Garvit Gupta
Introduction
In India, it is no longer voluntary for companies to indulge in Corporate Social Responsibility (CSR); rather, it has been made compulsory under Section 135 of the Companies Act, 2013. Companies must spend on social initiatives at least 2% of their average net profits, where relevant if they meet stipulated thresholds. However, this mandate suffers from an inherent inequity in application across various business structures excluding LLPs and partnerships from this liability. Thus, it creates an undue burden on companies, forcing them to seek tax benefits and other financial advantages to compensate for the cost they have to incur to comply.
CSR is a wider good that accrues for society through mobilizing money toward social causes. Yet the current framework does not balance the liabilities of CSR the same across all profit-making entities for these purposes. Issues arise as to equity, accountability, and how far tax incentives play their role in engendering corporate social involvement. This blog explores the CSR mandate, the apparent burden it places on companies, the role of tax incentives, and a better form of equitable and efficient framework regarding CSR contribution by all profit-making units, whether they are companies, LLPs, or partnerships.
CSR: A legal obligation with benefits
The framework for CSR in Section 135 of the Companies Act, 2013 has two purposes: corporate responsibility in itself and the contribution of business towards the welfare of society. Companies having one of the criteria net worth of ₹500 crores, turnover during the last financial year of ₹1000 crores, or net profit during the last financial year of ₹5 crores are required to spend 2 per cent of their average net profits of three immediately preceding financial years in activities related to CSR.
CSR can also have high reputational benefits for a company. While the concept of CSR is introduced in corporate culture, it develops a brand image where customers buy the product of responsibility as much as profit-generating activities. These times, with intense competition in the business arena, it requires showing that the organization is doing some meaningful CSR activities. This ultimately builds goodwill, brand equity, and customer loyalty in the long run. Consumers and investors are increasingly inclined toward organizations that seem genuinely associated with societal welfare. CSR has more advantages than money gain. It is a good opportunity for companies to show leadership in corporate governance, thus improving their public image and creating a positive organizational culture. While CSR could help companies in branding and reputation enhancement, the mandatory obligation can often be seen as a new measure to tax thereby restricting the autonomy of the company over their revenue. For many medium-sized companies that meet the required threshold while incurring losses, it can be a serious financial burden. This is especially true when compared to LLPs and partnerships that generate similar profits but are not required to comply with CSR regulations.
Disproportionate Burdens
One of the major loopholes in the current CSR framework is the unequal treatment to selectively mandate CSR for companies, excluding LLPs and partnerships from its ambit. This allows it to be exploited where a 2 per cent CSR contribution can be evaded by opening LLPs or partnerships instead of a company under the Companies Act. This disparity leads to an unequal playing field within the corporates.
The government have planned to include– LLP and partnerships in the CSR framework but there is no definitive timeline for the same. Due to this disparity, companies that are struggling to meet the CSR 2% requirement usually resort to tax-saving strategies. These companies can use Section 80G of the Income Tax Act,1961, which offers deductions for the contribution made to specified charitable funds but it provides partial tax relief concerning select types of CSR expenditure. In fact, for many businesses, especially small and medium-sized enterprises (SMEs), those in industries with thin profit margins, adopting corporate social responsibility can frequently appear to be a burden in terms of finances. Such an impression would be particularly true in contrast to partnerships and limited liability partnerships having similar profit-making capabilities, yet no such obligation is required of them. These companies hence have looked for ways to offset the cost of CSR compliance, seeking readily available tax incentives or structuring their CSR activities to enjoy maximum tax benefits.
Tax Incentives: A Relief or a Convenient Loophole?
The CSR framework brings a significant challenge to its intent for equity and philanthropy. Such a provision is anchored in compulsory mandatory applicability of relevant companies in allotting 2% of their profits to the field of CSR, which these firms tend to look at not as a voluntary effort for societal welfare but rather as a burden of compliance. The situation is made worse by exempting profit-making LLPs and partnerships from having similar obligations, which results in unfair competition. Such inequity would brew resentment in companies while lowering the focus on CSR as a genuine attempt at social welfare betterment.
One of the great negative impacts of this forced obligation is that there is a leaning by firms on tax credits to recover the expense of CSR disbursements. This tax deduction motive undermines the spirit of CSR and often leads to token contributions aimed at meeting compliance requirements rather than fostering substantial and meaningful change.
This tax relief also risks serve to transform CSR into a cost-reducing device and not a pride in business programs as agents of change. Instead of making contributions to urgent areas such as education, healthcare, or environmental sustainability, such funds will be diverted by firms into activities that would assist them in economizing taxes thereby deflecting the major purpose of CSR. The policymakers must confront these challenges with more than incentives. A complete restructuring must be made through which CSR instincts are reinvoked. Financial relief mechanisms are, of course, critical for compliance, but not at the cost of enjoying the broader objective of socially responsible behavior. Such would be an improved step in introducing a universal framework for all large profit-making entities, be it companies, LLPs, or partnerships, to share equitably in contributing towards CSR. Such measures by the government would make CSR contribution not a fiscal burden but a collective effort towards societal development.
Benefits of a uniform CSR framework
There is tremendous scope for a universal framework for Corporate Social Responsibility (CSR) to greatly improve the logic of corporate philanthropy in India and fill several gaps in the current existent system.
Broadening the purview of CSR obligations by extending them to LLPs and partnerships could make an even more collective impact. The government could engage a broader spectrum of the corporate sector to tap resources for schooling, healthcare, poverty alleviation, climate change, and more. With inclusivity, a larger scope of resources can be applied to initiatives that transform society. It would not leave CSR contributions just to companies, making sure that the strain of pushing social development is not left to a single segment of the business community, but rather is a collective effort.
Another significant advantage of a universal framework is that it probably is going to create a better condition for transparency and accountability. All large profit-making entities would have to submit to the same framework for that specific common reporting. They could define, standardize, and simplify the reporting practices and procedures for social accountability of all these large profit-making entities. Clear reporting guidelines would provide regulators and the general public with more information into company activities and their results. While guaranteeing that CSR initiatives stay concentrated on meeting actual social needs, this openness may contribute to the development of public and corporate trust.
Conclusion
The current structure of CSR in India, although very radical in its intent, has, over the years, begun to show certain inequities and shortcomings. The exemption of Limited Liability Partnerships (LLPs) and partnership firms from CSR obligations is one aspect that makes the entire landscape lopsided, placing an undue burden on companies alone. Further, the majority of such corporations use tax benefits as the yardstick to fulfilling their obligations, which rattles the whole essence of CSR as something philanthropic.
A uniform CSR framework for all large profit-making organizations would open pathways for fairness, inclusion, and wider social impact. Such a system would not merely share the burden equitably but also ensure a larger share of corporate profits directed at some pressing social realities. The government on its part must also find the right balance and not overly depend on financial incentives while encouraging accountability and transparency. By understanding CSR as mutually sharing value for social progress, India can bring a change in corporate into a collective force yang di manifestation toward significant changes. Thus, CSR would become a collective ethos instead of a statutory mandate and businesses of any form would have a crucial role in shaping the better future for society.
The author is a second-year law student at the Maharashtra National Law University, Nagpur.
NUALS Law Journal 