The Union Budget presented last week finally provided the long-awaited clarity on the tax position on expenditure incurred towards corporate social responsibility (CSR) activities. This comes as a mixed bag for corporates?good news for some and bad news for others, depending on the nature of activities being undertaken by them. This amendment, if passed, will take effect and be applicable from the assessment year 2015-16 onwards.
While the CSR provisions of the Companies Act, 2013, have been effective from April?1,?2014, corporates have been grappling with its implementation. While notifying these provisions, which are applicable to companies meeting certain size thresholds on revenues, net-worth and profitability, the ministry of corporate affairs also amended schedule VII to the Companies Act with a view to broadening the prescribed areas in which companies can undertake CSR activities, and subsequently clarified that these provisions are to be interpreted liberally.
However, having all these clarifications wasn?t enough for companies, as the tax status was unknown. For companies, apart from the key decision on what activities to undertake, they have been challenged with uncertainty on the tax deductibility of these expenses. In their view, sans a tax break, the required spend was effectively much higher than the 2% of profits that is mandated in the Companies Act.
The Finance Bill clarifies that the intent of the CSR provisions under the Companies Act is to get companies above a certain size to share the burden of providing social services, and if the government were to provide a tax relief on this expenditure, it would amount to the government subsidising one-third of this social spending. It further adds that under the current provisions of section 37(1) of the Income-Tax Act, only expenditure ?incurred wholly and exclusively? for the purposes of the business is allowed as a deduction for computing taxable business income and, therefore, CSR expenditure, being an application of income, is not ?incurred wholly and exclusively? for the purposes of carrying on business, and hence not an allowable deduction.
While setting out the overall principle that CSR expenditure is not tax deductible, the government has also drawn a distinction between the specific deductions for expenditure permitted under sections 30 to 36 of the Income-Tax Act and deduction for any other expenditure that is claimed under the provisions of section 37(1) of the Income-Tax Act. That?s the silver lining, as companies can still claim deductions under the provisions of sections 30 to 36 of the Income-Tax Act, subject to fulfilment of conditions, if any, specified therein.
Therefore, if any expenditure qualifies as CSR spend under the Companies Act and also is eligible for specific deduction under the provisions of any of the sections 30 to 36, then such expenditure would be eligible for tax deduction, thereby meeting dual objective for the company of complying with the CSR provisions as well as getting tax relief. In certain cases, the company could also potentially get a weighted deduction, thereby enhancing the quantum of tax relief.
Some of the specific deductions that can be availed by companies include expenditure on programmes for rural development, programmes for conservation of natural resources, agricultural extension projects or skill development projects, subject to meeting the conditions prescribed in respective sections of the Income-Tax Act. For instance, if a company undertakes a skill development programme that qualifies as CSR expenditure under the Companies Act and also meets the conditions laid down under the Income-Tax Act, then the company would get a weighted deduction for this expenditure.
It should be noted that there are several areas of overlap between the CSR areas identified in schedule VII of the Companies Act and the areas where specific tax deductions are available under the Income-Tax Act. It is expected that companies would now try and align their CSR activities to areas where a tax relief may be available. It appears that we can see some socially-relevant and tax-efficient spending from companies in the months and years to come.
The author is partner and head, Accounting Advisory Services, KPMG in India
