Differential tax treatment of the permitted CSR spending defeats the purpose of having priority activities
Undertaking corporate social responsibility (CSR) has become mandatory for Indian companies as well as foreign companies working in India from the current fiscal year. The law relating to CSR is provided in section 135 of the Companies Act, 2013 (Act), and is to be read with Schedule VII of the Act and The Companies (Corporate Social Responsibility Policy) Rules, 2014. The canvas for CSR activities seems to be wide open and companies can engage in a variety of causes—such as poverty alleviation, education, women empowerment, etc, or even contribute towards recognised funds such as the Prime Minister’s National Relief Fund. However, each such spend under the CSR laws will have a different tax treatment under the provisions of the Income Tax Act, 1961 (I-T Act). The contributor needs to evaluate whether he would claim income deduction under section 80G (@ 100% or 50% of the amount) depending on the scheme(s) selected or would prefer a weighted deduction under certain specified sections of the I-T Act. While the CSR laws are new and still evolving, there are many issues which require clarification so that bona fide activities are considered a part of the 2% mandatory CSR expenditure.
Interestingly, Schedule VII recommends that “Contributions to PM’s national relief fund and such other funds established by the central or state government” as one of the activities that can be taken up for CSR. Further, the company can claim 100% deduction of such contribution under section 80G of the I-T Act. Making contributions to the PM’s national relief fund can simply be done online through net-banking or through cheques/ draft. If one visits pmnrf.gov.in while making these contributions, there are certain conditions that the contributor has to agree, one of which is “conditional contributions, where the donor specifically mentions that the amount is meant for a particular purpose, are not accepted in the Fund.” How this ties up with the intention of the policy, wherein corporates are expected to go beyond communities and into the concept of philanthropy is a matter of debate.
The CSR policy considers activities “ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water” as eligible activities. So, can a company which does rain-water harvesting aimed at ‘maintaining quality of water’ within its premises claim this expenditure as part of CSR? Also, what about solar or wind installations within the premises of the business aimed at ‘ensuring environmental sustainability and conservation of natural resources’. The installations are made in the interest of the environment despite being costlier than the conventional energy source. Can this be considered as an eligible activity under section 135? The answer is “no”, as the spending has to be for general use purpose. Hence, it is important for Corporate India to be aware of its CSR obligations and always remember the thumb rule that the contributions have to benefit the public and one-off events such as marathons/awards/sponsorship of TV programmes would not qualify as part of CSR expenditure.
It has now been clarified that contributions towards disaster relief, which includes providing food packets, tents or medical services, can be shown under the already notified activity of eradicating hunger, poverty and malnutrition and other environmental sustainability heads. Companies spending on reconstruction of schools, hospitals or other social infrastructure need to ensure that this activity is covered within the permissible CSR activities given in schedule VII so as to be compliant with the CSR law.
The differential tax treatment of the legally permissible CSR expenditure will defeat the very purpose of enacting various priority activities. One of the questions being raised is: Why should a company incur CSR expenditure on priority areas without having any tax benefit, when it can incur the same with 100% tax deductions, through just contributions to general purpose funds set up by the state? Notwithstanding that the CSR policy has been welcomed as the need of the hour, with world looking at India in a new light, it would be worthwhile for the government to revisit deductibility of CSR expenditure and provide a level playing ground for all kinds of CSR expenditure. This move will incentive India Inc to set-up its own CSR teams and inspires its employees to participate in CSR programmes, thereby promoting socio-economic growth.
By Rajiv Chugh
With contribution from Pooja Tosniwal, senior tax professional, EY
The author is Tax Partner, EY. Views are personal