CSR and Taxation- A Game of Exemptions and Deceptions

“The brands that will be big in future will be those that tap into real social changes that are taking place.”

Sir Michael Perry (CEO, Centrica PLC)

In this ever-evolving world which has made a shift towards the concept of the greater good in the past decade, maintaining and developing a socially responsible corporation is the need of the hour. Corporate Social Responsibility, widely termed as CSR is one such concept that helps corporations build brand value and loyalty.

At the same time, it allows them to give back to society. In most countries, this is seen as a rather philanthropic effort but in India, CSR is also a legal responsibility of the companies.

The UNIDO defines CSR as, “A management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (Triple-Bottom-Line-Approach), while at the same time addressing the expectations of shareholders and stakeholders.”

While private institutions directly contribute toward the welfare of our society through this method, they also indirectly contribute by way of paying taxes. The Government plays its own part by creating welfare policies to empower these people.

However, these welfare policies need financial resources for their successful implementation. These resources come from the taxpayers of our country. The taxation regime is monitored and collected by the Income Tax Government to the Central Government of India.

That in turn is monitored by the Income-tax Act, 1961. It is the only legislative document having authority over the levy, administration, and collection of taxes in India.

The Indian Welfare Decision for Cohesiveness between Sarkar and Samaj

Before CSR was given legal recognition in India, it was majorly seen as a voluntary activity that companies undertook at irregular intervals of time and hence no specific department looked after the same.

Development programmes in India frequently fail to reach the base population for a myriad of purposes, including corruption, bureaucracy, and population. In such circumstances, corporations cannot simply pay taxes to absolve themselves of their social responsibilities.

When money is injected into CSR efforts indirectly and managed by individual enterprises, the impact is going to be considerably greater.

In the past few years, various rules and regulations have been enacted by the government to regulate CSR activities. With the release of the Voluntary Guidelines on Corporate Social Responsibility in 2009, the Ministry of Corporate Affairs launched its first formal attempt at regulating CSR. The National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business was released by the Ministry of Corporate Affairs in July 2011.

Since then, the Indian government has taken a number of additional steps to address CSR concerns, including requiring central public sector enterprises(CPSC) to set up a CSR budget. The Companies Act of 2013 was finally passed in 2013, and the CSR Rules came into effect in 2014. Section 135 was included in the Companies Act making CSR a mandatory action.

The specifications laid down said that, “any company having a net worth of ₹ 500 Crores or more, or a turnover of ₹ 1000 Crores or more, or a net profit of ₹ 5 Crores or more in the previous financial year must spend 2 percent of their average net profits on any type of CSR activity.” The said Section also lays down the activities that can be considered as CSR activities. The Central Government, invoking their powers conferred upon by Section 135 and sub-sections (1) and (2) of Section 469, made rules with respect to CSR that is Companies (Corporate Social Responsibility Policy) Rules, 2014 that were later amended by the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 which came into force on 22nd January, 2021. This was done to further facilitate the spirit of CSR by increasing transparency, accountability and sustainability.

CSR- A Sound Charlatan

Milton Friedman once stated that the only CSR a company has is to make profits. All businesses aim to maximize their profits and save costs. Taxes and for that matter, CSR are considered to be significant added burdens. Businesses attempt to reduce this burden of theirs in a variety of ways. Most of them seek a course of legal means like tax planning and ethically seeking tax reductions, but many attempts to do so via illegal and immoral means. There are three umbrella terms that can be used to differentiate how companies attempt to minimize their tax payments.

Tax planning is the process through which one can seek tax benefits by scrutinizing their financial activities. This Act offers various exemptions that can be sought to effectively plan one’s taxes.

Tax avoidance as the name suggests is the practice of avoiding payment of taxes by arranging financial affairs accordingly. Loopholes are being relied upon and this act is not illegal but highly unethical.

Tax evasion on the way comes under the ambit of illegal activity. When a company has the ability to pay higher amounts of taxes, but falsifies its paperwork and fabricates its invoices, they have sought to knowingly exempt itself from paying taxes. It is a punishable offence as seen in the case of Satyam Computers Service Limited.

The difference between tax planning and tax avoidance was laid down in the case of Vodafone International Holdings v. Union of India where the Court clarified that tax planning is a completely legal and ethical process. Companies also attempt to seek tax exemptions from the Government by availing to the different exemptions provided for by Companies Act and the Income Tax Act of India.

Case of Double Disallowance

There have been cases when companies that have spent on activities like skill development, agricultural projects and PM National Relief Funds have been able to avail to reductions under Section 80G and/or Section 35AC of the Income Tax Act.

Authorities countered such claims stating that since CSR has been mandated under Section 135 of the Companies Act it is not philanthropic in nature and cannot avail to tax reductions. However, in turn, the point was contradicted in many cases stating that while the mandate for CSR fall for “income under head business or profession” it cannot be the same for the total income of the assesse.

This point was made and accepted in the case of Fnf India Private limited v. Assistant Commissioner of Income Tax. A case of what is known as double disallowance began to occur. Disallowances refer to expenditure that is added back to the net profit that obligates the assesse to pay taxes on them. Double Disallowance has occurred as the assesse is obligated to pay taxes on both the added expenditure and CSR.

Conflicting Case of Tax Exemptions for CSR

The Income-tax Act of 1961 under Section 30-36 lays down specific tax deductions that can be granted. Section 37 clearly states that the purpose of the act must be wholly business in nature if tax exemptions are sought. The Central Board of Direct Taxes stated that “CSR Expenditure is not incurred with the purpose of carrying on business”.

CSR has a philanthropic aspect attached to it that does not make it wholly for the purposes of business or profession. Thus, it has been laid down that CSR cannot avail to tax deductions under Section 37 of Income Tax Act. However, even with the recent amendments, there have been no amendments to Section 37 of the Act that would allow businesses to seek tax exemptions for their CSR activities.

Conclusion

The world is burning and we are acting as nothing more than mere spectators. In a world that runs on competition, power and success there will always remain a dispute between what is not enough and what is too much. Companies should assess how their chosen approach to CSR applies to all elements of their operation, including the management of their tax liability because CSR is a way of doing business rather than a “add on” to conventional business practices.

Ethically paying taxes is our moral and legal responsibility. But should the CSR attempts also be taxed?

To improve transparency and legitimacy, governments, particularly in developing economies like India, should make policies that define taxes as part of a company’s CSR responsibilities. This will ensure that companies treat tax policies in the same way they treat other responsibilities in the eyes of the public. While it is easy to say that CSR efforts must be rewarded instead of taxed, it comes with a risk of tax fraud occurring.

This article has been submitted by Garvita Bhatt and Janya Navnitlal, students at Gujarat National Law University.