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Tax break eludes CSR spend

Calcutta, July 14: India Inc has started to groan after the Narendra Modi-government refused to grant a tax break for expenditure they have to make to meet corporate social responsibility (CSR) obligations spelt out under the Companies Act 2013.

The CSR obligation — enshrined under section 135 of the new Companies Act — requires companies with a turnover of over Rs 1,000 crore, or net worth of Rs 500 crore or more, or net profits of over Rs 5 crore to spend at least 2 per cent of their net profits on a range of projects designed to eradicate poverty, promote gender equality, nurture vocational skills and even contribute to the Prime Minister’s National Relief Fund.

The CSR rules, which were released in February and underlie the Companies Act provision, say the obligation on the big companies will kick in from April 1 this year.

Industry was hoping that the government would clear the air on CSR expenditure since several activities were independently entitled to tax breaks. For instance, all contributions to the PM’s relief fund are entitled to a 100 per cent tax deduction.

In its pre-budget memorandum submitted to finance minister Arun Jaitley, the Confederation of Indian Industry (CII), had argued that “certain corporate houses are incurring expenses for the purpose which has now been referred to as CSR activity.”

However, the CII noted, the income tax authorities had disallowed the tax deductions on the ground that Section 37 of the Income Tax Act does not recognise expenditure which has not been incurred “for the purpose of business” as eligible for the tax break.

“Considering this legal precedence, it is necessary that a specific section should govern allowability of the expenditure incurred on CSR activity under the provisions of Income Tax Act, 1961,” it argued.

The government did not buy the argument. It ruled: “CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, (the) amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company.”

This amendment will take effect from April 1, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years. Therefore, the CSR activities of the corporate made in this fiscal will not get exemption.

“This is a blow to firms. It seems the Companies Act and the Income Tax Act are acting at cross purposes. While the former is trying to encourage companies to spend on CSR, the latter is trying to stymie them,” said Narayan Jain, former general-secretary of the All India Federation of Tax Practitioners.

Arup Kumar Chattopadhyay, chairman of the CII’s eastern region sub-committee on social development and community affairs, agreed that the new amendment would impose a burden on the finance of companies.

“Even though it will strain the balance sheet, the benefit of CSR will far outweigh the financial cost attached to it in the long-run,” he said.

India is the first country in the world that has embedded a CSR provision into a statutory legislation. This was done because India has a very poor record of voluntary philanthropy.

Many believe that CSR expenditure is mandatory but it isn’t really so.

“The board of the companies will only have to report how much they spent on CSR and explain why they couldn’t meet the commitment. The government will not ask them to amplify on that explanation,” Bhaskar Chatterjee, CEO of the Indian Institute on Corporate Affairs and a former bureaucrat who was instrumental in drafting the CSR guidelines, had said in Mumbai last November.

Chatterjee had said the threshold spelt out in the law meant that only 16,000 of the 8 lakh companies registered in the country — or the fat cats of the corporate sector — would be covered by the proviso.

PAIN OR GAIN

What is CSR obligation?

lCompanies have to spend at least 2% of net profit on projects to eradicate poverty, promote gender equality and nurture vocational skills

Who fall in category?

Companies with over Rs 1,000-cr turnover, or net worth of Rs 500cr, or net profits of over Rs 5cr

 
 
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