ITC on CSR expenditure finance act 2023 retrospective vs prospective legal defense

Across audit wings and departmental anti-evasion cells, GST officers are scrutinising annual returns of companies from financial year 2017-18 to 2022-23 to disallow input tax credit availed on corporate social responsibility procurements. In practice, when tax authorities audit corporate purchase registers, they argue that community welfare expenses never qualified as business expenditure under Section 16(1), asserting that the insertion of Section 17(5)(fa) was merely clarificatory. For corporate finance teams and tax practitioners handling show cause notices under Section 73 or Section 74, this contention creates significant tax exposure. For background on the statutory text of the amendment, refer to our detailed analysis of ITC on CSR expenditure statutory amendment, as well as our reference guide on blocked credit under GST Section 17(5) list with examples.

Statutory mandate under Section 135 of the Companies Act 2013

Corporate social responsibility in India is not an optional charitable gesture. Under company law mandates, every entity having a net worth of ₹500 crore or more, a turnover of ₹1,000 crore or more, or a net profit of ₹5 crore or more during the immediately preceding financial year must spend at least 2% of its average net profits on approved community activities. The company must constitute a governing committee, formulate a board policy, and ensure execution under Schedule VII activities.

Failing to spend the mandated amount or transfer unspent funds to designated government accounts attracts severe statutory penalties under Section 135(7). The company faces financial penalties up to twice the unspent amount or ₹1 crore, while defaulting officers risk personal fines. Complying with these statutory obligations is therefore an imperative legal condition for maintaining corporate standing and lawful business continuity.

The core dispute prior to October 2023 under Section 16(1)

Prior to October 2023, the Central Goods and Services Tax Act contained no specific clause barring credit on CSR procurements. Credit eligibility depended strictly on the broad wording of Section 16(1) of the CGST Act:

“Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.” Section 16(1), CGST Act

Under Section 2(17) of the CGST Act, business includes any trade, commerce, manufacture, or any activity incidental or ancillary thereto, whether or not for a pecuniary benefit. In our client audits and compliance reviews, we saw that meeting statutory corporate obligations is vital to keep the business operational. Corporate taxpayers took the position that goods and services purchased for CSR were incurred in the furtherance of business. In several landmark advance rulings and appellate matters, conflicting conclusions emerged:

• Pro-taxpayer decisions: Authorities like the Uttar Pradesh Authority for Advance Ruling in Dwarikesh Sugar Industries held that mandatory CSR is an integral business duty, enabling full credit on inward supplies. CESTAT benches under legacy service tax also consistently upheld credit for mandatory CSR outlays.
• Revenue-favoured decisions: Conversely, Advance Ruling Authorities in Telangana and Kerala denied credit by ruling that CSR donations do not generate direct outward taxable supplies and constitute philanthropic non-business activities.

The statutory bar under Section 17(5)(fa) of the CGST Act

To eliminate legal disputes and establish a uniform national policy, Parliament intervened through the Finance Act 2023. Section 139 of the Finance Act 2023 inserted clause (fa) into Section 17(5), placing CSR under the list of blocked credits:

“(fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013;” Section 17(5)(fa), CGST Act

By issuing Notification No. 28/2023-Central Tax on 31 July 2023, the Central Government brought Section 139 into force with effect from 1 October 2023. From this appointed date onward, no input tax credit can be claimed on inward supplies utilised for Section 135 CSR obligations.

Why Section 17(5)(fa) is prospective and not retrospective

When defending past ITC claims against audit objections or Form GST DRC-01 notices, establishing the prospective nature of Section 17(5)(fa) is your central legal shield. The tax authorities attempt to apply clause (fa) retrospectively to 1 July 2017 by terming it a declaratory amendment. This departmental stance fails on established constitutional and statutory interpretation principles:

1. No retrospective language in the statute: When Parliament intends a tax amendment to apply retrospectively, it uses explicit statutory language such as "shall be deemed to have been inserted with effect from the 1st day of July 2017". In Section 139 of Finance Act 2023, no such wording exists.
2. Executive appointment of effective date: The Central Government issued Notification No. 28/2023-Central Tax under Section 1(2)(b) of the Finance Act 2023 appointing 1 October 2023 as the effective date. An appointed date notification confirms that the provision is prospective.
3. Substantive change of law: The Supreme Court in multiple constitutional bench decisions, including Commissioner of Income Tax vs Vatika Township, established that legislation taking away an existing substantive statutory right is presumed to be prospective unless a contrary intention is obvious. Section 17(5)(fa) removes an existing entitlement, creating a new disability. It cannot operate retrospectively.
4. Parliamentary drafting comparison: In the very same Finance Act 2023, other provisions were given explicit retrospective effect where intended. The absence of retrospective phrasing in Section 139 proves legislative intent for prospective operation only.

