Objective
Author in this article discusses the probable reasons that spending of Corporate Social Responsibility expenses is not mandatory in nature.
Structure-:
The article gives authors own analysis. This article is based on a judicial pronouncement and is divided into following parts.
| 1 | Objective | 4 | Broad characteristics of CSR | 7 | Whether CSR is a tax / duty / cess or not? |
| 2 | Structure | 5 | Take away points | 8 | Whether CSR spending is a fee? |
| 3 | Background | 6 | Author’s personal Opinion | 9 | Further Readings |
Background
While many corporate houses have been traditionally engaged in doing CSR activities voluntarily, the new CSR provisions, vide the Companies Act, 2013 [the Co Act], put formal and greater responsibility on companies in India to set out clear framework and processes to ensure strict compliance.
Broad characteristics of CSR
In general, big companies should spend 2% of average net profit for philanthropical purposes. Such obligations, whether contractual or legislative, which otherwise also are binding on the company cannot be covered under CSR expenditure.
The relevant section is section 135(5) of the Companies Act, 2013 which has come into effect from 1-April-2014 which reads as follows;
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, 1[or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years,] in pursuance of its Corporate Social Responsibility Policy:
1 – Inserted by the Companies (Amendment) Act, 2019, with effect from a date yet to be notified.
Take away points
As of today, CSR is neither a tax / duty / cess nor a fee as per constitutional framework. Thus, it cannot be recovered like land revenue.
If one observes various orders of National Company Law Tribunal in this regard, there is no order forcing a company to spend what is it required to spend u/s 135 of the Co Act. There are orders of following nature.
- If the company has failed to make the necessary CSR disclosures in its Board’s Report, it can by virtue of Section 131, prepare a revised report after obtaining approval of the Tribunal.
- If the company fails to spend the threshold amount toward CSR activities, the Board has to, in its report made under Section 134 (3) (o), specify the reasons for not spending the threshold amount.
- The company and its officers can make good the offence by applying for compounding of offence under Section 441 of the Act.
Author’s personal Opinion
Some of the undisputed facts are as follows;
- One of the reasons of tax evasion or tax avoidance is the unbrindled corruption of tax paid amounts.
- The citizens in general carry an impression that the tax paid does not serve social purposes / social causes.
- Maximum tax contribution comes from larger companies only.
- Government was well within its power to increase the corporate tax rate by 2%.
Impact of CSR
- The NDA government deliberately chose not to enforce CSR. Thus, no mandate to spend, no inquiry from government, no scrutiny or litigation thereof. Thus no expenditure of administering the levy.
- It demonstrated a confidence in the companies and allowed the them to spend the amount by itself towards social purposes / social causes.
- Thus, the companies were free [rather under obligation] to check genuineness of the end result of the monies spent.
- The legislation only placed an obligation on the companies to disclose the fact about the amount that should have been spent and amounts actually spent.
- These larger companies are under social obligation to prove that they are ethical in conduct of their business.
- This social pressure has worked ensuring the companies to spend the CSR on social causes.
Whether CSR is a tax/duty/cess or not
Any tax /duty / cess by whatever name called is a compulsory contribution to exchequer levied by the government. The Government is under no obligation to prove specific correlation in the taxes collected vis-à-vis utilisation of those funds. The power to tax arises from sovereignty of the state.
The freedom given to the corporates to spend the specified amount by itself will not change the character of CSR being a tax /duty / cess or otherwise.
To levy a tax /duty / cess it is necessary for Parliament / legislative assembly to pass the legislative enactment as a money Bill.
The requirement of money bill is important because it is closely interwoven with the Consolidated Fund of India and public accounts of India.
Characteristics of a “Money Bill” are defined in Article 110 of the Constitution of India. Part I chapter II of the Constitution of India elaborates the procedure for making a legislative enactment with specific requirements regarding a money bill and other bills [for brevity, non-money bill].
Text of the relevant articles is re-produced hereinbelow.
109. Special procedure in respect of Money Bills-:
(1) A Money Bill shall not be introduced in the Council of States.
