The necessity of Corporate social responsibility is undisputed, though the mandating of CSR under the Companies Act, 2013 is. The government has prescribed a set of CSR activities which aims at the establishment of an equitable society. That the disallowance of tax deductions under Section 37(1) and allowance of tax deductions under Sections 30 to 36 of the Income Tax Act, 1961 lead to appalling disparity in the tax liability of each company, depending on the nature of CSR activity taken up, is the central contention dealt with in the paper. The additional measures that are to be taken by the government for ensuring that the companies not just comply with the mandatory CSR but also fulfill the purpose for which the CSR was mandated is discussed with special emphasis on immediate action to be taken to encourage companies to extend help in the Chennai flood relief.
The object of any company is to maximize the wealth of shareholders, yet a duty is cast on the company to give back to the society. A company is indebted to assure the sustainability of environmental resources, without polluting or degrading it, even though it is not contributing for its betterment. The new concerns and expectations from stakeholders in the context of globalization and large scale change, social criteria influencing the investment decisions, increased concern about the damage caused by economic activity to the environment and transparency of business activity brought about by the media and modern information and communication technologies are some of the major driving forces fostering the evolution of corporate social responsibility.[i]“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”[ii]
Through CSR, the government shifts the onus to the corporate its responsibility. Thus, the company impresses on its concern and responsibility as a corporate citizen. CSR is not charity but an obligation of the company towards people and society for sourcing their profits from them and it is the right of the citizens.
Hitherto what was voluntary under the Companies Act, 1956 has become mandatory under Section 135 of the Companies Act, 2013. Every company, having at least Rs 5 crore net profit, or Rs 1,000 crore turnover or Rs 500 crore net worth, must spend at least 2% of average net profits made during the preceding three years. India is the concept seller of introducing statutory provisions for mandatory CSR. The companies are now expected to not just carry out their business in an environment friendly and sustainable manner, but take initiatives to improve and enhance the lives of various stakeholders and the society.
This provision received a very skeptical response from the business leaders but a positive nod from the industry observers, NGOs etc. Ratan Tata, the former chairman of Tata Sons, has said, “We have a phenomenon which is meant to be good but is going to be somewhat chaotic … we don’t as yet know what kind of monitoring there’ll be in terms of how well this money is used.”[iii] Similarly, Azim Premji, the head of Wipro has said, “My worry is the stipulation should not become a tax at a later stage … Spending 2% on CSR is a lot, especially for companies that are trying to scale up in these difficult times. It must not be imposed.”[iv] Further, the major criticisms and echoes that are voiced against mandatory CSR are that it would open up new avenues for corruption, extortion etc. Despite various concerns expressed as regards the efficacy and success, the mandating of CSR to companies cannot be dismissed as a futile exercise. Instead, stress need to be placed on the various means that can be resorted to, for making it a success.
The Indian companies are, already burdened with a tax rate of 34.61%[v], way more than the global average of 29.8%[vi]. In such a situation, the onus is upon the government to make the mandatory CSR attractive to the companies and take measures to encourage the companies to comply with the mandate rather than adding further pressure to the companies. That way, the non- prescription of any punishment for the non- compliance with the mandatory CSR and only requiring the Company to state the explanations for the unspent amount deserve appreciation. The companies, if not for the sake of contributing to the welfare of the society and various stakeholders, but at least for enhancing the goodwill of the company, will do their best to comply with the mandate. The act of insertion of the explanation 2 to clause (1) of Section 37 is putting a spoke in the wheel. It states that CSR expenditure, being an application of income is not incurred for the purposes of carrying on business, and such expenditures cannot be allowed under the existing provisions of section 37 of the Income-tax Act.[vii] Such provision renders the expenditure on CSR activities unattractive and it discourages companies from spending more on CSR. The corporate are between the devil and deep sea of Section 135 of the Companies Act, 2013 and clause (1) of Section 37 of the Income Tax Act, 1961.
It should be noted that, CSR despite being voluntary under the Companies Act, 1956, the contribution of various companies for the same was appreciable. In fact, a lot of companies had already started reporting their CSR contributions. Such amount spent was allowed as a deduction under Sections 35, 37, 80 G etc. of Income Tax Act, 1961. Many companies had come forward to help the needy by shelling out a percentage of their profits to the betterment of the society. Leading Indian companies like Infosys, Wipro, TATA, TVS, Dr. Reddy Laboratories, NTPC, and ONGC have taken initiatives in CSR activities by undertaking concrete actions towards healthcare, education, improving the standard of living and reducing poverty[viii]. But the scope of allowance for deduction for tax for CSR spending has been restricted now. Only the CSR expenditure which is of the nature described in section 30 to section 36 of the Income-tax Act, 1961 shall be allowed as deduction under those sections subject to fulfillment of conditions, if any, specified therein[ix].
