Tax Implication on CSR Expenditure

Section 135 of the Companies Act, 2013 governs the provisions regarding the CSR spending of the businesses, which makes India a leading country in the world to mandate a certain class of companies to spend their profit’s small portion on social activities.

CSR: Definition

As defined by Rule 2(d) of the Companies (CSR) Rules, 2014, “Corporate Social Responsibility (CSR)” refers to the activities undertaken by a company in pursuance of its statutory obligation laid down in section 135 of the Companies Act, 2013, in accordance with the provisions which are contained in these rules.

Applicability of CSR provision

Every company which has a net worth of Rs. 500 crore or more, or has a turnover which is Rs. 1000 crore or more or a net profit of 5 crore or more during the immediately preceding financial year has to constitute a CSR Committee of the Board which consists of 3 or more directors, out which at least 1 director must serve as an independent director.

Companies having above attributes are required to spend at 2% of their average net profits made during the last three years on CSR activities as indicated under schedule VII.

Tax Implication on CSR activities

The Income tax Act, 1961 provides tax deduction for donation and contribution. Section 37 of the Income Tax Act, 1961 mandates certain deduction in respect of general business expenditure. Therefore, the business houses are contemplating some sort of deduction in respect of CSR spending in line with Income Tax provision.

But the legislature's intention is to treat this CSR spending as appropriation of profit rather than considering it as a charge on profits like any other expenses such as rent, electricity charges, etc.

Is it possible to undertake CSR activities by establishing some other entities like trust or section 8 companies?

Most companies contemplate opening a separate entity because in this way companies are eligible to claim deduction under section 80 G.

Therefore, corporations are considering working through these elements like altruistic trust or organizations which are establishments secured directly under the important concession of CSR expenditure under Income tax Act.

There are some relevant provisions under the Income Tax Act which must be borne in mind before launching a CSR programme e.g. section 35C, 37 and section 80G.

Memorandum to Finance Bill, 2014

Expenditure which is incurred wholly and exclusively for the purposes of business is permitted as a deduction for computing the business’s taxable income. CSR is an income’s application. Therefore, it cannot be incurred wholly and exclusively for the purpose of carrying on business. Since the application income is not allowed to be deducted for the purpose of computing taxable income of a company, the amount spent on CSR is not allowed as deduction for computing the company’s taxable income. 

CSR’s objective is to share the government's burden when it comes to providing social services by the firms having net worth, turnover or profit which is above the threshold limit. If such expenses were permitted for tax deduction, they would lead to subsidizing about 1/3 of such expenses by way of tax expenditure by the government.

For the purpose of providing 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 CSR activities referred to in section 135 of the Companies Act, 2013 shall not be regarded to have been incurred for the business’s purpose and hence shall not be allowed as deduction as per section 37.

Conclusion

Companies must consult with tax experts or CAs who are familiar with the tax laws to understand the tax implications of their CSR expenditure. It is mandatory to comply with the rules and regulations as per the Income Tax Act to avoid fines or penalties. You can get in touch with Registrationwala for assistance.

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.