Corporate Social Responsibility (CSR) - EY · PDF filePage 3 Applicability of CSR CSR -...

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

CSR - Opportunities and Challenges- Tax Perspective

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

Permissible CSR activities


Under the Companies Act, 2013 (Schedule VII)

(i) Eradicating extreme hunger and poverty; (ii) Promotion of education; (iii) Promoting gender equality and empowering

women; (iv) Reducing child mortality and improving

maternal health; (v) Combating human immunodeficiency virus,

acquired immune deficiency syndrome, malaria and other diseases;

(vi) Ensuring environmental sustainability; (vii) Employment enhancing vocational skills; (viii) Social business projects; (ix) Contribution to the Prime Minister's

National Relief Fund or any other fund set up by the Central Government or the State Governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and

(x) Such other matters as may be prescribed

Under the Income-tax Act, 1961 (Section 80G)

I. Following donation allowed subject to a maximum

of 10% of the Adjusted Gross Total Income:

A. Donations to Government for promoting family

planning etc – 100% allowed

B. Eligible for 50% deduction:

• Donations to Government for other charitable

purpose

• Donation for housing accommodation/ improvement

of cities, towns or villages etc.

II. Eligible for 100% deduction w/o maximum limit:

Donation to PM’s National Relief Fund

Donation to State Government Fund for Medical

Relief to the Poor

National Illness Assistance Fund

Chief Minister's or Lt. Governor's Relief Fund

Approved university or educational institution of

national eminence, etc.

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



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

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

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)

XXX

*Permissible Deductions:

Usual Working Charges- revenue expenditures, bonus or commission

Abnormal or Special Tax

Interest on debentures, loans or advances

Compensations/ damages in virtue of legal liability, bad debts written off…

(XXX)

(XXX)

(XXX)

(XXX)

*Non- permissible deductions:

Income tax paid under Income Tax Act, 1961

Loss of Capital Nature

Compensations/ Damages paid voluntarily

XXX

Net Profits as per Section 198 XXX

*Illustrative list. For details, please refer Annexure 1


Meeting

Point?

CSR and Tax B

en

efits

to

th

e S

ocie

ty

Benefits to the Business

CSR eligibility

Tax deductibility


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

a capital expenditure?

► 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?

► Whether CSR is charge or appropriation of profits?

Ta

x is

su

es

on

CS

R

Tax issues on CSR

► 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?


Tax issues on CSR

Denial of CSR expenditure

► CSR to be incurred only by specified class of companies; hence

character of appropriation

► No provision under Income-tax Act, 1961

► No carry forward of unspent amount

► No investigation into the books of the company

Possible defenses

► From financial reporting perspective, it will be treated as expense

and not distribution of profit (Relevant case laws – Annexure 2)

► 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

+

Legal

obligation

Appropriation

v/s

charge to

profit

-


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

► CSR expense which is not connected with taxpayer’s business would not meet

this condition

Possible defenses ► CSR improves environment in which business operates

► 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

-

+


► CSR expense which is capital in nature - not tax deductible

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)

-

+

Deductibility

under Section

37 of the

Income-tax

Act, 1961

Capital

expenditure


Tax issues on CSR

Year of

deductibility ie

when actually

incurred or on

provision in

books


► Deduction may not be available if only provided in books of

accounts and not incurred

► Courts in past have disallowed mere provision of expenses

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


Specific provisions of ITA to improve prospects of deductibility of CSR


Sr.

No

Section Whether donation

based or activity

Based

Deduction available for Quantum of

deduction

1 35(1)(ii) Donation based Sum paid to research association university, college

or other institution to be used for scientific research

1.75 times of

sum paid

2 35(1)(iia) Donation based Sum paid to a scientific R&D company to be used by

it for scientific research

1.25 times of

sum paid

3 35(1)(iii) Donation based Sum paid to research association, university college

or other institution to be used in social science or

statistical research.