Building a legal defense against departmental notices

If your company receives an intimation in Form GST DRC-01A, a scrutiny notice in Form GST ASMT-10, or a show cause notice in Form GST DRC-01 for past CSR credit, structure your written reply around the following four-tier legal framework:

1. Establish the statutory nexus to business under Section 16(1)

Demonstrate that the company was statutorily mandated to incur CSR expenditure under the Companies Act. Provide board resolutions, CSR committee expenditure plans, and auditor reports showing that the procurements were made exclusively to discharge this statutory obligation. Emphasise that failure to comply would result in severe statutory penalties and direct injury to corporate continuity.

2. Rely on established CESTAT and judicial precedents

Before the statutory bar, courts and tribunals consistently affirmed that mandatory expenses are integral to business operation. In our litigation experience, citing the following core precedents provides a solid defense foundation:

• CESTAT Mumbai in Essel Propack vs Commissioner of CGST: The tribunal held that CSR is a mandatory statutory obligation under company law and an essential prerequisite for carrying on business. It affirmed that credit on CSR inputs is admissible.
• CESTAT Kolkata in PCBL Limited vs Commissioner of CGST: The tribunal confirmed that expenditure incurred in compliance with corporate statutes satisfies the criteria of business input services.
• High Court principles on statutory rights: Cite the principle that Section 17(5) is an exception to the general scheme of credit under Section 16(1). An exception created on 1 October 2023 cannot be applied to transactions executed years prior.

3. Challenge allegations of wilful suppression under Section 74

Departmental notices often invoke the extended period of limitation under Section 74 alleging fraud or suppression of facts. Point out that claiming CSR ITC was supported by divergent advance rulings across states and published tribunal decisions. When a legal position is based on a bonafide legal interpretation of statute, invoking Section 74 is legally unsustainable. Any demand must be restricted to the normal limitation period under Section 73.

4. Inward invoices and vendor compliance verification

Ensure that all invoices under dispute were properly reported by suppliers in their GSTR-1 filings, reflected in GSTR-2A or GSTR-2B, and that full payment was made to suppliers within 180 days under Section 16(2).

Worked financial example: evaluating exposure on a past CSR audit

Consider a manufacturing corporation, Delta Forge Private Limited, that incurred mandatory CSR expenditures of ₹1,00,00,000 between financial year 2019-20 and 2022-23. The company receives a departmental show cause notice under Section 73 demanding recovery of credit along with interest and penalty.

In this scenario, the ₹18,00,000 claimed prior to 1 October 2023 is supported by the prospective operation of Notification No. 28/2023-Central Tax and tribunal rulings. The company files a detailed reply on merits. However, for the ₹1,80,000 incurred in November 2023, the statutory bar is absolute. The company must reverse that credit along with interest under Section 50.

Common compliance mistakes during departmental audits

• Conceding past claims prematurely: Surrendering pre-October 2023 credits in Form GST DRC-03 during initial audit queries without submitting a formal legal objection surrenders substantive statutory rights.
• Failing to identify post-October 2023 auto-populated credits: Assuming that vendor invoices for CSR appearing in Form GSTR-2B are eligible. The portal auto-populates all valid B2B invoices into Table 4(A)(5). It is the recipient's legal responsibility to manually report the reversal in Table 4(B)(1).
• Confusing commercial marketing with CSR: Disallowing genuine brand promotional sponsorships, marathon events, or commercial advertisements because they resemble public welfare. Commercial marketing undertaken for business exposure remains fully eligible under Section 16(1).

Frequently asked questions

Last checked: 18 October 2026. Sources: CBIC Tax Information Portal, Notification No. 28/2023-Central Tax, GST Council Portal.