Tax rules on CSR remain a grey area, say analysts3 min read . Updated: 21 Aug 2013, 11:50 PM IST
Problems may arise in defining CSR activities; firms can’t claim tax benefit on expenditure on these activities
New Delhi: The tax implications of the mandatory spending on so-called corporate social responsibility (CSR) activities, which range from sponsoring sports to promoting gender equality, remain unclear, corporate executives and tax experts say. Whether companies will be eligible for tax breaks on such spending will depend on the tax authorities, they say.
The new companies law de facto mandates companies with a net worth of more than ₹ 500 crore or revenue of more than ₹ 1,000 crore or net profit of more than ₹ 5 crore to spend 2% of their average net profit over the three preceding years on CSR activities.
While non-compliance will not be penalized, companies will be required to disclose reasons for this, effectively making such spending mandatory.
The clause relating to CSR was a key provision in the long-pending legislation to overhaul the Companies Act of 1956, which controls businesses in the country. The legislation was approved last week by the Rajya Sabha, some eight months after the Bill had won passage in the Lok Sabha.
While welcoming the move in spirit—no one wants to be seen to be openly criticizing anything to do with CSR—experts have already pointed out the problems that could arise from defining what CSR activities are and aren’t. It also turns out that companies can’t claim a tax benefit on expenditure on these activities.
Neither the statute nor the draft rules that are under preparation stipulate a tax waiver on account of CSR spending, say tax experts and company executives.
The rules have not been made public yet and that is likely to happen only by the end of August or the beginning of September.
Under the Income Tax Act, exemption is granted for expenditure incurred towards business processes, said Rajiv Chugh, tax partner at audit and consulting firm EY (formerly Ernst and Young).
“Apart from such business processes, exemptions are given under section 80G, if a company donates money for charitable purposes, say to the Prime Minister’s relief fund," said Chugh. “So there is a dichotomy. Money spent on CSR is neither (that spent) for business processes, nor can it be counted as charity."
Indeed, there is nothing in the law to suggest that spending on CSR will be tax-exempt, said Vipul Jhaveri, head M&A (mergers and acquisitions) Tax at Deloitte India.
Some CSR activity may have an aspect related to donations and can be equated with charity, added Jhaveri, but others may not.
According to research done by EY, the CSR-spending stipulation is likely to apply to at least 2,500 companies.
Money spent on activities including eradication of extreme hunger, promotion of education and gender equality, reduction of child mortality and improvement of maternal health, environment sustainability, social business projects, employment enhancing vocational skills, sanitation, promotion of sports and games, welfare activities for the disabled and old, setting up model villages, scholarships and combating HIV and AIDS, is likely to be made permissible to be counted under CSR expenditure.
The new stipulations could also impact the government’s tax revenue.
Last week, Mint reported that taken together, registered companies in India would likely spend ₹ 18,000 crore on CSR activities. The potential dent to the government’s tax revenue could therefore be to the tune of ₹ 6,000 crore, if the government does grant income tax exemptions to CSR spending.
Jhaveri, however, said that the actual figure would be lower, since some companies would already be claiming tax breaks under section 80G of the Income Tax Act for charitable spending. These companies will now simply show such expenditure as those required under the new law.
A person who is on the rule-making committee said on condition of anonymity that clarifications on tax exemptions could be inserted into the draft rules before they are made public, but both Chugh and Jhaveri maintain that unless the Income Tax Act is either suitably amended or the Central Board of Direct Taxes issues a clarification, no changes can be put in practice.
According to data available with the income tax department, during the financial year 2012-13, the actual corporate tax collection stood at 3,56,396 crore, which was 99.31% of the revised estimate for the fiscal year. The figure for the current fiscal year is estimated to be ₹ 4,19,520 crore, a 17.71% increase over last fiscal’s actual receipts.