Corporates are not facing taxing times

Most of the affected companies have accepted, mostly unwillingly, the requirement under the Companies Act of 2013, that a company must spend at least 2% of its average profit before tax, in the preceding three years on corporate social responsibility (CSR) projects if it falls within the purview of Clause 35 of the Act.

However, they want tax incentives for effectively complying with CSR obligations while the government is reportedly planning to introduce a penalty clause for those repeatedly not meeting the target. At present, there is no penalty and the ministry can only question firms that do not provide adequate explanation for non-compliance.

The demand for subsidies, instead of penalties, is nothing new. But the rationale for this particular request has never been spelt out. There are three arguments for incentives: First, the business of business is not charity or philanthropy or even social responsibility in the form of contributions to social projects. It is to make profit, provide employment and income for the people, whereas it is the prime responsibility of the government to look after its citizens and to provide them the public goods that are needed in the form of education, health, and so on.

Social responsibility has been thrust on business because the government is unable to meet its commitment and, therefore, the government should offer business some incentives to shoulder the task.

Second, the people, or the corporate sector, can spend money for social welfare more efficiently than the government and instead of paying taxes, they should be allowed to keep their surpluses to enable them to undertake this responsibility.

Third, if CSR is regarded as social investment in the company’s future, then returns will come in after a lag. Just as the government compensates companies in cases where investment is socially necessary, but where returns are uncertain or deferred, the government should compensate for this deferred return to induce companies to undertake the investment.

The arguments against giving tax rebates for CSR are: One, mandatory CSR is in fact a tax on companies. But instead of a direct levy, the government is achieving its objective indirectly, the advantage being that companies get a choice and a say in how they would like their money to be used. However, if a tax exemption greater than the 2% mandated for CSR is allowed, it amounts to giving back with one hand what has been taken away by the other.

Two, true philanthropy requires the donor not to expect anything in return. So why should companies expect anything in return for doing good?

Though it is true that CSR is not voluntary giving, the fact is most companies agree that giving is good for companies too. It benefits businesses as well as societies, by having a stable progressive society; by having projects completed in time because conflicts with those adversely affected by the company’s projects are avoided; by ensured sustainability of resources like water, forests, and mines which are essential for many company operations; a healthy and skilled workforce; and a good brand name that adds to its bottom line. Since it is receiving both tangible and non-tangible benefits from CSR, why should business expect further rewards in the form of tax exemptions?

The arguments against tax exemptions for CSR contributions are stronger. Society as a whole contributes to the success of a business in many ways and business owes it to society and to itself to create a good social environment that is conducive to further growth. As they discover where they are also so engaged, participating in a community’s development enriches companies as well as society in many non-economic ways, and many are learning to value this experience.

Companies or their spokespersons must spell out the grounds on which they seeking tax exemptions or other incentives, so that a reasoned decision can be taken.

Pushpa Sundar is the author of Foreign Aid for Indian NGOs: Problem or Solution
The views expressed by the author are personal