taxation on csr

In this article, Druthi Polisetty pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses Taxation on CSR initiatives.

Corporate Social Responsibility or CSR is an initiative that rests on the ideology of give and take. Large corporations expend large amounts of resources from society and environment and this is a way of giving back to the world. It is a way of corporations taking the responsibility for the effects they have on the environment and social well-being.

Corporations have detrimental effects on the environment in the form of oil spills, waste production, pollution to the air, mining, polluting the sea which has resulted in loss and degradation of the local ecosystem. In light of this unfortunate state of events, the Companies Act had brought in the provision for CSR through the 2013th Amendment.

Section 135 deals with CSR of a company. It provides the threshold limit for applicability of the CSR to a Company which is:

  1. Net worth of the company to be Rs 500 crore or more;
  2. Turnover of the company to be Rs 1000 crore or more;
  3. Net profit of the company to be Rs 5 crore or more.

Further as per the CSR Rules, the provisions of CSR are not only applicable to Indian companies, but also applicable to branch and project offices of a foreign company in India. Ministry of Corporate Affairs has notified Section 135 and Schedule VII of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014, CRS Rules, which has come into effect from 1st April 2014. The activities listed under Schedule VII qualify as CSR activities. They relate to activities like eradication of hunger, promotion of education, gender equality, and setting up old age homes, environmental sustainability, slum area development, rural development projects and the like.

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The company is supposed to set up a CSR committee which will consist of the Board of Directors. They will decide on the amount to be spent on CSR and prepare the list of activities that they would engage in pursuance to this objective and monitor the same. An annual report of the policy will be prepared and submitted with the Board’s report. The company website is also required to reflect their CSR policy. Penalty provisions for non-compliance have been provided under the Companies Act.

There are some tax implications as well with respect to CSR. Prior to the 2013 Amendment and Finance Act, 2014, there was no provision relating to CSR. Therefore any expenditure that was voluntary in nature would be claimed under either Section 35 (2AA) or 35 AC or under Section 80G of the Income Tax Act, and in most cases, it was claimed under Section 37 of the Income Tax Act.

Through judicial pronouncements, it was allowed that expenditure towards CSR would be allowed as a deduction under Section 37 of the Income Tax Act only if the expenditures were for the purpose of business and for the advancement of the business of the assesse. Later, the rule 4 established that any expenditure towards CSR cannot be considered as an expense in relation to the advancement of business. Therefore there was clarity on the fact that, expenditure towards the purpose of business can be considered as CSR for availing the deduction under Section 37 of the Income Tax Act.

Therefore there was clarity on the fact that, expenditure towards the purpose of business can be considered as CSR for availing the deduction under Section 37 of the Income Tax Act.

However, any deductions claimed under Section 30, 32, 35, 35AC, and 80G is permissible. There is still lot of confusion regarding the treatment of tax on CSR. The Finance Act, 2014 said that any expenditure on CSR related activities will not be treated as business expenditure as it is treated as an application on income and hence the tax deduction will not apply. Only exception is if the expenditure falls under any of the Section 30 to 36 of the Income Tax Act, other than capital expenditure or business expenditure, then it can be deducted as business expense.

There are two views with respect to contributions made to a charitable trust that takes part in activities relating to those listed under Schedule VII on whether it can avail of the deduction under Section 80 G of the Income Tax Act.

  • One view is that if it can be shown that the contributions were made to a charitable trust and it can produce the 80 G certificate, then it can be treated as CSR and a rebate can also be obtained.
  • Another view is that corpus contributions to a trust, society or non-profit will be considered as CSR. The point is that donations under Section 80G are different from corpus contributions as it is essentially a capital contribution. It be treated as contributing a large sum of the money to the capital of the trust rather than an expense of the corporation.

There are some non-binding instruments as well which relate to CSR which can be followed by corporations that do not fall under Companies Act. Non-binding guidelines were issued in 2009 to encourage private corporations to contribute towards CSR initiatives. The Ministry of Corporate Affairs had released CSR Voluntary Guidelines, 2009. The reason for the making of these guidelines was due to the disparity that existed in the society where on one hand there were large corporations making lakhs of rupees while on the other hand there was growing poverty, degradation of the environment, malnutrition, illiteracy and the like. Due to this, the Ministry acknowledged that there was need for corporations to take responsibility and hence the Ministry had passed voluntary guidelines to encourage corporations to take up CSR activities and give back to the society.

The Guidelines are published for the companies that have intended to and initiated Corporate Social Responsibility activities. The intention is that all companies endeavor to adopt working models that complement the recommended guidelines with the main focus on it being fair, transparent, and ensuring to have responsible business practices. It is recommended that the execution of this should be done with using self-assessment CSR governance benchmark and terms of reference of CSR committee. The Guidelines were issued in exercise of the powers under Section 506B of the Companies Ordinance, 1984.

“The systems are expected to reflect following broad indicators:

a) Express commitment of the board and the top management to formulate and implement CSR Policy

b) Ensure that policies, processes and systems exist and support the CSR policy. This is measured by:

(i) Specifying the organizational approach towards CSR

(ii) Incorporating the CSR approach into code of ethics of company CSR Guidelines, 2013 Securities and Exchange Commission of Pakistan

(iii) Defining objectives for carrying out CSR activities

(iv) Setting targets for achievement of CSR objectives

(v) Determining the working model and devising action plan (time, resources, budget)

(vi) Delegating responsibility and management of resources with respect to CSR policy

c) Sensitization and training of the board, senior management and employees for implementation of CSR targets

d) Mechanism for stakeholder engagement prior, during and on conclusion of CSR plans

e) Periodic monitoring and evaluation of CSR activities

f) Disclosure and reporting of CSR achievements

g) Recognizing and documenting the shortfalls/failures

h) Incorporating improvement in future CSR policy/plans.”

In 2011, the National Voluntary Guidelines on social environmental and economic responsibilities of business was issued. The applicability of the guidelines are:

“The Guidelines are designed to be used by all businesses irrespective of size, sector or location and therefore touch on the fundamental aspects – the ‘spirit’ – of an enterprise. It is expected that all businesses in India, including multi-national companies that operate in the country, would consciously work towards following the Guidelines. The Guidelines also provide a framework for responsible business action for Indian MNCs planning to invest or already operating in other parts of the world. Businesses are encouraged to move beyond the recommended minimum provisions articulated in the document. For business leaders and managers entrusted with the task of deploying the principles of Responsible Business, it is worthwhile to understand that business boundaries today extend well beyond the traditional walls of a factory or an operating plant and all the way across the value chain. Businesses are therefore encouraged to ensure that not only do they follow the Guidelines for the areas directly within their immediate control or within their sphere of influence, but that they encourage and support their vendors, distributors, partners and other collaborators across their value chains to follow the Guidelines as well.”

Hence from the above it can be seen that India is making lot of efforts with respect to CSR which is much needed to help grow our society wholesomely. There are many loopholes which are being accessed by the corporations which results in the loss of the intent for having such a concept. Corporations sometimes circumvent the provisions in order to escape having to increase their expenses due to CSR and hence try to find loopholes to cut down their taxes as well as their expenses. It needs to be our effort to change this mindset and hope to see the society grow together.

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