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Corporate Social Responsibility (CSR)

Opportunities and Challenges- Tax Perspective


Agenda

► Applicability of CSR

► Permissible CSR activities

► Computation of CSR expenditure – Draft CSR Rules

► Computation of Net Profits

► Tax issues on CSR

► Specific provisions of ITA to improve prospects of deductibility of CSR

► Alternative forms of business

► Key Takeaways

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Applicability of CSR

Applicable to all companies incorporated in India and having either of the


following in any financial year – Section 135(1)

1. Net Worth of INR 500 crore or more; OR

2. Turnover of INR 1000 crore or more; OR

3. Net Profit of INR 5 crore or more

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Permissible CSR activities

Under the Companies Act, 2013 (Schedule VII) Under the Income-tax Act, 1961 (Section 80G)

(i) Eradicating extreme hunger and poverty;


I. Following donation allowed subject to a maximum
(ii) Promotion of education;
of 10% of the Adjusted Gross Total Income:
(iii) Promoting gender equality and empowering
women; A. Donations to Government for promoting family
(iv) Reducing child mortality and improving planning etc – 100% allowed
maternal health;
(v) Combating human immunodeficiency virus, B. Eligible for 50% deduction:
acquired immune deficiency syndrome, • Donations to Government for other charitable
malaria and other diseases; purpose
• Donation for housing accommodation/ improvement
(vi) Ensuring environmental sustainability;
of cities, towns or villages etc.
(vii) Employment enhancing vocational skills;
(viii) Social business projects; II. Eligible for 100% deduction w/o maximum limit:
(ix) Contribution to the Prime Minister's
National Relief Fund or any other fund set up  Donation to PM’s National Relief Fund
by the Central Government or the State  Donation to State Government Fund for Medical
Governments for socioeconomic Relief to the Poor
 National Illness Assistance Fund
development and relief and funds for the
 Chief Minister's or Lt. Governor's Relief Fund
welfare of the Scheduled Castes, the  Approved university or educational institution of
Scheduled Tribes, other backward classes, national eminence, etc.
minorities and women; and
(x) Such other matters as may be prescribed

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Computation of CSR expenditure – Draft CSR Rules

► ‘Net Profit’ means net profit before tax as per books of accounts, computed as per section 198 of the
Companies Act, 2013 and shall not include profits arising from branches outside India

► CSR spending = 2% of the average net profits made by the company during every block of three
years

► CSR is applicable from FY 2014-15. For the purpose of First CSR reporting the Net Profit shall mean
average of the annual net profit of the preceding three financial years.

Particulars Amounts
(in INR)

Net Profit before tax as per books of FY 2013-14 2,500

Net Profit before tax as per books of FY 2012-13 1,700

Net Profit before tax as per books of FY 2011-12 1,000

Total (A) 5,200

Average of annual net profit of the preceding three financial years B (A/3) 1,733

CSR expenditure for the FY 2014-15 (B*2%) 34.67

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Computation of Net Profit – Section 198

Particulars Amount
Profit before tax as per Profit & Loss Account XXX

Credit to be provided for:


Bounties and subsidies received from Government XXX
Credit not to be provided for:
Premium/ Profit on sale of shares XXX
Profits of Capital Nature – including profits on sale of undertakings
Profits from sale of immovable property/ fixed assets – unless undertaken
Any change in carrying amount of an asset or liability recognized in Equity Reserves as business activity
(Provided when the asset is sold for a consideration higher than WDV, income will be considered for the
amount in excess of WDV but limited to difference between WDV and Original Cost)

*Permissible Deductions:
Usual Working Charges- revenue expenditures, bonus or commission (XXX)
Abnormal or Special Tax (XXX)
Interest on debentures, loans or advances (XXX)
Compensations/ damages in virtue of legal liability, bad debts written off… (XXX)
*Non- permissible deductions:
Income tax paid under Income Tax Act, 1961 XXX
Loss of Capital Nature
Compensations/ Damages paid voluntarily
Net Profits as per Section 198 XXX
*Illustrative list. For details, please refer Annexure 1

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CSR and Tax

CSR eligibility

Meeting
Benefits to the Society

Point?

Tax deductibility

Benefits to the Business

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Tax issues on CSR

► Whether CSR is charge or appropriation of profits?


Tax issues on CSR

► In the absence of specific provision for deductibility of CSR expenditure,


whether the deduction can be allowed under Section 37 of the Income-tax Act,
1961?

► Does it make any difference to the proposition if expenditure is perceived to be


a capital expenditure?

► If considered to be deductible, in which year would the expense be


deductible? Can deduction be claimed on the basis of provision towards this
expenditure, without having actually incurred the expenditure?

