Taxation and Mandatory CSR in India: The Perplexity Persists

Abstract

AbstractParadigm shift was brought about in the dynamics of Corporate Social Responsibility (CSR) in India vide the Companies Act, 2013. The 2013 Act, mandated certain class of companies to spend 2% of their average net profits of the past three years on CSR activities as enumerated in the Seventh Schedule. The said shift from the voluntary to mandatory regime is marked by corporation’s choice to strict compliance. The Finance Act, 2014 prescribed that any expenditure incurred by a company assessee on the activities relating to Corporate Social Responsibility referred to in Section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. This meant that such expenditure would not be allowed as expenditure under the Income Tax Act. Traditionally, the companies making voluntary donations and those involved in charity were allowed deductions of such contributions under Section 80 of the Income Tax Act, 1961. Much clarity is not accorded to the contributions made by the companies as CSR activity, as tax treatment of activities is varied to an extent. Moreover, the position becomes vexed post the advent of the Goods and Service Tax. Undoubtedly, clarity is sought in this front. The future course of mandatory CSR is dependent upon several implementation issues to be clarified; clarity in the taxation policy being the paramount. The paper has succinctly analysed the present status of CSR spending (relying upon the government data) to exhibit the possible linkages between corporate CSR initiatives and tax policy. The paper has chalked out suggestions for the way forward in untangling the present tax regime vis-à-vis CSR in India.KeywordsMandatory corporate social responsibilityThe Income Tax Act1961Companies Act 2013