Spends With Benefits: Section 135 Becomes…Taxing

India is the first country in the world to mandate participation of companies in Corporate Social Responsibility (CSR) via legislation of Section135 and various guidelines in the now not so new Companies Act, 2013. Without a doubt, this increases the net of companies that will conduct CSR activities and bring more money in that sector by strict compliance via diligent annual filing from FY15 with the Ministry of Corporate Affairs (MCA). The passing of such a law should be applauded. However, the fog has just set in. S.135 states, those companies (incorporated in India and foreign entities) with an annual turnover of at least Rs 1000 crores or net worth of a minimum of Rs 500 crores or a net profit of Rs 5 crores or more shall constitute a CSR panel that shall formulate a plan centered around activities mentioned in Schedule VII and mandatorily dispense 2% of their average annual net profit towards CSR activities during the year.

S.135 has to read along with the CSR Rules, which states that any activity mentioned in Schedule VII has undertaken via

• The entity itself.
• Agreements with entities set up by others.
• A trust where the company’s contribution is restricted to 50% of its total funds u/s 80G of the Income Tax Act, 1961. Certain trusts get a 100% deduction.
• An S.8 company (A company not for profit).

Now let’s implement this into a scenario.

A company having annual net profit > Rs 5 crores enters in an agreement with an established association to conduct CSR activities in education or environment protection etc. on their behalf and can get a full deduction for a compulsory expense.

Here arises an issue of beneficial taxation. Deductions should not be allowed to corporate houses that have breached the threshold of S.135 and are under legal obligation to meet the 2% norm.

The argument to be raised here is simply a logical one. A law that imposes a mandatory duty should be kept so without providing any tax benefits once financial thresholds stated in the section have been crossed by the corporate conducting the CSR activities. If tax benefits like deductions are provided to a company that has to spend the stipulated sum, it dilutes the purpose of drafting the legislation. The law becomes counter-productive as expenses and disclosure are being done under Companies Act but benefits are being availed under Income Tax Act.

On the other hand, such deductions being offered to companies not falling under the CSR proviso would be ideal, as benefits should be for those who are not under any obligation or fundamental duty or legally bound to do an act.

The perk offered in turn of a gratuitous act done suo moto shall originate should always stem as a recognition for the act. A person under due obligation is merely executing their duty which should not be rewarded.

Even Standing Committee’s 57th report on the Companies Bill, 2011 states why such a legislation was drafted, but not the positive tax implications that it might result into.

However, we can always hope for MCA to put out a white paper in the near future to weed out these concerns.

It is interesting to note that as MCA’s database of 5097 entities, India Inc spent approximately Rs 9822 crores on CSR activities but there are no reports regarding tax benefits/deductions claimed by those companies on these expenses to arrive at a net annual CSR expense.