It's high time govt considered CSR spend as business expenditure. Here's why
Time Jaitley stepped in with a clear-cut amendment that says CSR spends would pass muster under the income tax law as business expenditure
The Budget 2014 came as a damp squib for corporates insofar as expected clarity on corporate social responsibility (CSR) spends mandated by the Companies Act 2013 were concerned — instead of providing clarity it muddled the water further by saying that while some may make the grade, others might not.
This was an example of speaking with a forked tongue made worse by the subsequent assertion that if CSR became tax deductible it would amount to state subsidy to the extent of one-third of such expenditure. The government’s reluctance to allow CSR as tax deductible is discernible from the further assertion in the same budget speech that CSR was after all an application of income and not expenditure!
Milton Friedman’s take on CSR makes eminent sense. His view is how corporates with no body to kick and no soul to damn can be expected to have social consciousness; it is the men behind them who should be expected to have one. Indeed it is for the promoters of companies and honchos to have societal considerations in mind and earmark a part of their income/wealth for activities close to their hearts.
Bill and Melinda Gates come to one’s mind in their zeal for eradication of dreaded diseases like malaria and AIDS in third world countries where they stalk. The Indian Company law instead foists this responsibility on the corporates with a touch of pride as evident from the claim made by the then Minister of Corporate Affairs Sachin Pilot that India was the first country to make CSR spends mandatory.
Having made it mandatory, it is amazing that the government refuses to make it tax deductible ungrudgingly. It is idle to expect a company to put on a philosophical air and spend its money in altruistic spirit without expecting anything in return. While there is no back to back relationship between taxes paid and benefits gotten by a company, the least the income tax law can assure is if a businessman spends any amount mandatorily for a lawful purpose, he would not be fobbed off with a wishy-washy tax position on the matter.
The government’s reluctance to ungrudgingly allow CSR spends flies in the face of its whole hearted encouragement to in-house scientific research that encourages charlatans as much as it encourages genuine researchers -- 200% tax deduction.
In the face of this sustained intransigence of the government, what the corporates can do is to route their CSR spends through the section 35AC official dispensation. That section says if anyone pays any amount to a public sector company, local authority or an association or institution approved by the National Committee constituted for the purpose, it would be fully tax deductible. Corporates would do well not to embark on CSR spends on their own in the face of huge uncertainty staring them in their faces in the matter of tax deductibility.
Routing them through section 35AC dispensation would end this uncertainty. Of course, the public sector company or local authority concerned might hog the limelight unless it has the grace to acknowledge prominently and conspicuously the financial contribution made by a company for the project in question.
To make sure the CSR spend does not go unrecognized what companies can do is to constitute their own NGOs that can be gotten approved by the National Committee and then start incurring the expenditure instead of assuming the passive role of washing their hands off by making a quick contribution to a public sector company or local authority.
Of course, routing CSR spends would be both time-consuming and convoluted but corporates would have no choice if the income tax law remains vague and uncertain. Time Jaitley stepped in with a clear-cut amendment that says CSR spends would pass muster under the income tax law as business expenditure.
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