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CSR: What keeps companies from doing good?

Constantly evolving rules and anomalies over tax treatment have constrained corporate programmes in the first year that the government's CSR mandate has been in force

Kanika Datta  |  New Delhi 

Union Minister for Women & Child Development Maneka Gandhi says companies are not serious about CSR

On the face of it, Maneka Gandhi's admonition to big business at an Assocham meeting earlier this month that it was "non-serious" about (CSR) is valid. By one reckoning, corporate India has spent only 30 to 40 per cent of the amount that was expected to flow in once Section 135 and Schedule VII of the 2013 were notified with effect from April 1, 2014, and the voluntary sector says corporate interest is still tepid.

Had Gandhi examined the issue a little more deeply, however, she may have discovered reasons for this underperformance that go beyond general disinterest from corporate houses. spending has been constrained by the nature of the law, the fact that the rules are still evolving - there have been more than a dozen amendments since the law was notified (see After the Act, the changes) - and, most critically, some anomalies in tax treatment.


One unintended consequence of the mandate, for instance, is the way it has impacted corporations with commitments and programmes that pre-date the law. As Seema Bansal, director (social impact and development practice), The Boston Consulting Group (BCG), points out, many large corporations introduced programmes that encouraged employees to opt for voluntary work as a means of sensitising them to India's socio-economic problems well before the laws were mandated.

In BCG, for example, high performers are given time out to work on development projects on a pro bono basis for three to six months or reserve a certain amount of revenue-equivalent time for such work.

Since work cannot strictly be monetised, it does not come under the purview of the current law that mandates an expenditure of 2 per cent of net profit for the immediately preceding three financial years by companies of a specified net worth (Rs 500 crore), turnover (Rs 1,000 crore) or net profit (Rs 5 crore). This means that several corporations have to substantially reorient their commitments to align them to formal, structured expenditures required under the new law.

The fact that is now specified in Schedule VII of the has also forced several large companies to rework their strategies. True, the activities itemised in the schedule are wide-ranging - from "eradication of hunger, poverty, and malnutrition," to "contribution of funds to technology incubators" within government-approved academic institutions - and the government has signalled that it intends to interpret these activities generously.

The rules, however, exclude expenditure on employee welfare projects such as schools and hospitals even if they include a certain percentage of non-employees, a route typically taken by large manufacturing companies operating within local eco-systems.

The new rules also require companies to set up a committee at the board level. Under Section 135, the committee must comprise at least three directors including an independent director. This, again, can be a help or a hindrance.

In one sense, it brings an additional level of scrutiny to the process and, as Priya Naik, founder and joint managing director of Mumbai-based Samhita Social Ventures, points out, "Making a board-level agenda can certainly be helpful if the board asks the same kind of questions as they would do for any other business and if they look at from a long-term perspective."

For some companies with robust programmes in place, however, mandatory board-level scrutiny has added another level of complexity to the decision-making process. At least one automobile giant and one IT major that have successful programmes have discovered that the introduction of board-level reporting has created some degree of divergence. For heads and CEOs, these relationships then become one more issue to manage.

AFTER THE ACT, THE CHANGES
31.03.2014
ADDITION
  • List of activities included under (Schedule VII) expanded to include activities promoting healthcare, including preventive healthcare
18.06.2014
CLARIFICATION
  • activities should be undertaken by the companies in project mode
  • One-off events not included as activity
  • Expense by company on any  statute of regulations (such as labour laws) would not count as expenditure
  • “Any Financial year” implies any of the three preceding financial years
  • Expenditure incurred by foreign holding company for activities in India will qualify as spend of the Indian subsidiary if the expenditures are:
    Routed through Indian subsidiaries
    Contribution to corpus of a trust/ society/ and Section 8 companies  will qualify as expenditure as long as it is created exclusively for undertaking activities
06.08.2014
ADDITION
  • Expansion of Schedule VII to include slum area development
12.09.2014
ADDITION
  • Cost on administrative overheads (including salary and capacity building costs of staff) to be limited to 5% of total budget
24.10.2014
ADDITION
  • Expansion of Schedule VII (list of activities included under CSR) to include contributions to Swach Bharat Kosh and Clean Ganga Fund by the Central Govt
19.01.2015
CLARIFICATION
  • activity can be implemented via a trust / society / Section 8 company established by the company, either singly or along with its holding or subsidiary or associate company, or along with any other company or holding or subsidiary or associate company of such other company.
Source: BCG

Tax troubles
By and large, though, replacing relatively opaque voluntary commitments with obligatory, structured programmes is considered a good development. But perhaps the biggest anomalies for companies that fall under the mandate is uncertainty over the tax laws.

Under the new rules, expenditure is not tax deductible and excludes "activities undertaken in pursuance of the normal course of business of the company". The trouble is that Section 37 of the defines allowable business expenditure as: "Any expenditure not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession."

As Rajiv Chugh, tax partner with EY, explains, "The issue that arises here is one of interpretation by the taxman on what to consider permissible spending and what to consider allowable business expenditure." Given that the rules now mandate a specified level of expenditure, these contradictions could be grounds for confusion and perhaps litigation in already crowded courts. For instance, Infosys fought a case that its expenditure on a set of traffic lights it installed to bring relief to its employees getting stuck in road blocks was wholly and exclusively for business purposes.

Such overlapping provisions in the tax laws and rules may end up vitiating the spirit of the mandate. As VV Ranganathan, consultant to a variety of social entrepreneurs, says, "Companies would rather risk the probability of the expenditure being considered not strictly a spend by the than it being completely disallowed by the income tax department." In other words, the tax-saving implications are likely to be more compelling than the mandate.

Further, the rules allow companies to implement their programmes through trusts or a "Section 8 company" (a not-for-profit company under the Income Tax Act) set up for this purpose. The company may set up its own trusts or invest in entities set up by others.

Here again, the issue is one of tax treatment. Currently, Section 80G of the specifies differential tax deductions for certain trusts. Some, like the Prime Minister's Relief Fund and specified government schemes are allowed 100 per cent deduction, whereas private foundations mostly get a 50 per cent set-off.

This differential tax treatment could mean that many companies would be tempted to simply meet their mandates by investing in the Prime Minister's Relief Fund and similar schemes. But such "by cheque-writing" would defeat the purpose of the law. As EY's Chugh points out, "In the long run, putting money in the PM's relief fund is no fun since the money cannot be earmarked by the contributor for a specific cause."

Managements that are serious about crafting a vision are likely to prefer trusts and not-for-profits of their choice. An amendment to extend the 100 per cent deduction to all trusts would go a long way in encouraging the corporate sector to create a genuine market-making opportunity for social change - and perhaps allay Maneka Gandhi's criticisms as well.

First Published: Tue, July 28 2015. 22:30 IST
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