1.25 times of

sum paid

4 35(2AA) Donation based Any sum paid to National Laboratory or a University

or IIT or a specified person with a direction that such

sum is to be used for scientific research

2 times of sums

paid

5 35CCC Expenditure on

agricultural extension

project

Any expenditure on agricultural extension project

notified by CBDT

1.5 Times of

sums paid

6 35CCD Expenditure on skill

development

project

Any expenditure (not being expenditure in the nature

of cost of any land or building) on any skill

development project notified by CBDT

1.5 Times of

sums paid

7 35AC Donation based Sum paid to public sector company/local authority/etc

for carrying out any eligible notified project for

promoting social and economic welfare of the public

1Time of sums

paid

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

Alternative forms of business


Public Trust

Society

Section 8 Company (Section 25 of Companies Act, 1956)

Form of entity

The concept of ‘trust’ flows from the faith of one person in another person. If a person, out of free will, entrusts his property to the care of another person for a specific purpose or period, that other person has to uphold the trust reposed in him

An association of persons united together by mutual consent to deliberate, determine and act jointly for some common purpose

A company with limited liability formed for “promoting commerce, art, science, religion, charity or any other useful object,” with no profits objective

Objective

Social Benefits and charitable

Literary, Charitable, Scientific and resource oriented

Non-profit Activities

Benefits to Donor

Deduction of 50% of donation from the taxable income



Taxability

Income exempt under section 12 of the Act- provided used for the charitable purpose

Income of a society is exempt under section 12 of the Act- provided utilisation for funds for the charitable purpose

Section 8 company’s income is exempt under the Act, if the society is registered under section 12AA

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


Ahmedabad Bangalore Chennai

Sunil Kapadia, Partner

[email protected]

Dhinal Shah, Partner

[email protected]

Riad Joseph, Partner

[email protected]

Deepa Bhatia Chirayath,

Associate Director

[email protected]

Vidya Nagarajan, Partner

[email protected]

Pradeep Narayanan,

Associate Director

[email protected]

Delhi Hyderabad Kolkata

Rajiv Chugh, Partner [email protected]

Prashant Khatore, Partner

[email protected] Ritika Loganey Gupta, Associate Director [email protected]

Jayesh Sanghvi, Partner

[email protected]

Aditya Bajoria, Senior Manager

[email protected]

Dinesh Agarwal, Partner

[email protected]

Rohit Bothra, Senior Manager

[email protected]

Mumbai Mumbai Pune

Jaideep Kulkarni, Partner

[email protected]

Sheetal Shah, Associate Director

[email protected]

Tejas Desai Partner

[email protected]

Mitesh Gada, Associate Director

[email protected]

Pramod Achuthan, Partner

[email protected]

Chetan Kakariya, Senior Manager

[email protected]

Key Tax Contacts

mailto:[email protected]



















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.

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ERNST & YOUNG LLP

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© 2013 Ernst & Young

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Detailed List as per Section 198 Annexure 1


Deductions to be made

► Usual working charges ► Directors’ remuneration ► Bonus or Commission ► Any tax in the nature of a tax on abnormal or

excess profits ► Any tax imposed for special reasons ► Interest on debentures issued by Company ► Interest on mortgages executed and on loans

secured by a charge ► Interest on unsecured loans and advances ► Revenue expenses on repairs ► Outgoings inclusive of contributions under

section 181 i.e. to bona fide charitable and other funds

► Excess of expenditure over income in previous years computed as per this section

► Compensations/ damages paid in virtue of legal liability

► Insurance premium ► Bad debts written off or adjusted

Deductions not to be made

► Income tax and super tax paid by the company under the Income Tax Act, 1961 or any other tax not covered in other category

► Any compensation, damages or payments made voluntarily otherwise than in virtue of a liability

► Loss of capital nature including loss on sale of undertaking not including any excess of Written Down Value over the Sale Price/ Scrap Value

► Any change in carrying amount of an asset/ liability recognized in equity reserves

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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