“Gandhi was ahead of time” …yes today his ideas on trusteeship, economics, environment, industrialisation , cottage industries, etc. etc. see taking shape into conventions and legislations at international and national level !!!
- Every thought of Gandhi may not be relevant today but Gandhian economics is very comprehensive to deal with many present day issues.
- One such issue is “Corporate Social Responsibility”, which can be traced to Gandhi’s concept of “Trusteeship”.
Every religion in India advocated the philanthropic practices. Hindus called it ‘Daan’, Muslim called it ‘Zakaat’ and Sikhs called it ‘Daashaant’. Christian, Jain & Buddhist missionaries’ view on charity is well known in the world.
After independence struggle when the industrialists were pressurized to show their dedication towards the benefit of the society. Mahatma Gandhi urged to the powerful industrialists to share their wealth for the benefit of underprivileged section of the society. He gave the concept of trusteeship. This concept of trusteeship helped in the socioeconomic growth of India. Gandhi regarded the Indian companies and industries as “Temples of Modern India”. He influenced the industrialists and business houses to build trusts for colleges, research and training institutes. These trusts also worked to enhance social reforms like rural development, women empowerment and education.
So Corporate Social Responsibility (CSR) links Corporate Sector to Social Sector. It is becoming more relevant in our society plagued by increasing inequalities between haves and havenots. Corporate Social Responsibility means that the corporate sector, which earns profit through the sale of its goods and services in the society also has some responsibility towards it.
Indian corporations should set their paradigms based on Mahatma Gandhi’s trusteeship principle. A distilled essence of this principle is found in the first verse of the Isopanishad (Shukla Yajur Veda) Isavasyam idam sarvam…dhanam (the One God is present here and everywhere). It underlines that everything around us has the Supreme residing in them and hence He is the rightful owner. We, who actually possess it, can enjoy a “delegated ownership” as trustees.
Different organisations have framed different definitions – although there is considerable common ground between them. Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.
Charity and philanthropy is in the DNA of Indian culture and ancient religious practices. The popular Indian economist of ancient origin Chankya to the pioneer Indian business group Tata advocated the principles of social responsibilities. Inspite of such extraordinary foundation, CSR in India is still in a nascent stage. It is still a least understood social initiative. Not all the organizations understand and realize the requirement of imbibing CSR initiatives into core business.
CSR is a voluntary action taken by an organization towards betterment of society and environmental sustainability. CSR initiatives no doubt become a social investment that help the organization in building sustainable business. The last decade has seen growing number of companies investing in CSR strategies because of the unseen pressure from all the stakeholders (customers, government, shareholders and public at large).
The Concept of Corporate Social Responsibility for firms and businesses has undergone a radical change since its early days and has evolved from a mere slogan to the present day situation where it is considered no longer a fashion but as the part and parcel of a company’s functioning to be socially responsible.
The reason that the firms should put their heart and soul while carrying out CSR activities is that humanity finds itself in the second decade of the 21st century and taking into considerations of all the political, economic, social, and environmental problems that the humans are facing, corporations have a serious responsibility of playing their role in contributing to the well-being of mankind and society.
CSR has become an integral part of a company’s functioning and today it has become indispensable that a firm demonstrates such responsibility. Although, earlier it was not a legal compulsion that had to be walked through by any firm, but following it was considered as a good practice for taking into account social and environmental issues.
Legal Framework
THE COMPANIES ACT, 2013
As per as Corporate Social Responsibility is concerned, the Companies Act, 2013 is a landmark legislation that made India the first country to mandate and quantify CSR expenditure. The inclusion of CSR is an attempt by the government to engage the businesses with the national development agenda. The Act came into force from April 1, 2014, Sec. 135 say every company, private limited or public limited, which either has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on Corporate social responsibility activities. The CSR activities in India should not be undertaken in the normal course of business and must be with respect to any of the activities mentioned in Schedule VII of the act.
The corporations are required to setup a CSR committee which designs a CSR policy which is approved by the board and encompasses the CSR activities the corporations is willing to undertake. The act also has penal provisions for corporations and individuals for failure to abide by the norms. The details of the same are highlighted in the act.
The act in its current form adopts the principle of ‘comply or explain’ requiring companies to report on its CSR spending and explain the shortfalls, if any.
CSR: Present Scenario
CSR is not a concept of the present day society but has been present in India since the antediluvian times as corporates like the Tata Group, the Aditya Birla Group and Indian Oil Corporation, to name a few, have been involved in serving the community from the inception.
Nowadays the main objective of companies is to maximize their impact on the society and stakeholders and in order to achieve their objective, many corporates indulge in various social events such as donations and charity events. CSR activities have become so embedded in a corporate’s life that they no longer consider it as an indirect expense and treat it as a route for improving their goodwill, reputation, defending attacks and increasing business competitiveness.
