There has been a culture of insincerity towards the envisioned provisions of “Corporate Social Responsibility (CSR)” mandate.
Revamping the regulatory provisions and addressing the anomalies in the “Companies Act” are critical to ensure better CSR compliance.
What is the overall appeal of the CSR mandate?
Companies Act stipulates that companies with a “net worth of Rs 5 billion, or turnover of Rs 10 billion or net profit of Rs 50 million per annum” must spend 2% of net profits on CSR.
Notably, “net profit” is derived accounting number that companies can tinker with, and “turnover” could’ve been a better metric for CSR calculations.
Even if this irrationality is overlooked, there are several other inefficiencies in the CSR mandate which needs to be scrutinised.
Data shows that “Indian companies” aren’t spending as much on “Corporate Social Responsibility” (CSR) as mandated by law.
Presently, the government is already looking into the records of top 1,000 companies, and prosecutions have been launched against 254 companies.
What are the financial ambiguities in the act?
Taxation - The rules stipulate that that CSR spending excludes “activities undertaken in pursuance of the normal course of business of the company”.
In other words, the amount a company spends on CSR cannot be claimed as business expenditure and be offset from taxable income.
Tax experts say this creates room for ambiguity as business expenditure is vaguely defined, thereby resulting in several court cases.
Tokenism - There are many schemes like “PM’s Relief Fund, Rural Development and Skill Development projects” that enjoy tax exemptions.
Hence, the bulk of CSR spending is merely cheque-writing activity, which defeats the spirit of the act, which is to get corporate entities to go social.
Carry Over - Presently, unspent CSR money is allowed to be transferred to the next financial year, which is causing stagnation in this domain.
Notably, only revenue and tax expenditure is allowed to be carried over, and as CSR is neither, it is not prudent to allow this accumulation unchecked.
A provision for the unspent amount must be spent within a year is needed to avoid this clause becoming an excuse for companies.
Dedication - CSR spending of many companies focus on aligning their philanthropic programmes to their image-building exercises alone.
Consequently, their CSR wings are mere arenas for forwarding their brand and remain institutionally weak to sustain initiatives to effectuate actual change.
