The recent data showing that India Inc has not been spending as much on corporate social responsibility (CSR) as mandated by law underlines the conceptual flaws in the statutory provision that came into effect from the financial year 2014-15. Section 135 of the Companies Act stipulates that companies with a net worth of Rs 5 billion, or turnover of Rs 10 billion or net profit of Rs 50 million must spend 2 per cent of net profits on such programmes. Although the law has a “pay or explain” provision, it has the potential to expand the scope for harassment by regulatory agencies. The government is already looking into the records of top 1,000 companies that were required to make CSR spends, and a parliamentary question revealed that prosecutions have been launched against some 254 companies.
Even if the illogic of sequestering a percentage of profit, which is a derived number, rather than turnover is set aside, there are several reasons to doubt the efficacy of the CSR mandate. The principal sticky issue pertains to tax. The rules stipulate that that CSR spending excludes “activities undertaken in pursuance of the normal course of business of the company”. In other words, the amount a company spends on CSR cannot be claimed as business expenditure and offset from taxable income. Tax experts say this exception creates room for ambiguity. Where would this leave, say, a school or a hospital built for the benefit of the wider community? Would this be defined as capital expenditure or revenue expenditure?
Several such cases are being decided in the courts. Since there are many schemes that enjoy tax exemptions under the Income Tax Act (such as donations to the prime minister’s relief fund, rural development and skill development projects), it is no surprise that the bulk of CSR spending is devoted to token cheque-writing activities, which defeats the spirit of the Act. Added to tax ambiguities is the mostly desultory approach to the exercise. Agencies monitoring CSR spending report that too many companies focus on aligning their philanthropic programmes to their image-building exercises, and, thus, set up weak institutional capabilities for following through on their initiatives. The result is too many schemes that lack viability.
The government would do well to accept the April 2018 report of the sub-committee which reviewed the enforcement of CSR and the reasons for the low compliance by corporate India. At present, India Inc is allowed to carry forward its unspent CSR amount. The committee, however, rightly pointed out that the carry-forward of unspent CSR would be tantamount to deferment of expenses and such deferment as prescribed under accounting standards is possible only for revenue expenditure or tax expenditure. Since CSR does not fall under either, carry-forward is improper. The unspent amount must be spent within a year or alternatively it has to be transferred to any of the central government funds as provided under the Act. This would hopefully stop companies from using this as an excuse for not spending enough under CSR.