The new imposition takes out the sanctity of CSR making it more of a forced exercise and more so a new form of tax on profits
It’s a Rs. 120 billion question - Does it make sense to thrust upon CSR spending upon corporates or should they be allowed to take a voluntary call on it…
In the new Companies Bill that was passed in the Lok Sabha towards the fag end of the winter session, it is precisely the Clause 470 of the Bill that aroused interest and skepticism in equal measures. As per the clause it has been made mandatory for corporates that make an average profit of at least Rs. 5 crore or have a worth exceeding Rs. 500 crore, or their turnover exceeds Rs. 1,000 crore in the last three years to spend 2 % of the net profit on CSR. It is herein that the debate on conscience versus action, heart versus mind and numbers versus results sets in. What is the worth of CSR kitty that the government decided to make it mandatory? A report by SMC Global Securities Limited states that in the last financial year the combined net profit of listed companies in India was to the tune of Rs. 4, 37,167 crores, at 2% the CSR kitty amounts to Rs. 8,700 crores. The March issue of Forbes India categorically states that the government expects Rs 63 billion to flow in from India’s top 500 listed companies, going by the government’s 2% norm. If this list is further expanded to the top 1,000 corporations, add MNCs, co-operative banks and SMEs, and then we are talking about at least Rs 120 billion. Undoubtedly such a large sum generated year on year has the potential to alleviate many social as well as environmental issues ailing the nation.
While there may be an overlap between philanthropy and CSR, Indian corporate led by Tatas and Birlas have been voluntarily investing in CSR. Hence, the provision to make CSR spending mandatory is more of an intrusion and it is apparent that by doing so the government is trying to abdicate itself of its social responsibilities. Will not the mandatory provision disrupt the business plans of a many companies? Going by an ETIG research, India Inc will have to scramble to meet the target as only two companies in the Nifty - Ambuja Cement and ITC - currently spend 2% of net profit towards CSR. While not all Tata group companies have disclosed their expenditure on CSR, Tata Steel's sustainability report mentions that the Tata group companies spend 4% of their net profit towards CSR. In fact, the new imposition takes out the sanctity of CSR making it more of a forced exercise and more so a new form of tax on profits.
Does it not make sense that corporations take up social responsibilities on a voluntary basis rather than making it mandatory? Those in support of the move argue that by mandating CSR in the Companies Bill, the government has created a process whereby companies are forced to spend on social returns along with financial returns and they are forced to report on such spends. Such a mandatory provision, however noble its intentions may be, could lead to irregularities in revenue accounts and perhaps more corruption. The other point worth considering is will not the mandatory clause give government officials a strong tool to harass companies. Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities Limited, says “While the objective behind CSR is noble, but proper system and procedures need to be implemented for effective usage of such massive amount. Else, there is always a risk of misusage of noble intentions.”
Is there a way out? There are a few who argue that if the government wants, it can increase the rate of corporate tax to 32 percent from the current 30 percent rather than making it mandatory for companies to spend 2% on CSR. According to media reports, a number of companies are lobbying for tax breaks on CSR investment.
While reporting CSR spends in their annual reports and making it public is a measure of good corporate governance, enforcing spending on CSR would perhaps not motivate companies to become more socially responsible. In essence CSR should be done with passion and dedication, and not because it is thrust upon.