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India Inc pitches for tax breaks on CSR spend CSR, an indication of government failure Proposed CSR norms still unspecific Cost and risk management

CSR should not become a convenient excuse for the Government to abdicate the primary role of delivering growth and public welfare.

India Inc is justified in demanding a tax deduction for amounts spent towards corporate social responsibility (CSR) initiatives whenever such expenditures become mandatory under a law that under the consideration of the Parliament. Without an explicit provision under the tax laws, the assessing officer would find it difficult to allow a deduction of such expenditure as incurred ‘wholly and exclusively for business’.

PhilanthropyThat said, ideally, CSR should have been best left to the industry’s own judgment. Like politicians, most corporates know the value of earning the goodwill of those living in their areas of operation. Even if these people may not be immediate consumers or input suppliers for their products, the fact that it isn’t worth putting up a plant where the locals don’t want you is something any sensible management would be aware of.

Rather than forcing, it would be better to induce companies to approach CSR activity as an investment, which can actually contribute to long-term shareholder value. A tax break is a good instrument because the corporate, in this case, would also be doing what the Government ordinarily may have using taxpayers’ funds. To that extent, there is no revenue loss per se from a public policy perspective.

Related to the above is also the need for widening the scope of CSR to permit undertaking such activities having desirable social outcomes as long as the expenditure incurred has no direct nexus to the incomes earned during the relevant year. Take, for instance, a sugar mill that seeks to promote new cane varieties or methods of cultivation. If this spending translates into higher yields and incomes to the many thousands of growers supplying cane to the mill, would it qualify for CSR?

In the conventional sense, it wouldn’t, though this is a case of “shared value” being created: While the farmers certainly benefit, so does the mill if the cane development expenditure incurred by it augments raw material availability to enable higher capacity utilisation in the long run. That, then, is justification for looking at CSR not just in terms of activity not ‘core’ to a company’s operations – opening schools or running community health centres – but as something creating shared value for a large section of stakeholders in the long term. And this can come even from the business that it is ordinarily engaged in.

India has a long way to go on many social and economic parameters to get to even middle-income group country status. In that sense, whatever little that corporates could be nudged into delivering through a legal framework would be welcome.

But CSR should not become a tool for the Government to abdicate the primary role of delivering growth and public welfare. The business of Business is about generating a surplus so that its stakeholders are well served. The business of Government is to govern such that it leaves the general public better off on various development parameters than they were, earlier.

(The Hindu Business Line,Editorial, 5 Dec 2012)

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