CSR And Tax Planning

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CSR has been recognized for the first time through the Companies Act, 2013 (hereinafter referred to as the ‘said Act’). Section 135 (under Chapter IX – Accounts of Companies) of the said Act deals with CSR while Schedule VII of the said Act lists out the CSR activities which may be undertaken by the companies.

Who must comply?

According to Section 135(1) of the said Act, CSR requirements are applicable to every company which is having: (1) net worth of 500 crore or more, or (2) turnover of 1,000 crore or more, or (3) a net profit of 5 crore or more during any financial year. The words used in section 135(1) are ‘during any financial year’ and not ‘at any time during any financial year’. This implies that the applicability of CSR obligations will have to be determined independently for every financial year.

 Mandated Areas on which CSR Expenditure is to be incurred

In spending the funds, the company is to give preference to the local area and areas around it where it operates and the activities to be undertaken will be those specified in Schedule VII of the said Act.

The Finance Act, 2014: CSR Expenditure

The Finance Act, 2014 has inserted an explanation below Section 37(1) of the Income Tax Act, 1961 with effect from the Assessment Year 2015-16:

“Explanation 2 – For removal of doubts, it is hereby declared that the purpose of sub-section (1), any expenditure incurred by the assessee on the activities relating to corporate social responsibility referred to in Section 135 of the Companies Act, 2013 shall not deemed to be an expenditure incurred by the assessee for the purpose of business or profession”.

This amendment is a great setback to the industry as the expenditure incurred in relation to corporate social responsibility will not be allowed as tax deductible expenditure and defeat the real purpose of bringing CSR related provision in the said Act.

The memorandum of the Finance Bill explained the rationale behind not-deductibility of the said expenditure. It states that the objective of the CSR is to share the burden of the Government in providing social services and therefore allowing such expenditure will result in subsidizing of around one-third of such expenses by the Government.

 Outlook Shift

Meeting dual objective is now a big challenge for the eligible company. In other words, same expenditure should be qualified as CSR spending under the said Act as well as getting tax relief under any Section 30-36 of the Income Tax Act, 1961. So it is expected that eligible companies would now re-align to their CSR activities to areas where tax relief may be available, including the following:

  1. If eligible company undertakes CSR activities through registered NGOs, having 50% or 100% tax benefit instrument (like Section 80G or 35AC), the company will get 50% or 100% tax benefit on CSR spending and will save the tax liability. In case the eligible company undertakes CSR spending directly on its own, the company will have to pay additional taxes on disallowance of CSR spending. So it would be encouraging for the eligible company to park their CSR money only through the registered NGOs where they get maximum tax benefit.
  2. When a company contributes from its CSR Fund to PM National Relief Fund, it cannot be said to be incurring any expenditure for the purposes of its business. It is simply a voluntary contribution. The business can be continued even without making such contribution. Hence it will not be covered by the prohibition contained in the explanation 2 to section 37(1) of the Income Tax Act, 1961.
  3. Spending on scientific research appears to be one such area which would give the companies dual benefits of complying with the requirement of law and availing appropriate benefit under the Income Tax Act, 1961. If the companies spend/contribute to the approved association(s) or university or institution(s) etc. engaged in scientific research pertaining to the activities mentioned under section (iv), (v), (vi) and (viii) of Schedule VII of the Act, then they would not only meet the requirement of the said Act but also allow them to avail appropriate deductions under Income Tax Act, 1961.
  4. Besides the analysis of aforementioned sections the eligible company can also explore other existing sections of the Income Tax Act, 1961 [such as 35 (1)(ii),(iia),(iii) & 35 (2AA) etc.] where they can contribute funds directly or through other entities for carrying out their CSR activities specified in schedule VII of the said Act.
  5. Promotion of education is one head on which CSR expenditure can be spent. However, for this purpose, ‘education’ needs to be considered in a broader way and not narrowly as done by the apex Court in the case of Sole Trustee Loka Shikshana Trust v. CIT (1975) 101 ITR 234(SC), where education has been described as the process of training and developing the knowledge, skill mind and character of students by normal schooling.
  6. The companies can turn to renewable energy for their power requirements. It looks like this strategy is quite smart in the sense that the energy expenditure, forming part of operating cost, gets allowed under the Income Tax Act, 1961 and such spend also qualifies for CSR.

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