CSR Spend and the Tax Issues
Corporate Social Responsibility has become the buzz word in the business circles since last few years and with the inclusion of CSR rules in the New Companies Bill 2013 it has emerged as a topic of debate across various sectors and corporate domain. With the Companies Act, 2013 largely in place, India emerges as the first country in the world to legislate CSR activities.
Corporate India is not new to this and many companies have been doing good work to the community through their CSR activities. A company being a corporate citizen earns from the society, has a moral obligation to give back to the society at large. CSR expenses include expenses on setting up schools and colleges & hospitals, community programme & welfare measures, etc. Since these expenses are incurred for the welfare of local community and thereby improve corporate image in addition to providing indirect benefit to the employees, by their involvement in these activities, the same therefore becomes claimable business expenditure for tax purposes. As per the recent Companies Bill, a company has to mandatorily incur expenses towards CSR (2% of average net profit). As per the Companies Bill, a company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities. If the company fails to spend such amount, the Board shall, in its report, specify the reasons for not spending the amount. Under this proposal, both private and public companies will be treated alike.
The Companies Bill made it mandatory for companies to spend 2 percent of their profits on social welfare. It further emphasises that it is preferable if the expenses are incurred in local area & vicinity around the company; however, there is no compulsion for the same.
The focus will be on the Finance Ministry, which if comes out with a Central Board of Direct Taxes (CBDT) notification for allowability of these expenses, rather than asking companies to find their way, it would be well appreciated by Corporate India and will act as an incentive for companies. This was well put forth in the address to the reporters at press recently by Mr. Sachin Pilot, Hon’ble Minister of State holding independent charge of corporate affairs, that many companies raised the issue of tax benefits for the amount they spend on CSR and that he will take up the issue with the finance ministry.
Companies that have recorded an average net profit of Rs. 5 crore in the past three years or clocked a turnover of Rs. 1,000 crore or have a net worth of Rs. 500 crore are proposed to be covered under the mandatory CSR norm. Since the canvas for CSR activities is wider, companies can engage in a variety of causes however complexity arises about how each such spend could under current tax laws will have a different tax treatment.
The Government has made it mandatory for companies to spend two per cent of their profits towards CSR, and as per the act it states the Board of Directors ‘shall ensure’ that the company spends towards CSR – however if no CSR activity has been undertaken, reporting on the same is mandatory.
Tax issues pertaining to CSR spend has become an issue of debate and confusion over time, for example, donation towards the PM National Relief Fund, would entitle the donor company to a deduction, from taxable profits, of the entire donation amount. On the other hand, if a company has constructed a school in a village, no tax benefit may be available – at least not without a drawn out litigation. Under section 37 of the Income Tax Act, an expenditure which is not capital expenditure and is expended ‘wholly and exclusively’ for the purpose of a business is allowed as a deduction from business profits. 2 percent of a company’s average profits is a significant amount; especially when there is no clarity on whether such CSR spending will be allowed as deduction for tax purposes. Except for the tax issues, however the act has introduced CSR to the forefront dogma of corporate companies’ policy through its disclose-or-explain mandate, by promoting greater transparency and disclosure.
There is nothing in the law to suggest that spending on CSR will be tax-exempt, said Vipul Jhaveri, Head M&A (mergers and acquisitions) Tax at Deloitte India. Recently, Mint reported that taken together, registered companies in India would likely spend Rs.18,000 crore on CSR activities. The potential dent to the government’s tax revenue could therefore be to the tune of Rs. 6,000 crore, if the government does grant income tax exemptions to CSR spending. Whether CSR spend – now mandated by law – is to be treated as a business expenditure is the question being raised by the tax experts and corporate lawyers
The time is ripe now for the tax issues and CSR spend to be clarified by the government.