India is probably the first country in the world to mandate corporate social responsibility (CSR) spending by large companies. Firms with revenue of Rs.1,000 crore, or net worth above Rs.500 crore, or profits above Rs.5 crore are required to spend 2% of their last three years’ average profits on CSR. While this law is yet to take effect, it has in no way reduced the intensity of debate.
The concept of CSR emerged in economies where there was excessive focus on corporate business responsibility. For instance, in social democratic societies such as Nordic countries, the concept of CSR is quite nascent and is focused more on sustainability and innovations, as the basic social security needs of health, education and old-age relief are taken care of by the state. Even in continental Europe, where some kind of state socialism prevails, CSR has limited appeal. The role of the private sector in these economies is to pay taxes which then fund social programmes. It is only in liberal market economies such as the US where the private sector dominates healthcare and education by catering only to the needs of the economically better-off citizens that CSR has flourished.
The reason for this is not too difficult to fathom. The primary business responsibility of a company in such a setting is restricted to earning a profit by conducting its affairs legally. Social concerns were not addressed despite visible and pressing need as this was seen to infringe personal freedom.
Three distinct views to justify CSR have emerged in these liberal economies. Initially, CSR spending was seen as an optional marketing expense, essential for building a brand and goodwill in the public at large, potentially seen as a group of customers or employees.
Gradually, as the pressure to spend increased in companies operating in certain sectors such as mining and energy that used natural resources and caused noticeable pollution, a new logic emerged. CSR was seen in the light of social contract theory.
Such spending was seen as the fee paid by polluting firms to society in return for their right to carry on business. This view seems to have gained credibility as firms with high CSR spending are located in highly polluting sectors, or sectors with large negative externalities, such as mining, tobacco and oil exploration and mineral refining. Around the end of the second millennium, a third view emerged. This is an interesting viewpoint whereby CSR was seen as businesses serving the base of the pyramid. Depending on who you are talking to today, all the three views are common.
The Indian government’s mandate for CSR spending by big Indian companies must be seen in this larger context. The present government, with the so-called common man as its primary focus, had two options to fund its social programmes. Increasing tax rates on the private sector was one option. The other option was to mandate CSR spending by big firms. Given that India is today a de facto liberal economy, with its glaring inequalities of all hues—economic, social and geographic—we need to evaluate this decision to mandate such spending by contrasting it with the alternative of raising tax rates for the private sector.
As a general principle, while navigating through unchartered territory, it helps to reflect on experiences of others who have traversed a similar terrain. As mandating CSR is an unchartered territory, the closest debate that one can find is the one in Sweden on granting tax exemptions for charitable contributions. This issue was debated not once or twice, but thrice, in 1979, 1991 and 2008. The issue in focus was whether public money should be spent by private organizations or was it better spent by a democratically elected government. The proponents for charity deduction advanced the view that providing tax deduction will increase the flow of funds to charity, which is socially beneficial. In contrast, opponents viewed tax deduction for charity as reducing tax collection, thereby transferring public revenue into private hands. On each of these three occasions, Swedes voted for the status quo—not providing tax deduction for charity contributions made by taxpayers. Their argument was clear—transferring public revenue into private hands was undemocratic as such spending did not entail public scrutiny that would be required for public expenditure.
Given that mandating CSR spending instead of increasing tax rates transfers public revenue and responsibility into private hands, can this move be seen as undemocratic and in need of a review? Looked at in the larger context of the development in the last two decades, is this a continuing sign of the government abandoning its primary responsibility? Viewed sceptically, the right to education with its 25% reservation clause, promoting public-private partnership to provide basic infrastructure and essential services and now mandating CSR spending, seems to further this idea. Against this background, should there not be a larger debate on what is a better option, to increase corporate tax rates instead of mandating CSR spending by firms? Perhaps, it is a better idea to levy a CSR surcharge on profits just as the education surcharge, instead of mandating it.
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Shankar Jaganathan is a former corporate treasurer of Wipro Ltd.