Why Indians aren't Zuck

Indians make a great virtue of thrift - and often find ingenious ways to save that extra buck.

By Our Special Correspondent in Calcutta
  • Published 3.12.15

Calcutta, Dec. 2: Indians make a great virtue of thrift - and often find ingenious ways to save that extra buck.

But there's a flipside to this trait: it makes them tight-fisted, which means philanthropy - or the art of giving - does not come naturally to them.

A little over four years ago, two donor evangelists - Bill Gates and Warren Buffett - came to India to preach the virtues of giving back to society and talk about their experience in financing noble causes. The hope was that they would be able to persuade a coven of Indian industry shoguns to open up their wallets. Fat chance.

"Giving back to society is what gives us immense pleasure," Gates had said.

Gates and Buffett practise what they preach. Forbes magazine recently estimated that Buffett topped the list of industrialists turned philanthropists in the US with his total giving in 2014 estimated at $2.8 billion.

His philanthropy corpus swelled to $22.7 billion last year, 37 per cent of his net worth. Gates was second with an estimated outgo of $1.3 billion last year and an overall spending on philanthropic causes put at $31.5 billion, or 41 per cent of his net worth.

When Facebook founder Mark Zuckerberg announced that he and wife Priscilla Chan would give away 99 per cent of their combined wealth during their lifetime, he was following a long list of illustrious altruists in America who believe that their children should be spared the crutch of a mammoth inheritance that could hobble their ability to make personal choices in life.

Indian industrialists have been less enthusiastic about making such outpourings of generosity. Cynics believe that they support philanthropic causes only when there is a prospect of grabbing an enticing tax break at the end of it.

A Bain and Company survey in 2010 estimated that India and China rank among the world's biggest scrooges. Only 10 per cent of individuals and corporations in India and 9 per cent in China contribute to charitable causes against 75 per cent in the US and 34 per cent in the UK.

But why are Indians such notorious tightwads?

Historically, Indian society has tended to frown on conspicuous consumption and tended to put a misplaced faith in simple living and abstemiousness. India's tax system tended to punish those with wealth; the quixotic treatment of the wealthy reached a peak in 1973 when the country had 11 income tax slabs ranging from 10 to 85 per cent. In some crazy situations, the maximum marginal rate of tax could rise to 97 per cent.

It was natural for the rich to conceal wealth, report low personal incomes, consign ownership of properties and luxury goods to corporate entities - and seek tax breaks for funding schools, colleges, hospitals and religious charities.

The tax rates have gone down substantially since then but it hasn't changed the way people park their wealth. That is one of the reasons why wealth tax collections barely topped Rs 1,000 crore, which is incongruous considering India has more than a 100 dollar billionaires. The levy was eventually scrapped this year.

Wealth tax used to be collected on property, luxury cars, airplanes, helicopters, yachts and art collections. Most industrialists didn't own them personally; they were owned and managed by special purpose vehicles and other entities.

In his budget speech this year, finance minister Arun Jaitley said: "Should a tax which leads to high cost of collection and a low yield be continued or should it be replaced with a low cost and higher yield tax? The rich and wealthy must pay more tax than the less affluent ones. I have therefore decided to abolish the wealth tax and replace it with an additional surcharge of 2 per cent on the super-rich with a taxable income of over Rs 1 crore."

The wealthy didn't personally have the moolah: it tended to be parked in trusts and foundations. If you didn't actually own the loot, what would you give?

The government tried to find a way out of this: it chose to force companies to commit funds to worthy social causes through a concept called corporate social responsibility (CSR).

India is the only country in the world that has worked a statutory CSR provision into the Companies Act, seemingly on the principle that if you can't shame them into giving, go ahead and force them.

The CSR proviso applies to companies with a turnover of Rs 1,000 crore a year, or a net worth of Rs 500 crore, or a net profit of more than Rs 5 crore.

It mandates these companies to spend at least 2 per cent of their average net profit in the previous three years on CSR activities - ranging from social uplift projects and women's education to parking money in the Prime Minister's National Relief Fund.

This is the first full year for CSR. Early data seem to show that many companies haven't met their targets.

A report submitted two months ago by a high-level committee formed by the government pointed to a major anomaly. In the statute books, there are no tax benefits for funding CSR projects. However, contributions to the PM's National Relief Fund -- an eligible area for funnelling CSR funds ---- qualify for tax breaks.

"There could be a temptation on the part of the companies to direct at least a part and possibly a substantial part of their CSR budget to the PM's National Relief Fund to avail this benefit," the report said.

"The tax benefit for contributions of CSR funds to the PM's Relief Fund may turn out to be a regressive incentive."

Renowned economist Milton Friedman had slammed CSR spending as an immoral business practice since it involves managers "taxing" shareholders and spending their money without their consent.

State-mandated CSR spending makes it even worse. But it is even more egregious when companies try to wheedle a tax benefit out of a mandatory compliance.

Indians may be well meaning in championing causes but when it actually comes to giving, we can be pretty mean.