High Level Committee Recommends CSR Expenditure to Be Made Tax Deductable - Everything You Need to Know About

A High Level Committee on CSR under the Chairmanship of Corporate Affairs Secretary Injeti Srinivas has recommended that CSR spends should be eligible for tax deduction under the income tax law.

The High Level Committee on CSR

In October, 2018, The High Level Committee on CSR was constituted under the Chairmanship of Corporate Affairs Secretary to review the existing CSR framework and to make recommendations on strengthening the CSR ecosystem, including monitoring implementation and evaluation of outcomes. The committee submitted Report of the High Level Committee on CSR to the Union Minister of Finance and Corporate Affairs, Smt. Nirmala Sitharaman on 13th August, 2019.

What is CSR?

CSR stands for Corporate Social Responsibility, and it aims to ensure that companies conduct their businesses in an ethical way. It is a practice that encourages businesses to take into account the social, economic and environmental impact and also the consideration of human rights.

CSR in India

In India, CSR was made mandatory by Companies Act 2013. CSR was made applicable not only to Indian companies, but also the foreign companies having brunches and offices in India. It requires the companies of certain sizes to spend two percent of their net average profits of the preceding three years on development activities. Section 135 of the Companies Act provides the threshold limit for applicability of the CSR to a company that is if

1. The net worth of the company is Rs 500 crores or more
2. The turnover of the company is Rs 1000 crores or more
3. Net profit of the company is 5 crores or more

Non-compliance can be treated as a criminal offense and attract penalties. In India, currently, the amount of money any company spends on CSR is not yet allowed to be tax deductible by income tax laws.

Why does the Committee recommend CSR to be tax deductible?

Companies enjoy no tax benefits under the Income Tax Act, 1961 for expenditure incurred by companies towards Corporate Social Responsibility as clarified by the Finance Act, 2014; However, companies, which spend on several activities like rural development, skill development, agricultural extension projects, contribution to Prime Minister’s National Relief Fund, etc., find a place in Schedule VII of the Companies Act, 2013, which may qualify for tax exemption under relevant provisions of the Income Tax Act, 1961, subject to fulfillment of any other specified conditions. According to the Committee’s observation, the allocation of CSR funds across development sectors may be distorted in the absence of uniformity in tax treatment for CSR expenditures on all the eligible activities. The Committee was informed that outsourcing of CSR activities to Implementing Agencies attracts payment of GST, whereas if the company enters into a Memorandum of Understanding with the Implementing Agency, the contribution made is treated as a grant, and, therefore, not liable for payment of GST. This raises the issue of CSR funds flowing to those activities or modes of implementation which enjoy tax incentives to the exclusion of the rest. This Committee is of the view that there is a need to address the distortions in CSR spending arising from the prevalent tax structure, and believes that CSR spending should be incentivized for the Companies. In simple words, the expenditure on CSR is to be deductible from the taxable income of the company. The committee believes that is measures will ensure greater transparency and accountability for CSR spending as the CSR expenditure shall get treatment as expenses.

Hi! I am Sahana Chakraborty. I am pursuing M.Sc. in Economics from University of calcutta. I love to travel and experience new cultures. If I could do anything in the world, I would travel the world and write about it. My hobbies include reading, writing, cooking and talking to my cat.