New CSR levy: A quasi tax

The law that requires large companies (net worth Rs 500 crore or more, or turnover Rs 1,000 crore or more) and profitable companies (net profit of Rs 5 crore or more) to spend 2 per cent of average pre-tax profit of previous three years on CSR activities listed in Schedule VII, which was introduced in 2014, was amended on August 1, 2019. Earlier, disclosure of information on CSR policy, spending, etc, was mandatory. The amendment has made the spending of 2 per cent of net profit on CSR activities mandatory and failure to spend the amount a punishable offence. 

A non-compliant company shall pay fine (Rs 50,000 to Rs 25 lakh) and the concerned official shall spend up to three years in jail and shall pay a fine between Rs 50,000 and Rs 5 lakh. However, recently a high-level committee has recommended that non-compliance with CSR norms be made a civil offence and the concerned official should not attract jail term. The amended law requires a company to transfer unspent amount that is not allocated to any programme/project to any of the government funds (specified in Schedule VII) within six months and transfer the unspent amount, which is a part of the amount allocated to a project or programme, to an escrow account within 30 days and if the full amount is not spent within three years thereafter, to transfer the unspent amount to any of the specified government funds. 

Crisil CSR Year Book 2019 reports that in 2017-18, of 1,913 listed relevant companies, 35 per cent either did not spend any money on CSR or their annual reports were not available, and 25 per cent did not meet the target of 2 per cent of net profit. Perhaps, this has prompted the government to amend the law to push all large and/or profitable companies to spend 2 per cent of net profit on CSR activities. However, there is a brighter side of the picture. CSR spending increased from Rs 10,066 crore in 2014-15 to Rs 15,097 crore in 2017-18, cumulative CSR spending over the four-year period has touched Rs 53,000 crore (listed companies: Rs 34,100 crore and unlisted companies: Rs 18,900 crore) and in 2017-18, 153 companies spent more than 3 per cent of profit. It appears that policymakers failed to appreciate this trend in CSR spending. 

In the US, the ‘responsiveness’ era, in which companies began taking serious management and organisational actions to address CSR issues, began in 1974, after passing through three stages -- ‘philanthropic era’ (up to 1950s), ‘awareness era’ (1953-67) and ‘issue era’ (1968-73), in which companies began focusing on specific social and environmental issues. Only from the beginning of 1990s, different companies, which developed excellent reputations for CSR practices, emerged in the US. India should not take decades to reach the ‘responsiveness’ era, as CSR moved centre stage in the early 2000s. However, it is too much to expect that India should attain the ‘responsiveness’ era within a short period of five years (2014-15 to 2018-19). 

CSR makes a business case only if it improves a company’s financial performance. Research is yet to establish conclusively that an investment in CSR activities improves financial performance. Across the globe, CSR makes a business case for companies that generate negative externalities or consume a significant amount of natural resources or derive value from managing brand and/or reputation. The approach to push companies, which do not see a business case for CSR, to invest in CSR activities is against the spirit of CSR. CSR requires companies to integrate social and environmental concerns in their business operations and in their interaction with stakeholders voluntarily. 

It is well accepted that business has four categories of responsibilities — economic, legal, ethical and social. Companies, particularly large and profitable companies, must pay attention to social responsibilities. However, spending money on Schedule VII activities might not be the only way to fulfil social responsibilities. A set of companies might be able to integrate one or more of listed activities with business operations, while others, when pushed, will take the ‘bolt-on’ approach rather than the ‘built-in’ approach. Worse, many companies will prefer to issue cheques in favour of government funds listed in Schedule VII, rather than investing attention and other resources on listed activities. As a result, CSR spending will not produce the desired outcome.

The law before the amendment was aligned to the global practice of mandatory disclosure. The prescription for spending 2 per cent of net profit was indicative only. The amended law, by mandating all large and/or profitable companies to spend 2 per cent of net profit on Schedule VII activities has indirectly imposed a levy, in the nature of quasi-tax, on those companies. 

The writer is director, Institute of Management Technology Ghaziabad

E-Mail: asish.bhattacharyya@gmail.com