Be a good Samaritan or face penal action: How the new CSR rules will affect corporates

This move is receiving a huge backlash from the industry as imposition of a mandatory tax in the garb of doing good and the government passing the buck of being responsible for the public to corporate leaders in the country. But has that not always been the case in the country? We operate in a progressively taxing country where good behaviour is, more often than not, coerced than left to human inspiration or goodwill. As can be seen in the past, many elements of positive corporate behaviour have been ensured through legislative actions. Actions like ensuring maternity benefits, payment of minimum wages, ensuring safe work environment and the like have been enshrined into the corporate culture through legislative actions that are backed by sanctions.

The ever-widening gap between the wealthiest Indians and those at the bottom has sparked innovation in efforts by the corporate sector to address social problems. With a voluntary CSR regime in place in the past five years major corporate players like Reliance Industries, ONGC, Tata, Infosys and HDFC were seen spending Rs 300-900 crore of their net profits on CSR. The motivation for companies has varied from giving back to the society to creating a brand image and gratifying the ever-hungry human spirit. Report by Crisil estimated the total CSR expenditure by Indian corporates in FY18 at Rs 15,010 crore, with listed companies spending Rs 10,000 crore and unlisted companies spending Rs 5,010 crore on CSR which is a 14 per cent rise over the last two fiscals, despite a moderate growth in net profits having education and skill development as their favourite area of social expenditure almost vindicating our belief in CEO materialism.

In setting out its position on mandatory versus voluntary CSR, the Confederation of British Industry, British businesses’ top lobbying organisation believes that it is not possible to raise standards through standardisation, as this would remove the competitive incentive driving forward CSR activity and would place an unmanageable burden on small and medium enterprises. They are of the opinion that public authorities should adopt a carrot-led rather than a stick-driven approach to CSR. The European Union, Norway, the Netherlands and Australia encourage CSR reporting requirements, less likely force a mandate on CSR.

The objective of mandating CSR for even a Section 8 company in India, which earns no profit, however, has excess income over expenditure and where the main objective is to promote charitable objectives, remains an unresolved mystery till date.

Corporate tax rate in India is quite high as compared to the global averages and increasing taxes have always made India less attractive to foreign investments. The revenue from taxation goes to the Consolidated Fund of India and is accounted for its usage with the government's responsibility to determine high priority needs of the society and target public expenditures in these areas on health, education, social welfare and the like.

CSR by way of contributions to PM’s national relief fund and such other funds established by the Central or State government as provided in Schedule VII of the Act, appear to be deeply flawed and have been a topic for debate since inception. As per the submission of the Prime Minister’s Office to the Central Information Commission, the Prime Minister’s National Relief Fund is not a government body and is not answerable to either houses of the Parliament. Could the new mandate of the government to transfer the unspent amount to such funds undermine the true intention of the CSR provision?

Under the current income tax law, the CSR spending cannot be treated as a business expenditure. The extent of tax benefits that can be availed are unclear leading to protracted litigation and disputes. As per the recent amendment the Central government will have the power to give direction to the corporates for compliance of CSR making corporates work as a government arm with little independence to using the profits on dividends or for green/brown field projects that contribute to the expansion of India Inc.

Is this the Government’s agenda to shift its responsibility towards corporates or will this lead to a better India, we cannot say, but we can see a huge impact on corporates to deliver without giving them much discretion?