CSR spending obligation on companies needs to be jettisoned in its entirety

| Updated on August 29, 2019

Ensuring welfare of the underprivileged and providing basic public amenities are the primary functions of the state; it cannot outsource this job to the private sector

Faced with scathing criticism of recent amendments to the Companies Act that made Corporate Social Responsibility (CSR) spending a statutory requirement for India Inc and non-compliance a criminal offence, the NDA government has back-pedalled on some provisions. One of the announcements that found place in the Finance Minister’s recent stimulus package, ostensibly to facilitate wealth creators, was that officials of companies that failed to meet their CSR spending obligations would now be subject to only civil and not criminal penalties. The Ministry of Corporate Affairs has been asked to review the relevant sections of the amended Act. But while the Centre appears to believe that it has handed India Inc a big concession in doing away with criminal penalties for not fulfilling their quota of CSR spending, this measure is woefully inadequate. If it is really serious about championing enterprise in India, the Government must look at doing away with Section 135 of the Companies Act, which imposes a CSR spending obligation on companies, in its entirety.

Under current law, companies with a net worth of ₹500 crore, turnover of ₹1,000 crore or net profit of ₹5 crore or more are required to set aside 2 per cent of their average net profits over the last three years towards ‘approved’ CSR activities laid down in Schedule VII. If unspent for three years, the sum is appropriated to the Central government’s coffers. In case of non-compliance, companies and their officials are liable for monetary penalties; officials can also be punished with a three-year jail term. It is only the last provision on imprisonment that the Centre is now looking to relax. While the Government seems to believe that for-profit corporations in India must accept welfare spending as a statutory duty, imposing such spends is draconian on several counts. A 2 per cent CSR liability on for-profit entities is tantamount to a back-door tax. Indian companies are already subject to usurious rates of taxation by global standards. Let’s not forget that large domestic companies in India, apart from coughing up a 30 per cent tax on profits, pay a 12 per cent surcharge, a 4 per cent health and education cess and a Minimum Alternate Tax, and also shell out an additional 20 per cent distribution tax on dividends and buybacks. Even without such back-door levies, the ultra-high corporate tax rates are a serious deterrent to domiciling businesses in India.

Mandatory CSR spending for private corporations is also unique to Indian law and no other country, including welfare states across Europe, goes so far as to appropriate corporate profits which rightfully belong to shareholders, towards welfare. Most regimes enable companies to fulfil their social responsibility by mandating detailed public disclosures of the external social and environmental impacts of their operations. Ensuring welfare of the underprivileged and providing basic public amenities are the primary functions of the state; given the plethora of taxes it levies, it cannot outsource this job to the private sector.

Published on August 29, 2019

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