According to estimates given by E&Y ,the new regulation of CSR will cover 3,000 companies and result in about more than $2 billion expenditure on social initiative in India. While Government estimated expenditure under social service head for 2014-15,which include health, education etc amount to $4.10 billion alone while estimated CSR spending of $2 billion itself indicate that CSR becoming strong catalyst in India’s social upliftment process.
Lets analyse the present admissible tax exemption can be avail regarding CSR spending. Following are summary of Income Tax section as per finance act 2014.
where a companies can claim the expenditure deduction which relate to CSR activity which mentioned under schedule VII of company act 2013.
| Sr No | Income Tax Section | Tax treatment of expenditure & Quantum of deduction |
| 1 | Sec 80G | Donation directly or to registered NGO or to PM national relief fund,or for promoting family planning etc. 100% (50% in some cases) of such deduction allowed . Donation in kind is not allowed. |
| 2 | Sec 35AC | expenditure incurred on project or scheme for promoting the social and economic welfare or upliftment of the public as approve by the national committee set up for this purpose ,100% of such expenditure is admissible.But the activity of association whom the donation made should be stated under Schedule VII of comp Act. |
| 3 | Sec 35 CCD | expenditure on skill development project as notified by the board is eligible with weighted deduction of 1.5 times of such expenses. |
MCA does not come out with the clear guideline regarding tax treatment of CSR expenditure which leads to confusion and vague interpretation of law.If we see the case laws of last year it shows ambiguity, for example in the case of CIT Vs Infosys Technologies Ltd (2014) (360 ITR 714) the Karnatka high court allowed the expenditure incurred for installing traffic signal by company under social initiative. Court said the traffic signal used by its employee so its relate to business activity hence allowed u/s 37(1)
Confusion & Vague Interpretation of Law
But in the case of CIT Vs.Wipro Ltd (360 ITR 658)(kar) expenditure for community development near its factory ,court does not find any nexus for its business activity hence disallowed such expenditure u/s 37(1).
There may be two possible solution for tax incentives of CSR expenditure, one the scope of CSR activity of schedule VII should be expands so as it include other activity which consider as social activity and also related to business for getting benefit of sec 37 or else amend the law and consider all CSR activity expenditure as allowable expenditure or exemption under sec10 of IT Act.
The tax difference between making donations and spending towards activities enumerated under the Schedule may vary vastly. By including PM National Relief Fund into the Schedule,policy-makers have allowed companies to merely write cheques and claim deductions instead of carrying CSR activities on the ground. Therefore, the new CSR provisions have to be aligned with the existing income-tax laws. If present tax treatment of CSR continue, then it result as companies only inclined to give funds to those organisation under sec 35 or sec 80 where they get maximum tax benefit . so purpose of CSR not serve fully as corporate avoid to spend in inadmissible category of expenditure. It is inert to expect a company to be selfless and spend its money in altruistic spirit without thinking anything in return.
Suppose exemption will be given directly for CSR spending ,then government will lose the $600 million with (assumed tax rate of 30% on $2billion). we can compare this revenue loss with the total estimated corporate tax receipt of F.Y 2014-15 i.e $570. Billion (Rs. 3,50,494 cr) then it will be bare minimum loss of government revenue.
It has been perceived by many industrialist that 2% of average net profit of the three proceeding financial year is a huge spending for companies apart from other mandatory legal liabilities.Corporates are already sharing the 30-35% of its net profit with government by corporate taxes as compare to global average of 24%,so government should not be diffidence by allowing tax sops to CSR spendings.
In 1962, Milton Friedman wrote in his book, Capitalism and Freedom, that “there is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits.” so CSR spending should be such that corporate find it as profitable.Suitable amendments and guideline to the Income Tax Act and companies Act are necessary to ensure allowance for deduction of CSR expenditure it help to avoid needless litigation
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