Zenobia Aunty firmly believes in karma. Little wonder then that Spot is forced to share his biscuit treats with the alley cat. In an ideal world, if a company contributed towards society, it would be amply rewarded by its stakeholders in many ways. However, without expecting anything in return, many companies contribute by building townships, funding schools, hospitals and the like.
There are others who firmly believe that this is not their role and taxes paid by them should take care of their social obligations. Perhaps it is only a matter of time before contributions for Corporate Social Responsibility (CSR) will be mandatory. The Companies Bill, 2011, at the insistence of the opposition, was withdrawn from Parliament in the winter session, but it is likely to be reintroduced in the Budget session in March.
This Bill called upon corporate entities meeting certain parameters to engage in CSR activities. In the Budget session, the Finance Bill, 2012, will also be tabled perhaps with the Direct Taxes Code. Thus, here is an opportunity for government to ensure that tax laws cover the treatment of CSR expenditure. The Companies Bill had prescribed that every company having a net worth of Rs 500 crore or more, or a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more during any financial year shall set up a CSR committee, which would guide and monitor the company’s CSR agenda and expenditure.
Companies meeting this criterion were required to spend at least 2% of their average net profits made during the three previous financial years towards CSR activities. Proper disclosure of the CSR policy including reasons for not meeting the required expenditure was called for. Schedule VII prescribed the various activities that would fit into the CSR policy agenda.
Besides contribution to the PM’s National Relief Fund and certain other funds of the central and state governments, the CSR activities covered those relating to eradicating hunger, promoting education or health, ensuring environmental sustainability and everything that could fall in the definition of social business projects.
Let us assume that the Companies Bill, containing mandatory CSR spend in some form or the other, gets passed in the Budget session . To ensure that the corporate sector gets its due recognition for such activities, the Finance Bill should also contain suitable provisions providing for tax deductions for CSR activities.
At present, tax exemption for cash donations can be broken up into various categories: donations that entitle the donor to a 100% or 50% tax exemption without any qualifying limit such as the PM’s National Relief Fund and PM’s Drought Relief Fund respectively; and donations that are subject to 100% or 50% deduction subject to a cap of 10% of the adjusted gross total income. In such cases, even if you make a donation larger than 10% of the adjusted gross total income, the total donation amount eligible for a tax deduction would be capped at this 10% limit.
The Companies Bill, by defining CSR activities, has widened the field. Currently, it may be possible for a Company to treat a particular CSR-related activity as a bona fide business deduction, say, installation of solar panels in its office premises – which helps environment sustainability – against which it claims tax depreciation. But claiming expenses for a medical camp in a nearby rural district as a business deduction may result in litigation. To avoid litigation on the issue, any expenditure that qualifies as a CSR expenditure, whether capital or revenue, should be entitled to a separate tax treatment.
A deduction, for tax purposes of 120-150 % of the CSR expenditure, should be permitted with a prescribed cap. As, the Companies Bill calls for a minimum spend of 2% of the average net profits during the previous three years, perhaps a cap of 5% of this amount should be set for the purpose of claiming a tax deduction . Any excess expenditure beyond 5% should not be permitted, as this would ensure that unscrupulous companies do not overspend under the CSR banner just for the sake of a tax claim.
Several companies have set up their own trusts or foundations for CSR activities. Perhaps companies may need to move these activities within the corporate fold so as to take the tax benefit. However, it would be best for the tax laws to provide that a contribution to the trust or foundation is also regarded as CSR expenditure, provided the trust or foundation has spent that money fully during a financial year. While internal CSR committees would bear the responsibility of ensuring that the prescribed funds are used for genuine CSR activities, appropriate tax policies would ensure clarity and also prompt India Inc to fully support this initiative.