The devil may lurk in details

S. Murlidharan | Updated on March 12, 2018 Published on February 26, 2011

Whose responsibility is it to provide clean drinking water to people?

Making corporate social responsibility spend mandatory may trigger off serious consequences arising out of discretionary powers leading to inspector raj and litigation.

The Companies Bill, 2009 before Parliament seeks to blaze a new trail by mandating a minimum spend by the specified corporates — annual turnover of Rs 1,000 crore or more or net worth of Rs 500 crore or more or annual net profit of Rs 5 crore or more - on what is perceived to be socially desirable activities. Like public interest which is an unruly horse, corporate social responsibility (CSR) too is a concept that cannot be straight-jacketed, much less defined precisely and exhaustively.

One man's potion is another man's poison. The Bill therefore while mandating that at least 2 per cent of the profits must be spent on CSR, leaves the minutiae to the rule-making authorities. The devil is always in the details. Policymakers can only make broad brush strokes, some of which may remain hazy and defy implementation. But when too much leeway is given away to subordinate legislating authorities, often Parliament no longer has a hang on things.

At the same time, it must be granted that it is impossible for Parliament to include everything in the main statute itself for two reasons — it would clutter the law, making it unwieldy besides calling for enormous prescience on the part of our parliamentarians to foresee everything comprehensively and exhaustively include them in the main statute.

While the importance of and need for subordinate legislation cannot be denied, trouble arises when the subordinate legislating authority overreaches itself for e.g. Parliament in the Income-Tax Act said family includes any number of children and the Central Board of Direct Taxes said only two, period, if they were born after October 1, 1998. The Supreme Court on numerous occasions had to rein in overzealousness on the part of subordinate legislating authorities.

Power to exempt

More to the point, the executive in the context of CSR would have powers to exempt companies from the rigours of the mandatory CSR spending requirements which might encourage graft. Cold calculations would be made by the dyed-in-the-wool finance managers on the wisdom of spending 2 per cent of their profits versus the wisdom of buying an exemption from the executive. A profit of Rs 5,000 crore requires a CSR spend of Rs 100 crore. A wizened company promoter over a soothing glass of beer might debate with his portly finance manager whether an exemption can be bought with Rs 1 crore.

Discretionary powers have been the bane of India as the recent telecom scam has shown. Will the discretionary power extend to granting extension of time to meet the CSR obligation? Would it also allow bunching and carry forward of commitments? Charities are now allowed to accumulate their profits up to a maximum of five years if they are unable to plough them back into charitable activities immediately.

Accounts cater to several stakeholders. To the shareholders, to the tax authorities who insist on MAT, to employees who want to make sure that their bonus claims have not be compromised by clever accounting. And now the CSR votaries. For them, there is always a lurking danger of accounts being cooked to show lesser profits if only to limit the outgo on CSR.

What is CSR spend

There could also be a considerable hair-splitting on what exactly is a CSR spend. Building road from factory to the nearest town has passed muster under the Income-Tax law on the ground that the expenditure at the end of the day facilitates business, though the roads belong to the municipal authorities and not to the company. Will the company law authorities take a similar broad view and accept the reality that the resultant expenditure serves a social purpose too even though the company has benefitted enormously out of the expenditure. Many companies run schools to which outsiders are also admitted who may be called upon to pay reasonable fees if only to cross-subsidise the children of employees. Does CSR require complete charity or facilitation?

The government's heart is no doubt at the right place. But unwittingly it might trigger off dangerous consequences arising out of discretionary powers and hair-splitting. Inspector raj and litigation could be the undesirable upshot. While there are companies with conscience and spend a lot more than 2 per cent on CSR, there are companies who believe that any large scale social commitment would make them go astray from its main objectives. The mammoth 26 per cent of profits to be yielded to the tribals may be a desirable CSR spend, but thrusting a responsibility on a company generally may not be desirable. After all, altruism should be left to an individual's choice.

Govt's responsibility

At any rate, it is for the government to use the tax collections wisely and judiciously for altruistic purposes. A compulsory CSR spend dispensation might be in addition perceived as an additional impost on the corporate sector which is already paying heavy taxes and correspondingly as flinching away from responsibility by the government whose duty it is in the first place to address societal concerns. Let the government foster and inculcate the lofty ideals mouthed by Justice Holmes when he said “I love paying taxes; with them I buy civilisation”. Let it not go for overkill. Let the civilisation be built by the government with tax collections.

(The author is a Delhi-based chartered accountant).

Published on February 26, 2011
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