So, in order to give shape to their strategies, many corporates have specialized CSR teams that formulate policies, strategies, and goals for their CSR programs and set aside budgets to fund them. The policies developed by the assigned teams are always made keeping in mind the main goal of business.
For example, a more comprehensive method of development is adopted by some corporations such as Bharat Petroleum Corporation Limited, Maruti Suzuki India Limited, and Hindustan Unilever Limited. Provision of improved medical and sanitation facilities, building schools and houses, and empowering the villagers and in the process making them more self-reliant by providing vocational training and a knowledge of business operations are the facilities that these corporations focus on.
Even though CSR sounds mandatory, companies failing to spend money are required to give reasons for the same in their annual reports. Companies will have to draw shareholders attention to their non-compliance.
CSR: Problems in its Implementation
Mandating CSR for businesses will not do any good unless there are proper mechanisms for its enforcement. One of the main hindrances that stand in the way of effective CSR enforcement is finding credible projects that the corporates can support. According to Guardian, bigger charities are being flooded with money, while the smaller charities have to seek their way for finding of funds due to which they lack the resources and capacity to cope up with the company’s bureaucratic and operational demands.
The CSR spending by top Indian companies in 2018 was 47% higher than what it was back in 2014 when India first made it mandatory for large private and public sector firms to spend at least 2% of their net profits on special development projects. Companies in the energy and power sector were the leaders in terms of overall CSR spending in India followed by those in the banking and financial services industry (BFSI), survey showed. Media and entertainment firms were the laggards.
According to a Report, geographic bias with respect to the company’s funding of CSR activities is also prevalent, as firms tend to fund those projects that are closer to where they are based. This result in industrialized areas getting preference over the poorer and underdeveloped areas that are truly in need of some development and aid.
A survey by accountancy firm found that 52 of the country’s largest 100 companies failed to spend the required 2% last year. A smaller proportion has gone further, according to an Economic Times investigation, allegedly cheating the system by giving donations to charitable foundations that then return the monies minus a commission. The main problem with the CSR is the reported expenditure on the projects. Most firms don’t mention the exact amount of expenditure spent by them on the CSR activities. Due to this, it becomes very problematic for the government to comprehend the exact amount of funds spent by the firms in this relationship because there is evidence showing that the firms were initially spending less than 2% increased their CSR activity, but those that were initially spending more than 2% reduced their CSR expenditure.
But, even if we were to take the CSR expenditure at its face value and assume the validity of all the numbers reported, there are still major issues that are to be dealt with. An expenditure that does not lead to higher profits for firms is treated as a tax by them. According to the survey, the corporate tax rate in India is one of the highest in the world, compared to a global average. So, the CSR is viewed by the firms as a 2% tax, albeit it is not paid to the government but many companies consider the 2% CSR expenditure as another way of burning their pockets.
Impact of deduction of TDS from CSR Grants
On a practical level, NGOs have been facing some new situations which they have not faced in past. Several companies deduct TDS (Tax Deducted at Source) from the CSR grants, treating it more like a service contract. This not only reduces cash-flow, but also gives rise to other complications. For example, NGOs are not sure whether companies would require them to certify utilisation against the actual net amount received or the gross CSR grant, since the TDS amount can be received by NGOs as refund from the Income Tax department, but that generally could take 2-3 years.
Another major complication has been observed – at times, the Income Tax department takes a position that if the TDS has been deducted, that Income must be ‘for profit’ and decides to treat the same accordingly. Although courts have generally not accepted such interpretations, deduction of TDS creates a situation that tax authorities could interpret it against the interests of NGOs and make such income subject to tax.
Non-Deductibility of CSR Expenditure under the Income Tax Act
Corporates are currently involved in various areas of social responsibility / community development as part of nation building. Further, the concept of Corporate Social Responsibility Costs has been introduced under Companies Act, 2013. The expenditure is mandatory in its nature and as such it is a statutory levy. Accordingly it deserves tax deduction. However, amendment made in section 37 vide Finance (No. 2) Act, 2014 has made it clear that expenditure incurred on activities relating to CSR under Companies Act, 2013 will be deemed to be a non-business expenditure. Providing suitable tax incentives in respect of such Corporate Social Responsibility Costs would accelerate the process and ensure that the country can reach the goal of being a developed nation in the near future and is the need of the hour.
GST and likely impact on NGOs
Currently, as the Goods & Services Tax (GST) is in an early stage of implementation, it may be of interest to understand how it could impact NGOs while they implement CSR projects. Per se, NGOs are not exempt from GST, as the exemption notification is applicable to very few charitable activities, leaving most NGOs out of scope of exemption. However, GST is applicable only if the activity is undertaken in furtherance of business and for consideration. This could adversely impact NGOs, as Income Tax authorities may treat this as service and include it as Business Income under Section S.2(15) of Income Tax rules.
