Budget 2016: Review the varying tax for CSR4 min read . Updated: 28 Feb 2016, 04:27 PM IST
Opinion is divided on whether companies should get tax benefits for activities conducted as per the requirements of the CSR rules
New Delhi: In April, India’s corporate social responsibility (CSR) rules will have been in place for two years. But the debates, questions and grey areas surrounding provisions of this legislation remain. Despite the ongoing stormy budget session, sector experts are hoping that the government will be able to provide answers some key problems with the CSR rules like differential tax treatment of different activities permitted as CSR.
Opinion is divided on whether companies should get tax benefits for activities conducted as per the requirements of the CSR rules, which came into effect on 1 April 2014. It has been one of the key demands of the corporates that expenditure for CSR be included in the ambit of tax rebates allowed under income tax laws. But the ministry of corporate affairs (MCA) has repeatedly stated that this would dilute the intent of the law which is to encourage companies to participate in social development work.
CSR rules of 2014 mandate that companies with a net worth of ₹ 500 crore or revenue of ₹ 1,000 crore or net profit of ₹ 5 crore spend 2% of their average profit in the last three years on social development-related activities. These activities are listed in Schedule VII of the CSR rules and include skill development, sanitation, rural development, education, women’s empowerment and agricultural extension.
Tax benefit is not envisaged to facilitate/incentivise CSR investment—something that has been clarified time and again by the MCA. But provisions under Sections 30-36 of the Income Tax Act permit expenses to be claimed for tax considerations, be it CSR or non-CSR monies. And the ministry has not suggested changes, “due to it being a legacy act," say experts.
“The government stand on tax benefits for CSR activities is that if rebate is given, then it is akin to government subsidizing or paying for the social development activities it has mandated the companies to undertake, yet tax rebate is applicable to certain activities because of the overlap in the two laws (CSR laws and income tax laws), " said Vijay Ganapathy, partner & COO at ThinkThrough Consulting Pvt. Ltd, a consultancy firm specializing in social sector investments.
As C.A. Gupta, partner, Deloitte Haskins & Sells LLP. explained, prior to the introduction of the mandatory requirement on certain qualifying companies to contribute towards CSR activities by the Companies Act, 2013, there were provisions under the Income Tax Act, which provided for specific deductions for certain qualified expenditure. “The government notifies deductions to promote expenditures in certain specific areas/purposes from time to time. The rebate changes in accordance to that. A uniform treatment of rebates hence may not fulfil the purpose for granting the deductions," he said.
He added that a tax rebate may not be all bad. CSR is applicable only to certain qualifying companies but if there is a rebate given on Schedule VII activities, it will act as an incentive for even those companies which otherwise do not qualify for CSR.
However, some sector experts and even government officials feel the varying tax treatment is impacting the selection of CSR activities by the companies. Even the government’s own High Level Committee (HLC) on CSR emphasized the need for uniformity in tax treatment. The HLC, headed by former ministry of urban development secretary Anil Baijal in its final report to the MCA in September 2015 had said, “Differential tax treatment for expenditure on various activities covered under Schedule VII may create unforeseen distortions in the allocation of CSR funds across development sectors."
CSR practitioners like Abhishek Humbad, co-founder and director, NextGen, a Bengaluru-based CSR management firm, concur. For instance, any activity addressing skill development is entitled to 150% tax rebate, or those dealing with research are eligible for 200% rebate. “Practically every activity listed under the schedule VII of the CSR rules has a different tax treatment. And as CSR is largely about compliance, the natural tendency by companies is to select activities which maximise tax benefits," said Humbad. He added that when tax aspects become one of the parameters of selecting of CSR activities, companies may not have the best impact on the social problems they have set out to address.
Others like Vikas Vasal, partner tax at KPMG India, a professional services firm, while agreeing that tax rebates have an impact on CSR activities selection, also point out the need for such benefits. According to him, tax benefits are important because CSR is over and above the purpose of business. “This fundamental debate is not new and many industry associations have made repeated presentations in this regard," he said. However he adds that, “The varying tax treatment is leading to an anomaly between income tax act and CSR rules provisions." Like other consultants, he is of the opinion that further clarity is required on the issue and hopes this budget will have some pointers.
“There have been indications/statements by the FinMin that certain deductions/ weighted deductions maybe gradually withdrawn soon, and we eagerly await the budget announcements to see whether this shall impact deductions provided under the Sections 30-36 of the IT Act or not," added Biplav Chatterjee, associate director, responsible business advisory at PricewaterhouseCoopers Pvt. Ltd.