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Tax issues on CSR

- Denial of CSR expenditure


► CSR to be incurred only by specified class of companies; hence
character of appropriation
Legal ► No provision under Income-tax Act, 1961
obligation ► No carry forward of unspent amount
► No investigation into the books of the company

Appropriation
v/s + Possible defenses
► From financial reporting perspective, it will be treated as expense
charge to and not distribution of profit (Relevant case laws – Annexure 2)
profit ► Disclosure requirement as additional information to P & L A/c as per
Part II of Schedule III and not appropriation from profits under
Reserves & Surplus
► Courts in the past have allowed voluntary CSR expenses as tax
deductible under various situations
► Drinking water facilities to the residents in the vicinity of the refinery
► Aid to the school run for the benefit of the children of those local
residents

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Tax issues on CSR

- Denial of CSR expenditure


► Essence for deductibility under section 37 - Expenditure must be incurred
wholly and exclusively for the purpose of business of taxpayer
Deductibility ► CSR expense which is not connected with taxpayer’s business would not meet
this condition
under Section
37 of the
Income-tax
+ Possible defenses
► CSR improves environment in which business operates
Act, 1961 ► Benefits the business in an indirect manner
► Incurred as a good corporate citizen to earn goodwill and create an atmosphere
in which business can succeed in a greater measure (Relevant case laws – Annexure 2)
 Construction of fountain near traffic island
 Expenditure incurred on garden in factory premises and labour quarters
to maintain ecological balance

- Denial of CSR expenditure


► CSR expense which is capital in nature - not tax deductible
Capital
expenditure
+ Possible defenses
► Courts in the past have allowed the deduction if the same results in an asset
which is not of assessee but of the third party (such as contribution to housing
board for construction of tenements)

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Tax issues on CSR

- Denial of CSR expenditure


► Deduction may not be available if only provided in books of
accounts and not incurred
Year of
deductibility ie ► Courts in past have disallowed mere provision of expenses
when actually
incurred or on
provision in
books + Possible defenses
► If provision is made in books on reasonable, scientific basis and
approved by the statutory auditors, it can support that the taxpayer
is mandated to spend the statutorily qualified CSR expenditure

Tax treatment of CSR in accordance with IT Act expected to be notified by CBDT as


per draft CSR rules

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Specific provisions of ITA to improve prospects of
deductibility of CSR
Sr. Section Whether donation Deduction available for Quantum of
No based or activity deduction
Based
1 35(1)(ii) Donation based Sum paid to research association university, college 1.75 times of
or other institution to be used for scientific research sum paid
2 35(1)(iia) Donation based Sum paid to a scientific R&D company to be used by 1.25 times of
it for scientific research sum paid
3 35(1)(iii) Donation based Sum paid to research association, university college 1.25 times of
or other institution to be used in social science or sum paid
statistical research.
4 35(2AA) Donation based Any sum paid to National Laboratory or a University 2 times of sums
or IIT or a specified person with a direction that such paid
sum is to be used for scientific research
5 35CCC Expenditure on Any expenditure on agricultural extension project 1.5 Times of
agricultural extension notified by CBDT sums paid
project
6 35CCD Expenditure on skill Any expenditure (not being expenditure in the nature 1.5 Times of
development of cost of any land or building) on any skill sums paid
project development project notified by CBDT
7 35AC Donation based Sum paid to public sector company/local authority/etc 1Time of sums
for carrying out any eligible notified project for paid
promoting social and economic welfare of the public

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Alternative forms of business

Key parameters for evaluating alternative forms of legal presence:

• Minimal procedural/ compliance implications


• Other Commercial Drivers

Typical forms of legal presence in India for setting up a “Charitable/ Not-for-


Profit” institution:

1. Public Trust

2. Society

3. Section 8 Company

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Alternative forms of business

Public Trust Society Section 8 Company


(Section 25 of Companies
Act, 1956)

Form of The concept of ‘trust’ flows from An association of persons A company with limited
the faith of one person in another united together by mutual liability formed for
entity person. If a person, out of free will, consent to deliberate, “promoting commerce, art,
entrusts his property to the care of determine and act jointly for science, religion, charity or
another person for a specific some common purpose any other useful object,”
purpose or period, that other with no profits objective
person has to uphold the trust
reposed in him

Objective Social Benefits and charitable Literary, Charitable, Non-profit Activities


Scientific and resource
oriented
Benefits Deduction of 50% of donation from Deduction of 50% of donation Deduction of 50% of
the taxable income from the taxable income donation from the taxable
to Donor income

Taxability Income exempt under section 12 of Income of a society is Section 8 company’s income
the Act- provided used for the exempt under section 12 of is exempt under the Act, if
charitable purpose the Act- provided utilisation the society is registered
for funds for the charitable under section 12AA
purpose

