Hazy CSR tax laws make companies jittery

Companies Act silent on tax treatment

Starting April 1, the corporate social responsibility landscape for India Inc is in for a change. And the clock has started ticking for corporate India to rejig its CSR activities, and bring them in line with the new guidelines.

Even as CSR practitioners and corporate lawyers read between the lines of the notified rules under section 135, and the schedule VII of the Companies Act 2013, tax experts point out that the new guidelines could spring a surprise or two on the taxation front for the companies. The ball is now in the court of the Ministry of Finance - in effect, the Central Board of Direct Taxes - to align the existing income tax regulations with the new CSR guidelines. The crux of the issue, say tax experts and corporate lawyers, is whether the CSR spend - now mandated by law - is to be treated as a business expenditure.

The Companies Act 1956 - or even the 2013 Act - does not talk about tax treatment of CSR expenses - something that falls under the exclusive domain of the Income Tax law. Moreover, under the old Companies Act of 1956 there is no mention of CSR or equivalent requirement on companies.

Such a spend could typically be incurred through a donation route. Under Section 80G of Income Tax Act, 1961, donations to tax registered "not-for-profit" organisations are eligible for deduction - 50 per cent or 100 per cent - depending on which category they fall under. Tax experts point out that there have been instances where income tax authorities have disputed allowing CSR expenses as business expenditure. Tax authorities claim that under section 37 of the Income Tax law, CSR is not business expenditure. Only business related expenses can be treated as tax deductible, they contend.

"Possible disallowance of CSR expenses would have the effect of increase in taxable income and the overall tax liability of the corporate," says Nabin Ballodia, partner, tax & regulatory services, KPMG.

However, some corporate lawyers claim that in the past, based on specific facts, courts have taken the view that CSR expenditure should be allowable as a deduction for income tax purpose.

THE CHANGING LANDSCAPE

Key changes in the notified CSR rules in Companies Act 2013

• CSR expenditure to be in line with the amended Schedule VII of the Companies Act 2013
• Net profit calculations exclude dividends from other Indian companies and profits generated outside India
• Indian branches and project offices of foreign companies covered under CSR provisions
• Private companies exempted from requirement of having independent directors in CSR committees
• CSR Policy which includes the list of CSR projects, modalities of execution and monitoring process to be displayed on company website
• Political contribution excluded from CSR expenditure

 Key amendments in Schedule VII to Companies Act 2013

(i) Eradicating extreme hunger, poverty and malnutrition, promoting preventive healthcare and sanitation and making available safe drinking water
(ii) Promotion of education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects
(iii) Promoting gender equality and empowering women, setting up homes and hostels for women and orphans, setting up old age homes, day care centres, and other such facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups
(iv) Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water

(v) Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art, setting up of public libraries, promotion and development of traditional arts and handicrafts
(vi) Measures for the benefit of armed forces veterans, war widows and their dependents
(vii) Training to promote rural sports, nationally recognised sports, and para-Olympic sports and Olympic sports
(viii) Contribution to the Prime Minister's National Relief Fund or any other fund set up by the central government or the state governments for socio-economic development and relief and welfare of the scheduled castes, the scheduled tribes, other backward classes, minorities and women

(ix) Contributions or funds provided to technology incubators located within academic institutions which are approved by the central government
(x) Rural development projects
Tax deductions under Income Tax Act 1961 (Section 80G)
I. Following donation allowed subject to a maximum of 10% of the Adjusted Gross Total Income:
A. Donations to government for promoting family planning, etc, 100% allowed
B. Eligible for 50% deduction:

• Donations to government for other charitable purpose
• Donation for housing accommodation/ improvement of cities, towns or villages etc.  

II. Eligible for 100% deduction w/o maximum limit:

• Donation to PM’s National Relief Fund
• Donation to State Government Fund for Medical Relief to the Poor
• National Illness Assistance Fund
• Chief Minister's or Lt. Governor's Relief Fund
• Approved university or educational institution of national eminence, etc.

Thus, without a clear-cut guidance from tax authorities in relation to the new CSR guidelines, corporates could clearly be heading towards uncharted territory when it comes to tax implications of their CSR spend.

With a legislative mandate to incur the expenditure, there is now a stronger case for allowing tax deduction, says Ritika Loganey Gupta, associate director, Tax & Regulatory Services, EY. Clarity on tax deduction would not only help avoid the haze but would also encourage corporates to focus on the CSR spend - without worrying about tax liability, adds Ballodia.