The 2013 Companies Act requires companies with turnover of ₹1,000 crore or net worth of ₹500 crore or net profit of ₹5 crore to spend, in each financial year, at least 2 per cent of their average net profit (in the three preceding financial years) on specified corporate social responsibility activities. While currently there is no penalty for not meeting CSR obligations, the director’s report must specify the reasons for not meeting the CSR spending requirement.
The range of CSR activities specified in Schedule VII are diverse. It ranges from projects to eradicate hunger, poverty, malnutrition; promotion of gender equality, education to environmental sustainability; protection of national heritage, art and culture, measures for the benefit of armed forces veterans, war widows etc.
It also includes contributions to technology incubators located within academic institutions approved by the centre; contributions to the Prime Minister’s National Relief Fund or any other fund set up by the centre for socio-economic development and relief and welfare of the scheduled castes, the scheduled tribes, other backward classes, minorities and women.
According to reported statistics, the CSR obligations would apply to around 8,000 companies in India, translating to an estimated CSR spend of about $2 billion.
When governments are under pressure to cut healthcare and other public expenditure, there is a compelling argument that profitable companies should support the government’s efforts to improve and advance society.
Therefore, while India is probably the only country in the world that statutorily mandates CSR spending, such a move is generally welcome given our socio-economic environment and relatively low levels of corporate philanthropy. However, the Finance Act (No. 2), 2014 has made CSR spending non-deductible by providing that any expenditure incurred on CSR activities will not be regarded as business expenditure. Hence, in addition to incurring the expenditure, a company will have to pay income-tax at the rate of 30 per cent (plus surcharge, if applicable, and education cess) on such expenditure.
The disallowance of CSR is not only inconsistent with certain other provisions of the Income-Tax Act, but is also unfair.
Make it simpleIncome derived by public charitable and religious trusts is exempt from income tax if it is applied for charitable and religious purposes.
Stand alone donations made to the Prime Minister’s National Relief Fund (and a number of other funds) are deducted in computing the taxable income.
However, if a company contributes to the National Relief Fund as a part of its CSR obligations, it will not be able to claim a deduction since the Finance Act (No. 2) 2014 makes such expenditure non-deductible.
When income applied by charitable and religious trusts on activities of their choice, is fully exempt from tax and when companies are given a weighted deduction of 150% for expenditure incurred by them on notified agricultural extension projects and skill development projects, there is no justification for disallowing the CSR expenditure which is required by law in areas or projects of equal national interest.
Therefore, there is a strong case for amending the Income-Tax Act to provide that CSR expenditure will be allowed as a deduction.
This will also encourage other companies to voluntarily undertake CSR spending, resulting in greater benefits to the less privileged members of the society.
The writer is a founding partner of Associated Law Advisers