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Key Takeaways

► There is a need to develop appropriate CSR policy


► Fulfillment of CSR is the need of the hour
► Deduction of CSR expenditure for tax purposes will be an important consideration
► Documentation to reflect some connection / benefit to business. Necessary to claim
deduction
► Current CSR programs need to be viewed and evaluated for compliance with CSR
guidelines

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Key Tax Contacts

Ahmedabad Bangalore Chennai

Sunil Kapadia, Partner Riad Joseph, Partner Vidya Nagarajan, Partner


sunil.kapadia@in.ey.com riad.joseph@in.ey.com vidya.nagarajan@in.ey.com

Dhinal Shah, Partner Deepa Bhatia Chirayath, Pradeep Narayanan,


dhinal.shah@in.ey.com Associate Director Associate Director
deepa.bhatia@in.ey.com pradeep.narayanan@in.ey.com

Delhi Hyderabad Kolkata

Rajiv Chugh, Partner Jayesh Sanghvi, Partner Dinesh Agarwal, Partner


rajiv.chugh@in.ey.com jayesh.sanghvi@in.ey.com dinesh.agarwal@in.ey.com
Prashant Khatore, Partner
Aditya Bajoria, Senior Manager Rohit Bothra, Senior Manager
prashant.khatore@in.ey.com
aditya.bajoria@in.ey.com rohit.bothra@in.ey.com
Ritika Loganey Gupta, Associate Director
riitka.gupta@in.ey.com

Mumbai Mumbai Pune

Jaideep Kulkarni, Partner Tejas Desai Partner Pramod Achuthan, Partner


jaideep.kulkarni@in.ey.com tejas.desai@in.ey.com pramod.achuthan@in.ey.com

Sheetal Shah, Associate Director Mitesh Gada, Associate Director Chetan Kakariya, Senior Manager
sheetal.shah@in.ey.com mitesh.gada@in.ey.com chetan.kakariya@in.ey.com

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Thank You
This presentation provides general information existing at the time of preparation. The
presentation is meant for general guidance and no responsibility for loss arising to any
person acting or refraining from acting as a result of any material contained in this
presentation will be accepted by Ernst & Young.
It is recommended that professional advice be taken based on specific facts and
circumstances. This presentation does not substitute the need to refer to the original
pronouncements.

ERNST & YOUNG LLP


www.ey.com

© 2013 Ernst & Young


All Rights Reserved.
EY is a registered trademark
Detailed List as per Section 198 Annexure 1

Deductions to be made Deductions not to be made


► Usual working charges ► Income tax and super tax paid by the
► Directors’ remuneration company under the Income Tax Act, 1961 or
► Bonus or Commission any other tax not covered in other category
► Any tax in the nature of a tax on abnormal or
excess profits ► Any compensation, damages or payments
► Any tax imposed for special reasons made voluntarily otherwise than in virtue of
► Interest on debentures issued by Company a liability
► Interest on mortgages executed and on loans
secured by a charge ► Loss of capital nature including loss on sale
► Interest on unsecured loans and advances of undertaking not including any excess of
► Revenue expenses on repairs Written Down Value over the Sale Price/
► Outgoings inclusive of contributions under Scrap Value
section 181 i.e. to bona fide charitable and
other funds ► Any change in carrying amount of an asset/
► Excess of expenditure over income in previous liability recognized in equity reserves
years computed as per this section
► Compensations/ damages paid in virtue of
legal liability
► Insurance premium
► Bad debts written off or adjusted

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Deduction of CSR expenditure Annexure 2
Relevant case laws

CSR expenditure was held deductible in the following cases:

 Funds provided for establishing drinking water facilities and providing aid to school meant for
residents of the locality in which the taxpayer operated1.
 Expenditure on community assistance programmes and welfare measures undertaken in the
vicinity of taxpayer’s manufacturing unit2.
 Installation of traffic lights in the vicinity of taxpayer’s office to improve traffic situation, serving
dual purpose of benefitting the employees as also social commitment3.
 Trips to Bhuj and Jamnagar post earthquake for relief work4.

 Construction of hockey stadium for use of local residents5.

 Sponsorship of sports tournaments bearing the sponsor’s name on banners and association with
the trophy6.
 Contributions made by Pharma company to health care society and science foundation allowed as
it would bring Goodwill to the assessee7.

1 CIT v. Madras Refinery Ltd. [266 ITR 170](Mad)


2 CIT v. Madura Coats Ltd. [24 DTR 24](Mad)
3 Infosys Technologies v. JCIT [109 TTJ 631](Bang)
4 Jindal Steel and Power Ltd. [16 SOT 509](Delhi)
5 ITO v. VeluManickam Lodge (123 ITD 25)(Chennai)
6 CIT v. Lake Palace Hotels & Motels (P) Ltd. [293 ITR 281](Raj)
7 ACIT v. Ranbaxy Labs Ltd. (7 ITR (Trib) 161](Delhi)

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