In the past, a significant portion of Indian CSR activities have been voluntary. The proposed Companies Bill makes it mandatory for companies meeting the specified criteria to earmark 2% of the net profits in the preceding three years towards CSR activities. There is increased accountability on companies to define a clear framework to ensure strict compliance. The Bill is to be placed before the Rajya Sabha during the budget session. The proposed CSR framework, once ratified, would make India one of the first few countries to mandate CSR through a statutory provision.
The draft Bill requires companies with a net worth of more than R500 crore or a turnover of R1,000 crore or a net profit of R5 crore to constitute a CSR committee as well as formulate a clear policy for spending the earmarked funds towards CSR activities. The composition of the committee, the CSR policy as well as activities undertaken by the company need to be disclosed in the boards report as well as on the companys website. In case companies are unable to spend the earmarked funds on the identified CSR activities, adequate disclosure on reasons for failure also need to be made.
The focus is more on ensuring greater and sustainable engagement of corporates with the community rather than a cheque book-based philanthropy. The emphasis is towards transparency and accountability of CSR spends rather than penalising companies on failure to spend the earmarked funds.
At present, as part of voluntary CSR projects, large corporatesspecifically in the manufacturing and infrastructure sectorshave been undertaking expenditure on providing better basic amenities such as healthcare, drinking water, sanitation and education. The focus of these CSR projects is the socio-economic betterment of weaker sections of our community. Generally, such activities are undertaken by corporates in and around the areas of their operation and act as a mechanism for building trust and goodwill amongst the local communityestablishing a business nexus for CSR expenditure.
In the past, there have been differences of opinion about deductibility of such CSR project-related expenses while computing the taxable profit of corporates. The bone of contention is whether CSR expenses are incurred by the company in connection with its business operations or should be considered outside the ambit of business operations. As long as the expenditure qualifies for business purposes, the same should be considered deductible while computing taxable income. The issue becomes much more intense as existing mandatory guidelines on CSR for Central Public Sector Enterprises require public sector undertakings to contribute 0.5-5% of their net profits for CSR activities. In view of the statutory requirement, there is a divergent position creating an undesired haze around the tax treatment of expenses incurred on CSR. Given the magnitude of spending contemplated under the Companies Bill and the intention of the government to involve the corporate community to partner with the government in the overall socio-economic growth of the economy, there is a need to bring out some clarity on tax deductibility of CSR expenses.
In fact, it may be worthwhile for the government to consider allowing a higher weighted tax deduction to corporates with respect to the CSR expenditure incurred by them. This would not only encourage them to come forward and support the community as responsible citizens of the country but also incentivise them by reducing the effective tax rates of the companies. Such a mechanism would definitely encourage the corporates to undertake CSR activities rather than finding loopholes in the law to avoid such spends.
Over the years, several business houses have embraced CSR, albeit on a voluntary basis. The perception of corporates towards CSR has also been changingviewed not just as a cost but as an enabler for brand building. With the advent of the Companies Bill, the government should consider not only clarifying the position on tax deductibility of the CSR expenditure in the Budget 2013 but also provide incentives in the form of weighted deductions to encourage corporates to continue to meaningfully engage with the community.
The author is partner, Global International Corporate Tax, KPMG in India. Views are personal