CSR has to be made more meaningful

Sudha Srinivasan | Updated on March 09, 2018 Published on September 25, 2016


The feedback on CSR is not inspiring. Since each industry has a distinct social impact, industry-specific CSR projects will help

It is disappointing to learn that Indian companies are not serious about CSR despite the mandate being stipulated in Section 135 of the Companies Act, 2013.

The transition from Millennium Development Goals to Sustainable Development Goals requires India Inc to contribute significantly through CSR. The CSR ambit is comprehensive in that the Government has recognised 10 major areas for spending: promoting education, promoting gender equity, ensuring environmental sustainability, promoting sanitation, promoting availability of safe drinking water, eradicating hunger, poverty and malnutrition, promoting preventive healthcare, protecting national heritage, spending for the benefit of armed forces veterans, war widows and their dependents, and contributing to the Prime Minister’s Relief Fund.

The distortions

The Act requires a class of companies ( companies with net worth of ₹500 crore or more / with annual turnover of ₹1000 crore or more / with a net profit of ₹5 crore or more) to mandatorily spend 2 per cent of the average net profit of the preceding three years on CSR activities, establish a CSR committee, and report CSR activities. In fact, in fiscal 2015, smaller listed companies ( outside the ambit of the CSR legislation) have relatively spent more on CSR than bigger ones (Crisil CSR Yearbook 2015).

Even though CSR expenditure is not eligible for tax deduction (according to Finance Act 2014), certain areas of investment are attractive to companies. For example, a company’s contribution to the Prime Minister’s Relief Fund and to other funds set up by the Central/State government for socio-economic development is eligible for 100 per cent tax deduction without any maximum limit, according to Section 80G of the Income Tax Act 1961.

Other investments that attract deductions are payment to PSUs for certain projects (under Section 35AC) and rural development programmes (Section 35CCA). Even the most sluggish company could have met the CSR obligation by simply writing out a cheque in favour of a relief fund and claimed tax deduction!

Why the apathy?

According to the ministry of corporate affairs, 460 companies have cited trivial reasons for either not spending on CSR, or for having spent less than the minimum required. The reasons for this were: (1) The current fiscal was the first year of implementation of the CSR mandate; (2) adoption of long-term social projects; (3) difficulty in finding an implementing agency.

The first and third reasons are unacceptable because information about CSR legislation has been in the air since two years after the formulation of the Companies Act 2013. Companies either have an established foundation to implement CSR; else have an exclusive division that performs CSR activities; many companies also partner with NGOs to implement CSR. Moreover, the National Foundation for Corporate Social Responsibility has been set up as the apex national institution to build an enabling environment for corporates to work in partnership with government bodies and NGOs for sustainable development.

The second reason is worthy enough to be given a second thought, since long-term investment in social projects leads to benefits over multiple periods and will therefore, fit into the description of ‘Capex’. Presently, capital expenditure is not tax deductible. Capex on CSR can be deferred over the period of benefit; the amortisation method needs to be worked out and explicitly stated in the legislation.

For effective CSR implementation, firstly, there is a need to craft an industry-specific CSR mandate by setting weightage to important areas such as environmental sustainability. Companies are subject to varied environmental and social risks depending upon the industry they belong to. Companies belonging to polluting industries should not be allowed to simply write out a cheque for the stipulated CSR expenditure for the sake of compliance. The negative environmental externalities generated by such businesses can be neutralised only by setting mandatory weights/proportion of CSR expenditure to be channelised towards eco-efficiency based projects and investments focused upon ecosystem conservation. During fiscal 2015, only 9 per cent of total CSR funds of India Inc. were allocated toenvironmental sustainability.

Secondly, crafting an industry-specific CSR mandate requires the collaboration of the MCA, the environment ministry, and the Central Pollution Control Board to come up with an industry-wise toxic release inventory (TRI) along the lines maintained by the US Environmental Protection Agency (EPA). Creating this database will not only facilitate the task of earmarking mandatory investment in environmental sustainability, but also help identify the right projects for companies so that they can contribute to sustainable development goals.

The writer is an assistant professor at the Great Lakes Institute of Management, Chennai

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Published on September 25, 2016
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