Under the Companies Act, 2013, Corporate Social Responsibility (CSR) mandates certain companies to spend 2% of their average net profits on social and environmental initiatives like education, poverty relief, and sustainability. Companies meeting financial criteria must form a CSR committee, implement approved policies, and disclose activities, ensuring compliance and transparency.
This article discusses whether TDS applies to CSR Expenses, under which sections and how Companies can stay compliant.
1. Legal Background
Corporate Social Responsibility (CSR) under the Companies Act, 2013, is a mandatory requirement for certain companies in India to contribute towards social and environmental welfare. As per Section 135 of the Act, companies with a net worth of ₹500 crore or more, turnover of ₹1000 crore or more, or net profit of ₹5 crore or more in the preceding financial year must form a CSR Committee. These companies are required to spend at least 2% of their average net profits of the last three years on CSR activities outlined in Schedule VII of the Act, which includes areas like poverty eradication, education, gender equality, environmental sustainability, and rural development. The Board is responsible for approving and disclosing the CSR policy, while the company must ensure compliance. If CSR funds remain unspent, they must be transferred to specified government funds, with penalties for non-compliance.
2. Disallowance of CSR Expenditure under Section 37(1)
As per Explanation 2 to Section 37(1) of the Income-tax Act, any expenditure incurred by an assessee on the activities relating to Corporate Social Responsibility (CSR) referred to in Section 135 of the Companies Act, 2013 shall not be deemed to be incurred for the purpose of business or profession, and hence not allowable as a business deduction.
3. TDS on CSR Expenditure – Nature based Deduction
Although CSR expenditure is not allowed as a business expense under Section 37, that does not exempt it from TDS provisions. The Income-tax Act does not provide any specific exemption from TDS for payments made under CSR.
Therefore, the TDS applicability depends on the nature of the payment:
- If CSR involves contractual work (e.g., construction of toilets, setting up infrastructure), Section 194C applies.
- If it involves professional services (e.g., awareness campaigns, consultancy), Section 194J applies.
- If the company is purchasing goods for CSR in excess of ₹50 lakh, Section 194Q may apply.
- If it is a pure donation to a registered charitable trust with no quid pro quo, TDS may not be required.
Conclusion
While Corporate Social Responsibility is a noble and statutory obligation under the Companies Act, 2013, it must still pass through the lens of tax compliance under the Income-tax Act. Though CSR expenses are not allowed as business expenditure under Section 37(1), companies must ensure TDS is deducted wherever applicable, based on the nature of the payment.
Failure to deduct TDS can lead to disallowance under Section 40(a)(ia) and potential interest and penalties. Hence, companies should strike the right balance between fulfilling their social duties and maintaining strict compliance with tax laws.
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A small clarification please
when the CSR expenditure is not an allowable expenditure how the provisions of section 40 (a) (1a)
can be applied in the event of failure to deduct TDS?
Thank you for your query. While CSR expenditure is not allowable as a deduction under section 37(1), the disallowance under section 40(a)(ia) is a separate compliance provision related to TDS. If TDS is not deducted where applicable, section 40(a)(ia) can still trigger disallowance—even for expenses not otherwise allowable—since it deals with the deduction of TDS on expense paid or credited in the Books of Accounts.