SUSTAINABILITY REPORTING : Emerging CSR Tool

“Every profession bears the responsibility to understand the circumstances that enable its existence.”-Robert Gutman

“Corporate sustainability is a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic ,environmental and social developments” (-Wikipedia)
The most widely adopted framework has been the Global Reporting Initiative (GRI) Sustainability Reporting Framework.
Disclaimer- the figures/ data/ reports have been referred from the respective relevant websites. Definitions produced have been marked by source.

Introduction
Corporate Social Responsibility is not a new concept. However it has been statutorily recognised when the said provisions came into the picture at the time of advent o

CSR expenditure will be taxable!

                            Corporate Social Responsibility (CSR)
 
Under the Companies Act, 2013 certain companies (which have net worth of Rs.500 crore or more, or turnover of Rs.1000 crore or more, or a net profit of Rs.5 crore or more during any financial year) are required to spend certain percentage of their profit on activities relating to Corporate Social Responsibility (CSR). Under the existing provisions of the Act expenditure incurred wholly and exclusively for the purposes of the business is only allowed as a deduction for computing taxable business income.

CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR
is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold.

If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure. The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes
of carrying on business, such expenditures cannot be allowed under the existing provisions of section 37 of the Income-tax Act.

Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfillment of conditions, if any, specified therein.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.

‘Clear air on tax treatment of CSR spend’

Corporate India wants the income-tax law to be clarified upfront so that their corporate social responsibility (CSR) spend is eligible for tax deduction from April 1, 2014, when the new CSR framework comes into force.

There is no explicit provision in the income-tax law or specific guidance from the Central Board of Direct Taxes (CBDT) on tax treatment of CSR spends by corporates, Siddharth Birla, President of FICCI, told Business Line.

All eyes are now on the Finance Ministry — especially the CBDT— to provide clarity on tax treatment of CSR contributions. “The income tax law needs to be clarified to prevent taxman from treating CSR spends as an appropriation,” Birla said.

If treated as an appropriation of profits and not as a charge to profits, the taxman could disallow corporate claims of such spend as deductible expenditure. This would add to the tax bill of corporates making such CSR spends, he pointed out.
While the Ministry has come up with framework, the tax treatment of CSR contribution is still not clear, say experts.

“The tax treatment of CSR contribution is not clear, as nothing is specifically provided in this regard, so whether or not CSR contribution will be deductible as a business expenditure is still debatable,” Lalit Kumar, Partner, J Sagar Associates, a law firm, said. Aseem Chawla, Partner, MPC Legal, said the lack of clarity on tax treatment of CSR spend is another illustration where two statutes equally applicable to a company do not provide a complete guidance to corporate India. There have been so many previous instances where a company has been left in disarray with regard to treatment under two equally applicable statutes.

Dolphy D Souza, Senior Partner, S R Batliboi & Co, also said the new rules do not provide any clarity on tax deduction for CSR spend, which essentially has to come from the CBDT.

Qualifying expenditure
According to the rules, the qualifying expenditure does not include any spend incurred in the normal course of business.
Under Section 37(1) of the income-tax law, expenditure is deductible only if incurred for the purposes of business.
Therefore, there is an inherent conflict in what the rules require the company to spend, and the deduction allowed under the income-tax law, according to D’Souza.

(This article was published in the Business Line print edition dated March 1, 2014)