To an extent, this boosts the CSR expenditure but restricts the expenditure to only those categories for which deductions are allowed under sections 30 to 36. When donations and grants to NGOs or PM’s National Relief Fund under Section 80G, and approved projects for promoting social and economic welfare of people under Section 35AC allows for 100% tax deduction, contribution to any institution for social science or statistical research under Section 35(1)(iii) allows for 125% tax deduction, donation to an institution approved under Section 35(1)(ii) for scientific research allows for 175% tax deduction, donation to any national laboratory, university, IIT or any approved institution for scientific research program under Section 35(2AA) allows 200% tax deduction, and approved projects under Section 35CCC or Section 35CCD allows 150% tax deduction[x], the companies would make sure that they spend in such activities, and particularly those relating to any of the matters given under Schedule VII so as to be eligible for tax benefits. The difference in the tax liability by spending for activities envisaged in these Sections and the spending in other CSR activities is so wide that companies would hesitate to spend their money on other CSR activities. This in fact defeats the whole purpose for the introduction of CSR. The paramount aim of mandating CSR is to encourage and boost the company to take up social activities for betterment of life of the people in various spheres. The government must take appropriate measures to do away with such appalling disparity so that companies can take up CSR activities meaningfully and as according to the needs of the locality in which they operate.
Further, the contribution can be made only to Prime Minister’s National Relief Fund or any other fund set up by the Central Government as per Schedule VII[xi] and no mention is made as regards contribution to those funds set up by the State Government. By contributing to PM’s National Relief Fund and other funds set up by the Central Government, a company, though assured that its money will be used for the benefit of the poor and needy, loses control over the specific activities for which the money is spent and where the same has been spent. In fact, the feeling of self satisfaction one feels by helping the needy, by seeing their happiness and the difference their contribution makes to the lives of the poor and needy is lost. Whereas, if contribution to State funds are allowed, the companies will be at least assured that the money will be spent somewhere in its vicinity or the State in which it operates. The company will also be able to gain the goodwill of people, specifically those in the State in which it operates. In addition, when the money is spent in a close geographical area, the people who are affected or disadvantaged by the operation of the company get the benefits from the CSR spending of the company.
Further, in the recent floods in Chennai and coastal areas of Tamil Nadu, heavy loss of property and lives was caused. There was an acute shortage of food, drinking water and other essentials due to the floods. The contribution towards flood relief flowed in from NGOs, volunteers, Government relief funds, and corporate bodies. But donations in kind are also disallowed under Section 80G of Income Tax Act, 1961. Any contribution by the companies towards flood reliefs in the form of food packets, drinking water packets, etc. cannot be allowed under any provision of the Income Tax Act. The provision of certain services like setting up a free phone facility for the victims like the ones by Care India, Bharti- BT, and CISCO during Gujarat earthquake[xii], provision of shelter in premises belonging to the companies, provision of free transport services etc are not explicitly covered under Schedule VII. Though the entries in Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule VII[xiii], contribution to disaster relief programmes must be added as a separate head in the Schedule VII, so as to encourage companies to extend their help during such times.
Various corporate bodies like Walmart, Hyundai Motors, Cognizant, TCS, TVS Motors, etc. extended their helping hand to the victims of the floods, in our humble opinion, the number of companies as well as the amount parted by the companies towards flood reliefs would have been much more if the concerned authorities had allowed deductions for tax for the amount so parted at least temporarily through a circular. Such circular providing for temporary relaxation in times of natural calamities/disasters is not unprecedented. The Department of Public Enterprises inviting attention to the havoc caused by the cyclone “Phailin” issued an Office Memorandum that relief and rehabilitation projects taken up by the Central Public Sector Enterprises in cyclone affected areas of States of Andhra Pradesh, Odisha and Bihar during 2013-14 would be treated as projects in the backward region and would also qualify for the purpose of MoU evaluation[xiv]. The circular also contained that the limit of 5-10% of annual budget for CSR and Sustainability activities earmarked for natural calamities/ disaster will be relaxed for this purpose and any contribution made to the Prime Minister’s/ Chief Minister’s Relief Fund and/or National Disaster Management Authority would count as valid CSR and Sustainability activity[xv].