(2) After a Money Bill has been passed by the House of the People it shall be transmitted to the Council of States for its recommendations and the Council of States shall within a period of fourteen days from the date of its receipt of the Bill return the Bill to the House of the People with its recommendations and the House of the People may thereupon either accept or reject all or any of the recommendations of the Council of States.
(3) If the House of the People accepts any of the recommendations of the Council of States, the Money Bill shall be deemed to have been passed by both Houses with the amendments recommended by the Council of States and accepted by the House of the People.
(4) If the House of the People does not accept any of the recommendations of the Council of States, the Money Bill shall be deemed to have been passed by both Houses in the form in which it was passed by the House of the People without any of the amendments recommended by the Council of States.
(5) If a Money Bill passed by the House of the People and transmitted to the Council of States for its recommendations is not returned to the House of the People within the said period of fourteen days, it shall be deemed to have been passed by both Houses at the expiration of the said period in the form in which it was passed by the House of the People.
110. Definition of Money Bill
(1) For the purposes of this Chapter, a Bill shall be deemed to be a Money Bill if it contains only provisions dealing with all or any of the following matters, namely;
(a) the imposition, abolition, remission, alteration or regulation of any tax;
(b) the regulation of the borrowing of money or the giving of any guarantee by the Government of India, or the amendment of the law with respect to any financial obligations undertaken or to be undertaken by the Government of India;
(c) the custody of the consolidated Fund or the Contingency Fund of India, the payment of moneys into or the withdrawal of moneys from any such Fund;
(d) the appropriation of moneys out of the consolidated Fund of India;
(e) the declaring of any expenditure to be expenditure charged on the Consolidated Fund of India or the increasing of the amount of any such expenditure;
(f) the receipt of money on account of the Consolidated Fund of India or the public account of India or the custody or issue of such money or the audit of the accounts of the Union or of a State; or
(g) any matter incidental to any of the matters specified in sub clause (a) to (f)
(2) A Bill shall not be deemed to be a Money Bill by reason only that it provides for the imposition of fines or other pecuniary penalties, or for the demand or payment of fees for licences or fees for services rendered, or by reason that it provides for the imposition, abolition, remission, alteration or regulation of any tax by any local authority or body for local purposes.
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113. Procedure in Parliament with respect to estimates—
(1) So much of the estimates as relates to expenditure charged upon the Consolidated Fund of India shall not be submitted to the vote of Parliament, but nothing in this clause shall be construed as preventing the discussion in either House of Parliament of any of those estimates.
(2) So much of the said estimates as relates to other expenditure shall be submitted in the form of demands for grants to the House of the People, and the House of the People shall have power to assent, or to refuse to assent, to any demand, or to assent to any demand subject to a reduction of the amount specified therein.
(3) No demand for a grant shall be made except on the recommendation of the President.
117. Special provisions as to financial Bills-:
(1) A Bill or amendment making provision for any of the matters specified in sub-clauses (a) to (f) of clause of article 110(1) shall not be introduced or moved except on the recommendation of the President and a Bill making such provision shall not be introduced in the Council of States:
Provided that no recommendation shall be required under this clause for the moving of an amendment making provision for the reduction or abolition of any tax.
(2) A Bill or amendment shall not be deemed to make provision for any of the matters aforesaid by reason only that it provides for the imposition of fines or other pecuniary penalties, or for the demand or payment of fees for licences or fees for services rendered, or by reason that it provides for the imposition, abolition, remission, alteration or regulation of any tax by any local authority or body for local purposes.
(3) A Bill which, if enacted and brought into operation, would involve expenditure from the Consolidated Fund of India shall not be passed by either House of Parliament unless the President has recommended to that House the consideration of the Bill.
265. Taxes not to be imposed save by authority of law.—
No tax shall be levied or collected except by authority of law.
266. Consolidated Funds and public accounts of India and of the States.—
(1) Subject to the provisions of article 267 and to the provisions of this Chapter with respect to the assignment of the whole or part of the net proceeds of certain taxes and duties to States, all revenues received by the Government of India, all loans raised by that Government by the issue of treasury bills, loans or ways and means advances and all moneys received by that Government in repayment of loans shall form one consolidated fund to be entitled “the Consolidated Fund of India”, and all revenues received by the Government of a State, all loans raised by that Government by the issue of treasury bills, loans or ways and means advances and all moneys received by that Government in repayment of loans shall form one consolidated fund to be entitled “the Consolidated Fund of the State”.
