One side effect of the corporate social responsibility (CSR) law is that a mundane concept like taxation has been rendered rather exciting. When the law was passed in 2013, some corporates made subtle statements that seemed to say they were feeling quite cheated that their CSR expenditure, which was hitherto voluntary and mostly tax-exempt, was made all but mandatory and would ‘not’ be eligible for tax benefits. This was more shocking to them than the idea of a fair minimum wage. After all, in the corporate world the word ‘tax’ is more terrifying than Voldemort in Potterverse.
The government has repeatedly clarified that CSR spend will not be exempt from tax. Even then, certain activities that come under the broad list of permissible CSR already do enjoy tax-exempt status, such as contributions to the PM Relief Fund, rural and skill development projects, etc.
Despite the howls of protests, the government has stated that the CSR law is to encourage participation in social development and that incentivising through tax benefits may dilute the spirit and intent of it. It has also clarified that the objective of CSR is to help out the State in delivering social services and, hence, tax deductions will mean subsidising this for the private sector – this negates the entire purpose of the 2013 Act. Whatever your opinion is about this law, using taxpayers’ money to assist and incentivise companies to help the very same taxpayers is the kind of circular logic that is quite illogical.
Tax-proofing, tax-fooling, or whatever it is that they do
The differential tax treatment has had its fallout. Take for example those cases where a company implements its CSR through a trust set up by itself or others. Now, under Section 80G of Income Tax (IT) Act, 1961, contributions to only certain trusts are given 100 per cent deduction, while for many it is restricted to 50 per cent. Then there are institutions that come under Section 35AC of I T Act – here, any company working through them on their CSR can easily avail of a 100 per cent deduction on the expenditure. In fact, for institutions that work on scientific or social research, the tax advantage may even go up to 175 to 200 per cent. Loopholes like these can be figured out by a half-competent CA and exploited fully by companies to save on tax money, whether or not it ties in with their actual CSR priorities and area of expertise. There is bound to be a lot of cherry picking, not necessarily for the right reasons, on which organisations to partner with, even if it means reducing the potential social impact. This argument is frequently employed by those who are in favour of tax exemptions for CSR activities. However, using the same points, many are of the opinion that there are plenty of ways in which a company can conduct its CSR without considering it a tax burden and an onerous, unwanted task, and yet avail of some tax benefits.
Even then there are compelling voices within the government who are cognisant of the implications of the differential tax treatment since it can result in differential allocation of funds to various development sectors. Corporate India, meanwhile, asserts that since CSR spend is mandatory, it should be considered as part of business as usual and hence be eligible for deductions such as the one under Section 37 of IT Act. As per this rule, a non-capital expenditure that is exclusively for business purposes is allowed as a deduction from business profits. Of course, this then leads to the next quandary – projects wherein schools or other infrastructure are built for the community won’t benefit from this exception, which is objectively unfair. The current government, despite its business-friendly image, seems unlikely to give in to India Inc.’s demands.
One interesting aspect of this entire taxing (pun intended) drama is that certain companies, as late as early this year, were under the mistaken ‘assumption’ that the two per cent to be invested in CSR was to be from the profit after tax, rather than before tax. A case of convenient incompetence or pure chicanery, depending on whom you ask. What this proves, though, is that unless all CSR spend is made tax-deductible, calculated as a percentage of after-tax profits and possibly with a few more freebies and subsidies given by the government as ‘incentives’, some companies will continue to play victim. After all, a penny saved is a penny earned, right?