Corporate Social Responsibility (CSR) is a means through which a company incorporates environmental, social and human development concerns into its planning and actions to ensure that its operations are ethical and beneficial for society. CSR in India has traditionally been seen as a philanthropic activity. However, with the introduction of Section 135 in the Companies Act 2013, India became the first country to have statutorily mandated CSR for specified companies. The Act requires companies with a net worth of ₹500 crore or more, or turnover of ₹1,000 crore or more, or a net profit of ₹5 crore or more during the immediately preceding financial year, to spend 2 per cent of the average net profits of the immediately preceding three years on CSR activities. It enumerates the activities that can be undertaken and the manner in which the companies can undertake CSR projects/programmes.
Having regard to the fact that CSR expenses have a ‘philanthropic’ nature and are not ‘wholly and exclusively’ in the nature of business expenses, Parliament legislated that such expenses would not be eligible for deduction under section 37 of the Income Tax Act. It was explained that the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. Allowance of the same as business expenditure would result in subsidising the expenditure by one-third of the amount. Consequently, an explanation was inserted stipulating that any expenditure incurred by an assessee on activities relating to CSR shall not be deemed as expenditure incurred by the assessee for the purpose of business and profession.
Case of ‘double disallowance’
However, corporates spending on activities like rural development, skill development, agricultural extension projects, contribution to Prime Minister’s National Relief Fund, etc., took recourse to tax exemption under other relevant provisions of the Income Tax Act, like section 80G and 35AC. Tax authorities challenged the claim of deduction under section 80G on the grounds that ‘sums paid’ need to be in the nature of ‘donation’ for the purpose of being eligible for deduction under the section. It was argued that a voluntary act on the part of a donor is an essential element to treat an amount paid as ‘donation’. However, CSR expenses are required to be paid mandatorily in accordance with the provisions of the Companies Act and hence, should not be allowed as deduction under the said section.
Nevertheless, the ITAT, in several cases, accorded the benefit of deduction under section 80G of the Income Tax Act, remarking that Explanation to section 37 disallows the deduction while computing ‘income under head business and profession’, while deduction under section 80G is permissible from ‘Total Income’ of the assessee. It has been opined that an assessee cannot be denied 80G benefit merely because payment forms a part of CSR as it would lead to double disallowance, which is not the intention of the legislature.
Further, Section 80G clearly prescribes only two instances (i.e. contribution towards the Swachh Bharat Kosh and Clean Ganga Fund) in respect of which deduction under section 80G is not permissible if sum spent by the assessee is in pursuance of CSR.
It has been clarified by the Ministry of Corporate Affairs that while no specific tax exemptions have been extended to CSR expenditure, spending on several activities like contribution to Prime Minister’s Relief Fund, scientific research, rural development projects, skill development projects, agriculture extension projects, etc., already enjoy tax exemption under different sections of the Income Tax Act. Additionally, the memorandum explaining the provisions of Finance Bill 2014 also brings out that CSR expenditure, which is of nature described in Section 30 to 36 of the Act, shall be allowed as deduction under those sections subject to fulfilment of conditions specified therein. Therefore, inference can be drawn that expense in the nature of CSR may be claimed as deduction under other sections like 35AC of the Income Tax Act, if stipulated conditions are satisfied.
Need for a uniform tax policy
The above analysis and litigation around the issue is suggestive of the fact that there is absence of a uniform tax policy in respect of CSR expenses. The High Level Committee set up to review the CSR framework, and make recommendations to develop a coherent CSR regulatory ecosystem, has itself acknowledged that “allocation of CSR funds across development sectors may be distorted in the absence of uniformity in tax treatment for CSR expenditures on all the eligible activities”. Companies would wish to perform activities that qualify for deduction under 80G/35AC.
The committee, therefore, recommended that there is a need to address distortions in CSR spending and believed the same should be incentivised for the corporates. It was suggested that CSR should be deductible from the taxable income of the company, thus ensuring greater transparency and accountability for CSR spending.
Notably, across the globe, several countries, driven by the ‘philosophical approach’, have not made CSR spending mandatory despite acknowledging the responsibility of the corporates to integrate people, profits and planet. In countries where CSR is mandatory, deduction of expenses is allowed from the taxable income. The Philippines allows deduction of all expenses incurred by any corporation whether a large taxpayer or not, in the exercise of its CSR from the taxable income. In Singapore, businesses that send employees to volunteer and provide services to approved charitable institutions within a specified period are allowed to deduct 250 per cent of the wages and incidental expenses incurred, subject to certain conditions. Malaysia offers tax incentives in the form of deduction of expenses incurred by taxpayers on provision of services, public amenities, education, health, housing, etc.
Tax deductions of CSR expenses have long acted as an incentive for companies to invest in developmental projects. In a world where incentives such as weighted deduction are accorded to taxpayers who fulfil their ‘social responsibility’, India must consider allowing such expenditure as deduction from business income. CSR expenses are all connected to social and charitable causes and not for any personal benefit or gain. It is, therefore, only fair to allow the same as business expenditure.
The author is Chairman, Nangia Andersen India