(2) All other public moneys received by or on behalf of the Government of India or the Government of a State shall be credited to the public account of India or the public account of the State, as the case may be.
(3) No moneys out of the Consolidated Fund of India or the Consolidated Fund of a State shall be appropriated except in accordance with law and for the purposes and in the manner provided in this Constitution.
The Companies (Amendment) Act, 2019[1] came into existence after receiving President’s assent on 31st July 2019. Few of the sections of this amendment act shall deemed to have come into force from November 2018 itself. However, some of the provisions including Section 21 (Amendment to Section 135 of Principal Act) has yet to be notified.
(1) The first amendment is given in Sub-Section (5) of Section 135, explaining that, if the company has not completed the period of 3 financial years since its incorporation, and still satisfies any of the given CSR applicability requirements, then here, the average net profit of immediate preceding financial years must be taken. For contemplating average net profit, this provision shall be r/w Section 198 of the Act.
(2) The next amendment plays vital role in computing the budget plan required to be spent towards the affairs of CSR since, it specifically talks about the treatment of unspent targeted CSR amount. If the company is unable to spend the reserved amount for CSR project, as decided, then along with the reasonable explanation in the board report, following steps are required to be taken by the company –
Case 1: Company is having any ongoing CSR projects –
> Any unspent amount by the company, despite of having any ongoing CSR project, shall be transferred to any scheduled bank under a special account in the name of “Unspent Corporate Social Responsibility Account” within a period of 30 days from the end of financial year.
> Such transferred amount essentially needs to be spent by the company for the due compliance of CSR policies within a period of next 3 financial years from the date of such transfer.
> Even after 3 years, if the company fails to disburse such balance amount, then, that shall be transferred to any of the funds specified in Schedule VII of the Act within a period of 30 days from the date of completion of 3rd financial year.
Case 2: Company is not having any ongoing CSR projects –
> If the company is not currently engaged in any of the ongoing CSR projects, then the aimed unspent sum of CSR money straight away shall move to any of the funds specified in Schedule VII of the Act within a period of 6 months from the expiry of financial year.
(3) The former “comply or express” (CorEx) provision of CSR has now become a punishable offence with the launch of following amendment. The defaulting company as well as their respective officers shall attract a penalty in case of violation of above terms. The sanction structure for the same has been provided as follows
> Fine Amount for Defaulting Company: Starting from Rs. 50,000/- extending upto Rs. 25,00,000/- AND
- Fine Amount for Defaulting Officer: Starting from Rs. 50,000/- extending upto Rs. 5,00,000/- Or
- Term of Imprisonment for Defaulting Officer: Upto 3 years Or Both
There is a possibility that the provisions relating to transfer of unspent amount to “Unspent CSR Account” and those which legally enforce spending of CSR of the Companies (Amendment) Act, 2019 may get challenged for its validity for not being a money bill and not falling within the meaning of the term “fee”.
In view of the manner in which the Companies Act, 2013 or the Companies (Amendment) Act, 2019 has been passed, none is a Money Bill.
Whether CSR spending is a fee?
After we have dealt with the question as to whether CSR is a tax / duty / cess or otherwise, let’s discuss whether it is a fee charged by Government. It is so because a Fee can be collected by a legislative enactment which may be a non-money bill.
A mention of the same is made in article 110(2) as fees for license or fees for services rendered.
Supreme Court has given a twin test to be fulfilled for something to be categorised as “Fees”, namely;
- it must be levied in consideration of certain services rendered by some government agency; and
- payments demanded for rendering such services should be kept apart, or specifically appropriated for that purpose, and not merged in the general revenue to be spent for general purposes.
It is not necessary that the fee collected must have exact co-relation with the service rendered but a quid pro quo is necessary.
In respect of CSR expenditure, Government is not rendering any service to the company. Thus, it is not a fee.
Further Readings
Decision of Constitution bench of Supreme Court
Among other issues, the main issue was Whether the ‘Finance Act, 2017’ insofar as it amends certain other enactments and alters conditions of service of persons manning different Tribunals can be termed as a ‘money bill’ under Article 110 and consequently is validly enacted?
