The newly elected government presented its first full-fledged Budget in the backdrop of soaring expectations on February 28, 2015. The Budget has given due importance to the corporate sector of the economy and has tried to enhance the ease-of-doing business while keeping its focus on infrastructure development.
The finance minister has announced some tax incentives in his Budget to encourage companies to participate in ‘Swachh Bharat Abhiyan’ and ‘Clean Ganga campaign’. In his speech he has announced that the donations (other than the corporate social responsibility or CSR contributions) made to ‘Swachh Bharat Kosh’ (both by resident and non-resident) and Clean Ganga Fund (by resident) shall be eligible for 100 per cent deduction under section 80G of the Income Tax Act.
‘Swachh Bharat Kosh’ has been set up to attract CSR funds from the corporate Sector and contributions from individuals and philanthropists to achieve the objective of clean India by the year 2019. The ‘Clean Ganga Fund’ is aimed at pooling money for taking up works to rejuvenate the Ganga. ‘Swachh Bharat’ and ‘Clean Ganga’ are among the major initiatives of the Modi government, which has embarked on a major drive to ensure cleanliness across the country.
CSR Provisions At Present
Companies have been mandated to spend 2 per cent of their three-year average net profit on CSR under the Companies Act, 2013. The companies are also required to disclose the CSR activities and the amount spent on it in their annual reports. At present, non-compliance of CSR provisions is not penalised under the Companies Law.
Schedule VII of the Companies Act prescribes activities towards which CSR expenditure should be incurred, including livelihood enhancement, promoting education, working towards protection of national heritage, setting up public libraries, rural development projects, slum area development etc.
In October 2014, the government widened the activities coming under the CSR ambit and said contributions to ‘Swachh Bharat Kosh’ and ‘Clean Ganga Fund’ would be considered as social welfare spending work.
But the Income Tax Act does not provide for any incentives for such expenditure. The Budget for 2014-15 has clarified that the expenditure incurred on CSR activities is not for the purpose of business and hence cannot be allowed as deduction for computing tax liability of the company under the residuary provisions of section 37(1). The deduction for CSR expenditure is allowed if it falls under Section 30 to Section 36 of the Income Tax Act. Also, as per the memorandum explaining the provisions in the Finance (No. 2) Bill, 2014, it is clarified that the CSR expenditure is an application of income (which is not incurred wholly and exclusively for the purposes of carrying on business) and hence the tax benefit of the same will not be given in computing the income as per the normal provisions and also in computing book profits of the company for MAT purposes. The logic of the government may be that, if the deduction is allowed, the government would be subsidising of around one-third of the expenditure.
Corporate Expectations from Budget FY 15-16
Various forums and corporates, in India, in their recommendations to the Budget, had requested the government to allow tax benefits on their mandatory CSR spend. But the said expectations of the corporates have not been accepted and no specific provisions for allowing deductibility of CSR expenditure from the taxable income has been introduced in the latest Finance Bill.
For corporates, allocating 2 per cent of net profits towards mandatory CSR expenditure is in itself is a big task and they will ponder before making additional contribution to ‘Swachh Bharat Kosh’ and ‘Clean Ganga Fund’, under section 80G over and above the mandatory CSR expenditure, to claim tax benefit. However, the donations to these funds can be opted for by individuals and companies that are not covered within the ambit of mandatory CSR spend.
Even earlier also, there have been several cases wherein the courts have held that expenses incurred towards the voluntary contributions for the purpose of social responsibility linked to business will be considered as an allowable expense for an assessee company. However, now, an assessee is not only required to mandatorily bear such expenditure but is also not being allowed the tax benefits on same. This move is pinching corporates, as on one hand they are witnessing high tax rates and even the future looks gloomy since the finance minister indicated in his recent Budget speech ‘to take away various kinds of tax exemptions and incentives for corporate taxpayers’.