Corporate India, still to be unburdened from a much higher incidence of taxes and levies compared to what their peers in competing economies are subjected to, has been dealt another blow.
Corporate India, still to be unburdened from a much higher incidence of taxes and levies compared to what their peers in competing economies are subjected to, has been dealt another blow. The government on Wednesday made specified corporate social responsibility (CSR) spend virtually mandatory for large cross-section of them. Worse, any lapse will now be penalised — with not just considerable monetary fines but also with imprisonment of the designated executive for up to three years.
While taking no exception to the government’s intent and the need to ensure CSR spending that brings about optimal societal outcomes, analysts wondered whether forcing such spending was indeed the right policy. Many believe the new norms, cleared by the Upper House of Parliament late Tuesday along with a host of other amendments to the Companies Act (the Lok Sabha had cleared these changes last Friday), is akin to “a commitment levy”.
Rumjhum Chatterjee, who is co-chair of CII’s CSR Committee, said, “The penal provision surprised us a little. It is an extreme step. The government is focusing on spending rather than monitoring the outcome. The ecosystem for managing CSR funds should be strengthened. There are several MSMEs involved in it. It has come as a sledge hammer.” Chatterjee was speaking to a TV news channel.
Thanks to an Ordinance issued earlier, effective from April 1, 2014, the companies with a net worth of Rs 500 crore or turnover of over Rs 1,000 crore, or net profit of Rs 5 crore are mandated to spend 2% of the average net profit of the preceding three years on CSR programmes.
As per the new rules, companies meeting certain defined thresholds are required to spend 2% of their average net profit of the preceding three years on CSR programmes. Further, unspent funds earmarked by such firms for ongoing projects have to be transferred by the company to a special bank account called Unspent Corporate Social Responsibility Account, and should be utilised within three years of transfer. Additionally, any unspent annual CSR funds must be transferred to one of the funds under Schedule 7 of the Companies Act like Prime Minister’s Relief Fund within six months of the financial-year end.
According to proxy advisory firm Institutional Investor Advisory Services (IiAS), the top-100 BSE firms spent more than Rs 21,000 crore on CSR activities between FY16 and FY18. The gap between the prescribed and actual spends by these firms declined from Rs 1,078 crore in FY16 to just Rs 141 crore in FY17 but widened again to Rs 523 crore in FY18.
“The law earlier was based on the principle of compliance, where any slippages needed to be explained. However, it has now been made mandatory and in effect a social commitment levy is in place” Sai Venkateshwaran, Partner and Head, CFO Advisory, KPMG in India, said. “Three years ago, the gap between prescribed CSR and actual spend was Rs 1,000-1,100 crore/year. The number for FY19 looks lower. The corporates are embracing CSR commitments and it loses some of the appeal if it is mandatory. As it is, the absorptive capacity of the social sector is not high enough. The government has not recognised the challenges companies face while bringing this new law,” Amit Tandon, founder and managing director of corporate governance, IiaS, said.
According to Dinesh Kanabar, CEO, Dhruva Advisors, a leading tax consultant, the government should have made CSR spending tax deductible to promote it. “All over the world CSR provisions are viewed in terms of reporting by companies. It is treated as an opportunity for them to show what they are doing for the society. Only Indonesia, Mauritius and Nepal impose penal provisions for non-compliance of CSR provisions. This is an additional tax and is non-tax deductible. We had given a suggestion to the government to make CSR spends as tax-deductible,” Kanabar said.
Speaking on the Companies Bill in Parliament, finance minister Nirmala Sitharaman said on Tuesday “companies cannot get away without meeting CSR requirements”.
“It was easy for people to interpret that either we comply or we give an explanation and get away with it. Now that is not happening because Section 135 (of the Companies Act) is being amended to provide specific penal provision in case of non-compliance,” Sitharaman said.
Data from the ministry of corporate affairs for FY17 showed 19,933 companies out of 21,498 eligible companies spent Rs 13,466 crore on CSR activities. In 2018, the ministry issued ‘preliminary notices’ to 272 firms for not complying with CSR provisions.