If the answer to the above is in the affirmative then Whether Section 184 of the Finance Act, 2017 is unconstitutional on account of Excessive Delegation?
It is interesting to read the judgement and more particularly the one of Dr. Justice Dhananjay Chandrachud who has elaborately dealt with characteristics of Money bill and its importance.
Relevant provisions of the Companies Act, 2013
Chapter IX Accounts and Companies of the Co. Act.
Following articles of the Constitution Of India 1949.
Article 107 to 122 relating legislation to be passed by Parliament.
Article 196 to 212 relating legislation to be passed by State Assembly.
Author Bio
Consider recent judgement of SC in Jalkal Vibhag Nagar Nigam & Ors dated October 22, 2021
41 Ms Divan’s submission that the tax which is imposed in Section 52(1)(a) is truly speaking a fee is premised on the argument that a true tax on lands and buildings under Entry 49 of List II
(i) should be agnostic as between owners and occupiers;
(ii) should make no differentiation between those who do and do not consume water; and
(iii) should contain no provision for a separate fund into which the revenue of the Jal Sansthan is earmarked.
42 The distinction between a tax and fee has substantially been effaced in the development of our constitutional jurisprudence. At one time, it was possible for courts to assume that there is a distinction between a tax and a fee: a tax being in the nature of a compulsory exaction while a fee is for a service rendered. This differentiation, based on the element of a quid pro quo in the case of a fee and its absence in the case of a tax, has gradually, yet steadily, been obliterated to the point where it lacks any practical or constitutional significance. For one thing, the payment of a charge or a fee may not be truly voluntary and the charge may be imposed simply on a class to whom the service is made available. For another, the service may not be provided directly to a person as distinguished from a general service which is provided to the members of a group or class of which that person is a part. Moreover, as the law has progressed, it has come to be recognized that there need not be any exact correlation between the expenditure which is incurred in providing a service and the amount which is realized by the State. The distinction that while a tax is a compulsory exaction, a fee constitutes a voluntary payment for services rendered does not hold good. As in the case of a tax, so also in the case of a fee, the exaction may not be truly of a voluntary nature. Similarly, the element of a service may not be totally absent in a given case in the context of a provision which imposes a tax.
43 The gradual obliteration of the distinction between a tax and a fee on a conceptual level has been the subject matter of several decisions of this Court.
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47 In view of this consistent line of authority, it emerges that the practical and even constitutional, distinction between a tax and fee has been weathered down. As in the case of a tax, a fee may also involve a compulsory exaction. A fee may involve an element of compulsion and its proceeds may form a part of the Consolidated Fund. Similarly, the element of a quid pro quo is not necessarily absent in the case of every tax. In the present case, the tax has been imposed by the legislature in Section 52 on premises situated within the area of the Jal Sansthan. The proceeds of the tax are intended to constitute revenue available to the Jal Sansthan to carry out its mandatory obligations and functions under the statute of making water and sewerage facilities available in the area under its jurisdiction. The levy is imposed by virtue of the presence of the premises within the area of the jurisdiction of the Jal Sansthan. The water tax is levied so long as the Jal Sansthan has provided a stand post or waterworks within a stipulated radius of the premises through which water has been made available to the public by the Jal Sansthan. The levy of the tax does not depend upon the actual consumption of water by the owner or occupier upon whom the tax is levied. Unlike the charge under Section 59 which is towards the cost of water to be supplied by the Jal Sansthan according to its volume or, in lieu thereof on a fixed sum, the tax under Section 52 is a compulsory exaction. Where the premises are connected with water supply, the tax is levied on the occupier of the premises. On the other hand, where the premises are not so connected, it is the owner of the premises who bears the tax. The levy under Section 52 (1) is hence a tax and not a fee. Moreover, for the reasons that we have indicated above, it is a tax on lands and buildings within the meaning of Entry 49 of List II.
now the Companies (Amendment) Act, 2019 coming into effect from 22-Jan-2021 which has made significant amendments, there is a change in scenario. But the question of Money bill will still arise.
Nice article sir