- Keeping in view the long term consequences, the government must remove the explanation 2 to clause (1) of section 37 with retrospective effect and allow deduction for CSR expenditure, so as to give an incentive for companies to take up CSR activities more seriously with dedication rather than just complying with the mandate for the sake of it.
- The government must introduce a mechanism by way of audit checks and disclosures to monitor CSR expenditure so that the misuse of the CSR can be prevented.
- The government by an amendment must include in the Schedule VII, the funds set up by the State governments, so as to keep up with its own direction to the companies to give preference to the local area and the areas around which it operates, for spending the amount earmarked for CSR. Contribution to relief and rehabilitation programs for natural disasters/ calamities must also be added as a separate head under Schedule VII.
- The Department of Public Enterprises must issue a circular in line with the one issued after the Phailin cyclone.
- CBDT must come up with a circular giving relief to the corporate that CSR expenditure on flood relief and other natural calamities shall be allowed as a deduction under clause (1) of section 37 of Income Tax Act, 1961.
These measures will make many companies to come forward willingly for various social causes and come up with solutions for the same. This fulfils the actual purpose for which the CSR was introduced and goes a long way in building an equitable society.
[i] Fernando, A.C., 2014, Chapter 11: Corporate Social Responsibility, Corporate Governance: Principles, Policies and Practices, 2nd Edition, pp.311, Print.
1 Phil Watts, Shell International and Lord Holme, Rio Tinto, 2000, Corporate Social Responsibility: Meeting Changing Expectations, World Business Council for Sustainable Development, http://www.wbcsd.org/pages/edocument/edocumentdetails.aspx?id=82&nosearchcontextkey=true Web. 16 Dec. 2015
[iii] Ashok Prasad, 2014, India’s new CSR law sparks debate among NGOs and businesses, The Guardian, 11 August http://www.theguardian.com/sustainable-business/india-csr-law-debate-business-ngo Web. 16 dec. 2015
[v] http://www.tradingeconomics.com/india/corporate-tax-rate Web. 19 Dec. 2015
[vi] Kyle Pomerleau, 2015, Corporate Taxes Around the World, Fiscal Fact, Tax Foundation. Sept. 2015, No. 483 http://taxfoundation.org/sites/taxfoundation.org/files/docs/TaxFoundation_FF483.pdf Web. 19 Dec. 2015
[vii] Circular No. 01/2015, F. no. 142/13/2014- TPL, 2014, Explanatory Notes to the provisions of Finance (No. 2) Act, 2014, CBDT, Department of Revenue, Ministry of Finance, Government of India. https://taxguru.in/income-tax/explanatory-notes-to-provisions-of-finance-no-2-act-2014.html Web. 19 Dec. 2015
[viii] Prachi Manekar, 2013, Chapter XVIII: Corporate Social Responsibility, Insights Into The New Company Law. Print.
[x] 2015, CSR and Income tax, GrantAble, Accountaid.net Issue:January 2015 http://www.accountaid.net/Periodicals/GrantAble/GrantAble%201%20CSR%20and%20Taxation.pdf Web. 19 Dec. 2015
[xi] F. no. 1/18A/2013- CL-V, 2013, Ministry of Corporate Affairs, Government of India. http://www.mca.gov.in/Ministry/pdf/CompaniesActNotification3_2014.pdf Web. 19 Dec. 2015
[xii] Fernando, A.C., 2014, Chapter 11: Corporate Social Responsibility, Corporate Governance: Principles, Policies and Practices, 2nd Edition, Print.
[xiii] No. 15(13)/2013- DPE(GM)- Pt- 2- Part- (2), 2013, Department of Public Enterprises, Ministry of Heavy Industries and Public Enterprises, Government of India. http://dpe.nic.in/sites/upload_files/dpe/files/on_going_csr_activities0001.pdf Web. 19 Dec. 2015
[xiv] No. 15(9)/2014- DPE(GM), 2014, Department of Public Enterprises, Ministry of Heavy Industries and Public Enterprises, Government of India. http://dpe.nic.in/sites/upload_files/dpe/files/glch1234_301020130001.pdf Web. 19 Dec. 2015
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