Even though there has been a substantial increase in the social activities incurred by the firms, but the spending has mostly gone to the set priorities of the company rather than the democratically determined priorities. Of the nine different schedules prescribed by The Companies Act, 2013 two schedules: combating various diseases and promotion of education accounted for 44% of the total CSR expenditure while reducing child mortality received no funding and eradicating extreme hunger and poverty received only 6% of the total CSR expenditure.
The fact that about 50% children in India are malnourished due to acute poverty, relief and care only appears as a distant dream to them. It is the government’s duty to determine and fulfil the needs of the society by channelizing the funds of the public. With the CSR law, the government has failed in one of its primary functions.
The issue of geographic inequity also needs to be taken into consideration as there is a wide amount of gap in spending on CSR activities between the states of India. For example, Maharashtra, Gujarat, Andhra Pradesh, Rajasthan and Tamil Nadu account for well over one-quarter of all CSR spending. Towards the bottom of the list are Nagaland, Mizoram, Tripura, Sikkim and Meghalaya—all from the North-East.
This inequity reflects the interests and priorities of the business sector. Therefore, it is the duty of the government to ensure that the society moves towards a more egalitarian society.
Issues Hindering the Corporate Social Responsibility
The earlier government used to rely on legislation and regulations for regulating the objectives of the business sectors. But, the reduction of government involvement in CSR has resulted in the exploration of non-voluntary actions.
To ensure that CSR becomes a success, it is necessary that there should be a consensus among the local agencies. But, a lack of consensus, results in duplication of activities by the corporates which further results in generating a competitive spirit between the local agencies rather than a collaborative approach.
The success fruit of CSR can only be plucked when there exists knowledge about the CSR activities within the local communities. Since not much efforts have been put in creating awareness about the CSR activities, thereby it has resulted in a lack of interest on part of local communities in participating towards CSR activities.
Also, there is non-availability of well-organized governmental or non-governmental organizations in remote and rural areas. Due to the absence of any proper authority, the needs of the rural people often gets unnoticed and there remains no proper authority along which a company can assess and identify the needs of the society.
Further, the key to any successful CSR initiative is transparency, but there are certain perceptions that partner NGOs or local agencies do not disclose the information about their programs, address concerns, assess Impacts and utilize funds. This lack of transparency creates an indelible impact on the relationship and trust between the companies and local communities which is the key to the success rate of any CSR initiative.
In order to ensure that the CSR activities are carried out in an efficient and effective manner, it is necessary to ensure that each organization and institution is well equipped with proper resources. But due to a dearth of trained and effective organizations, fulfilment of CSR initiatives, appears to be a distant dream. This results in the compromise and limitation of various CSR initiatives.
Various analysis shows that the law in its current form is failing to promote healthy CSR initiatives due to its poor enforcement and lack of clear obligations. The legal provisions related to CSR contains vague language which results in a high degree of self-interpretation. Another flaw from which the CSR has to struggle is that the Act doesn’t penalize a defaulter and just allows them to walk away with an explanation regarding their failure on CSR activities. This results in high corruption, low levels of public confidence, low development and weak institutions.
It is noted that only medium and large corporate houses are involved in CSR activities, that too in selected geographical areas. This issue builds a case for more companies to be brought under the CSR domain. To address the issue of reaching out to wider geographical areas, the involvement of small and medium enterprises (SMEs) in the CSR domain will be essential.
It is found that corporate houses and non-governmental organizations should actively consider pooling their resources and building synergies to implement best CSR practices to scale up projects and innovate new ones to reach out to more beneficiaries. This will increase the impact of their initiatives on the lives of the common people.
Recently Maneka Gandhi also criticised the corporate houses for not taking the CSR initiatives seriously. Her criticism was in lieu of the poor response given by the corporate houses to Prime Minister Narendra Modi’s call of using the CSR route for Swacch Bharat Abhiyan.
Conclusion
Corporate Social Responsibility has become an innate part of the working of Corporates in recent times. Though the concept of CSR was prevalent in India since antediluvian times, it is only, recently that the concept has picked favouritism in the companies. Finally, and importantly, the mandatory requirements create anchoring effects which may alter the quality of the CSR activities as also reduce the spending magnitudes. Therefore, the government may want to rethink its policy on the mandatory trusteeship. A reconsideration of Friedman, Smith, and Gandhi’s ideas of rules of ethics, moral sentiments, and voluntary trusteeship respectively could be a step towards saving the firms’ CSR from getting trapped in the legal net. Transparency and dialogue can help to make a business appear more trustworthy, and push up the standards of other organizations at the same time.
Author Bio
Nicely Written about the CSR very relevant topic for the Corporate’s