CSR Spend & Tax Benefits Expectations – Prof R R Pillai

August 13 2013No Comments

Categorized Under: Uncategorized

The Companies Bill, 2012 now mandates CSR spending by companies having a networth of Rs 500 Cr or with a turnover of Rs 1000Cr or more  or a net profit of Rs 5 Cr or more . 2% of average net profits of past three years is the amount to be spent under CSR (Corporate Social Responsibility). Wide range of activities are included to benefit society thrugh CSR spending ,like education, health care environment etc.

The Objectives of this law is to make the Corporates show responsibility towards Society by of giving back to the society in a benign manner from it has gained immensely. The healthy survival of human and natural resources are necessary condition for the Corporaes to thrive in a society. Especially in a country like India where the inequality of Income and Wealth is so stark the Corporates involvement in building a better living conditions is imperative for social harmony too. Government of the day is not enough rich to meet the needs of the deprived society from the revnues it garner. Even with utmost efficiency in spending by the government the gap of dprivation cannot be filled by the ruling disposition, as the tax to GDP ratio is far short of the needs of poor Indian society. Hence CSR spends aim to fill this need for every deprived area to benefit.

Thus the object is to give back to society and hence one should not expect to reap tax benefits in the same way as one would expect on business expenditure spends. Business expenditure are incurred to keep the businees alive and necessary expenditure in the conduct of the business are allowed as deduction to arrive at profit which is taxed as per Income tax Rules and Laws. CSR spend cannot be construed as expenditure incurred to conduct business. Hence expecting deduction as other business expenditure is ccarrying the interpretation of business expenses too far on the illogical side. CSR spend  is expected only if profit is generated by healthy Companies of ceratin stature. If CSR spend is allowed as business expenditure it defeats the purpose of Corporate involvement in social needs for there will be revenue loss  by the exchequer, since the Corporates will be paying normal rate of  tax on on post CSR spend profit. It means the Government is meeting the social needs via the Corporates, which is not the aim of this law.

Sudhir Kapadia, tax head EY in TOI, says ” Any CSR-designated revenue expenditure should be regarded as having a nexus with the business and should be allowed as business deduction ” The aim of CSR expenditure is not to benefit a particular business as much to benfit the society’s social goals like better skills, healthy living, better environmet etc. Businesses may benefit in the long run fron these CSR spends. But CSR spend can’t be equated with raw material spend or staff and energy Bills spend which are pure business expenses reqired to be spent to generate profits hence reqire a deduction.CSR spend has a larger goals in mind than running business only with a profit motto.

Again Punit Shah of KPMG cites in TOI,SC on a donation by a Company to public welfare fund  that was directly connected to the company’s business,and it was allowed as a deduction as the donation helped directly the Company to carry on its Business . So he says donations under Company’s CSR policy must be allowed as business deduction. Donations are not epense  per se. Expenditure has different objectives than Donations. This Interpretation of SC can be revisited to understand the true aims and objectives of Donations. Just because a particular donation is allowed as a deduction from business income does’t mean it is purely an expenditure necessary to carry on the business. So donations are bynature has social objectives more than profi objectives as business entity has in the first place.

Thus CSR spend must  be seen from the angle of social benefits more than from tax gains even on the meagrre spend that the Cororates are going to plan quite meticulously and selectively within the broad social objectives aimed to be achieved under the the CSR mandatory provisions. Arguments based on tachnicalities must give in to arguments based on human needs in our starkly deprived and inequality ridden society at least till some time when we are more of an egalitarian one.

 

 

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