India: Corporate Social Responsibility: A Mere Shadow ‘Tax' Lacking Spirit; Needs Resurrection

Last Updated: 19 September 2019
Article by Harish Kumar and Vivek Agarwal

At a time when the world is staring at a possible downturn in economic activity, the Indian government has rightly re-considered and rolled back on its proposal to impose higher levies on the 'super-rich' and it is clear from the recent rollback of such levies that, given the current economic scenario, the government also, perhaps only not for now, believes that such a move is not apt. The government's current stance on the concept of corporate social responsibility ("CSR") is, however, another case in point.

The concept of CSR spend by corporations was first time introduced under the newly enacted Companies Act, 2013 (the "Act") and made effective from April 2014. The recent amendments to CSR law as enshrined in section 135 of the Act, once enforced, will make CSR spending a statutory obligation under the India legal system and will also make companies and its officers liable in case of any non-spending of such CSR obligation. As a concept, mandatory CSR spending (that too under a statute) is quite unique to Indian legal system as no other country around the globe has gone so far as to mandatorily require appropriating a portion of corporation's profits, towards certain prescribed social welfare. In any case, as and when the proposed CSR amendments (which is likely to be in near future) is notified and brought into effect, it would have the effect of re-characterisation of CSR from being a 'moral responsibility' to a 'social compulsion' for Indian corporations. The other downside is that this is also likely to shift focus on spending and not its outcome.

The recent amendments to the Act (though not notified as yet) also require companies to transfer the requisite CSR amounts to designated accounts and in case the amounts remain unspent for three years, transfer the unspent amounts to the 'prescribed government funds'. Thus, making such mandatory transfer to the government's kitty may be considered being akin to an additional 'back-door' levy by the government and effectively stands at a very close footing with other statutory levy/cess etc. Given the scenario wherein the Indian corporate have been consistently requesting for suitable reduction in corporate tax rates, bringing such additional levies (that too for the purpose of enforcing a social responsibility) may not be considered justifiable by corporates. On the contrary, means to encourage corporations to be socially responsible, without any legislative sword hanging on their head, should be considered.

Interestingly, the above amendments are being pushed through at a time when India is striving to rationalize its tax rates and improve investor sentiments in order to draw more foreign investments which would be key to achieving the government's ambitious target of making India a USD 5-trillion economy in the next five years.

Thus, unless the government reconsiders the proposed mandatory CSR spending requirement, the world may read CSR as a 'government' policy driven autoimmune syndrome, especially considering that, it will, post the recent proposals to amend the legislation on CSR becoming effective, stand as a mere shadow 'tax' lacking spirit. Nonetheless, the recent rhetoric from India Inc. has driven some sense into the system and it has already resulted in washing away the intended 'criminal colouring' to CSR related non-compliances.

It is very well understood that ensuring welfare of the deprived, providing basic public amenities, fighting malnutrition, hunger and poverty, promoting education, women empowerment are the primary functions of the state and therefore the attempt to put this responsibility upon the shoulders of the private sector by way of the proposed amendments to CSR law, which may be prone to legal challenge, requires introspection before a final decision to the roll out of such proposals is taken.

In contrast, striking down the CSR spending obligation on companies, appropriate monitoring of CSR related functions, introducing measures to increasing qualitative capability to service CSR requirements of India Inc. and requiring large corporations to undertake impact assessment studies and reporting on their actual CSR expenditure as part of their corporate governance requirements may be a more balancing move for India Inc. In this regard, one would do well to also pay heed to recommendations of the high-level committee on CSR (set-up to review the existing framework and recommend a roadmap for CSR which submitted its report to the government in August 2019) such as engaging with international organizations for designing CSR projects, monitoring and evaluation as well as capacity building of CSR eligible companies and implementing agencies, creation of CSR exchange portal, uniform tax benefit for CSR activities, having a nodal agency for all CSR activities, which are certainly thoughts in the right direction aimed at uplifting the spirit of CSR and would perhaps go a long way in bringing about structural changes in the CSR framework in the country.

It is worthwhile to note that, except the CSR amendments, all other amendments that were proposed to the Act vide the Companies (Amendment) Act 2019, have already been made effective which seems to give a strong indication that the government is rightly reconsidering the proposed amendments and is likely to come out with a more balanced CSR framework on the lines of the recommendations of the high-level committee on CSR. This would certainly be a good opportunity for the government to further improve its 'policy' perception and showcase its seriousness on this subject, especially considering that at-least the near-term ride is likely to be fraught with weak economic activity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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