In a thought-provoking perspective on India’s philanthropic landscape, Sunil Bhandari, Chairman of SVP India (Kolkata Chapter), recently highlighted the deep divergence between voluntary giving and structured obligations. Reflecting on how society often struggles to connect wealth with kindness, he observed that while India does not lack resources or benevolence, it lacks a seamless habit of connecting the two. Bhandari argues that a robust culture of generosity must be supported by external institutions, noting that governments can actively strengthen this ethos through tax incentives, simpler regulations, and fostering greater confidence in the nonprofit sector.
However, when this “culture of giving” is translated into the corporate arena under the banner of Corporate Social Responsibility (CSR), it ceases to be a simple moral choice. Instead, it becomes a highly regulated, statutory obligation. For Indian corporations, “mandated kindness” is not merely an ethical pursuit; it is a complex administrative exercise that intersects heavily with direct and indirect tax frameworks. To understand the true cost of corporate philanthropy in India, one must look beyond the boardroom resolutions and analyze the strict GST, Input Tax Credit (ITC), and corporate tax compliance realities that govern every rupee spent.
The GST Implication: The Hard Block on Input Tax Credits
For years, one of the most contentious battlegrounds in indirect tax litigation was whether companies could claim Input Tax Credit (ITC) on goods and services procured to fulfill their statutory CSR obligations. Under Section 16(1) of the Central Goods and Services Tax (CGST) Act, 2017, a registered taxpayer is entitled to take credit for input tax charged on any supply of goods or services used or intended to be used in the course or furtherance of business.
Corporate taxpayers argued that since CSR is a mandatory requirement under Section 135 of the Companies Act, 2013—non-compliance with which carries severe reputational and legal penalties—it is undeniably an expense incurred “in the course or furtherance of business.” Several Authority for Advance Rulings (AAR) benches initially supported this view, recognizing that complying with state-mandated laws is essential for running a business smoothly. However, other benches took a contrary stance, viewing CSR as a philanthropic distribution of goods without a direct commercial nexus.
This ambiguity was decisively resolved by the legislature, albeit to the detriment of corporate tax planning. Through the Finance Act 2023, the government introduced clause (fa) to Section 17(5) of the CGST Act. This amendment explicitly blocks ITC on goods or services received by a taxable person which are used or intended to be used for activities relating to obligations under Section 135 of the Companies Act, 2013.
As businesses navigate this landscape, aligning their broader compliance frameworks becomes essential. Much like the operational shifts discussed in Transitioning to GST 2.0: How Shorter Refund Timelines and Expanded Input Tax Credits Will Reshape Corporate Compliance, companies must now implement rigorous internal controls to ensure that CSR-related procurements are strictly segregated from general business operations to prevent erroneous ITC claims.
The Financial Impact of Blocked ITC on CSR Budgets
The statutory blocking of ITC under Section 17(5)(fa) represents a significant financial escalation in the “cost of giving” for Indian corporates. When a company purchases relief materials, constructs school buildings, or procures medical diagnostic machinery as part of its CSR mandate, it pays GST to its vendors—often ranging from 12% to 18% or even 28%.
Because this GST cannot be claimed back as ITC, the tax paid becomes an absolute sunk cost. This effectively inflates the company’s CSR expenditure budget. For instance, if a corporate entity is legally mandated to spend INR 1 Crore on CSR activities and procures goods attracting an average GST rate of 18%, the actual cash outflow rises to INR 1.18 Crore, with the tax portion yielding zero commercial or compliance credit. This structural reality makes the administrative and financial execution of CSR a highly delicate balancing act, requiring precise tax tracking and reporting.
The Direct Tax Double-Whammy: Non-Deductibility Under Income Tax
The fiscal challenges of mandated kindness are not limited to indirect taxes. The direct tax regime mirrors this restrictive approach. Under Explanation 2 to Section 37(1) of the Income Tax Act, 1961, any expenditure incurred by an assessee on activities relating to CSR is explicitly deemed not to be an expenditure incurred for the purpose of the business or profession.
Consequently, corporate taxpayers cannot claim CSR expenditures as business deductions when calculating their taxable corporate income. This creates a double-taxation effect on mandated philanthropy: the funds spent do not reduce corporate income tax liability, and the GST paid on the corresponding procurements cannot be offset as ITC. This rigid tax architecture underscores the corporate sentiment that mandated philanthropy is treated more like an additional tax levy than a collaborative social partnership.
Compliance Controls and the Need for Precision
To avoid severe penalties, interest, and litigation, corporate tax departments must establish ironclad compliance workflows. This is particularly crucial during corporate restructuring or operational overhauls. As explored in the context of AI-Driven Corporate Restructuring: Analyzing Goldman Sachs’ Warning on Middle Management Through a GST and Corporate Tax Compliance Lens, maintaining clear compliance pathways is vital when organizational roles and procurement chains are in flux.
In the context of CSR, companies must ensure that:
- Procurement Segregation: Invoices for CSR-related goods and services are clearly marked and routed through distinct accounting codes to prevent accidental ITC auto-population in GSTR-3B.
- Vendor Compliance: Contractors executing CSR projects must be thoroughly vetted to ensure correct tax invoicing, even though the ITC is ultimately blocked.
- Audit Trails: Detailed documentation must be maintained to prove to GST auditors that no blocked credits under Section 17(5)(fa) have been mixed with eligible business credits.
Conclusion: Aligning Tax Policy with the Spirit of Giving
As Sunil Bhandari suggests, fostering a true culture of giving requires a supportive ecosystem where governments simplify regulations and offer meaningful tax incentives. While the current statutory framework in India treats CSR as a non-deductible, ITC-blocked expense, a more collaborative future policy might consider rationalizing these taxes. Until then, Indian corporates must rely on meticulous tax compliance and strategic planning to ensure their mandatory contributions to society are executed without triggering costly tax disputes.
Frequently Asked Questions
Sunil Bhandari is a writer, podcaster, philanthropist, and the Chairman of SVP India, Kolkata Chapter.
He suggests that governments can strengthen the culture of giving by providing tax incentives, introducing simpler regulations, and building greater confidence in the nonprofit sector.
As a twelve-year-old, the author resented losing five rupees every month, believing it made him poorer. However, visiting an old-age home taught him the opposite lesson: that giving does not diminish a person, but rather enlarges them.
According to the author, a culture of generosity begins at home, where families must make giving an ordinary conversation rather than an occasional act.
