to avoid this ambiguity from becoming an obstacle to the relief that companies are providing during challenging times. Further, it is likely that more state governments would follow suit to incentivize companies which are disposing their social responsibility not under a mere mandate but from their own free will during these trying times. Nonetheless, turning to these policies might be less beneficial for companies that can avail ITC otherwise. This is because the incentives provided under these policies is only with respect to the reimbursement of the SGST and IGST paid on the goods and services, while the benefit of ITC, if available, can be claimed on the whole of GST paid. Thus, it is pertinent for companies to first examine their position in regard to their eligibility in availing ITC, and only then jump on the bandwagon in striving to derive a benefit from the same.
(Shubham Vijay is the Principal Associate, Lakshmikumaran & Sridharan Attorneys and Kapil Kumar Sharma is Partner, Lakshmikumaran & Sridharan Attorney)
