Incentivising Corporate Social Responsibility

14.o6.2009

I was conducting a session on Business Ethics to day and while explaining Corporate Social Responsibility, made the following points:

Companies must make profits and maximize shareholders’ wealth. But, this is not to say that this is their only goal. They owe a duty to serve the community and society within which they exist, function, and derive the sustenance for their growth. If they fail to fulfill this duty, they will be no more than a cancer that destroys the very thing on which it feeds.

Corporate Social Responsibility (CSR) is a conceptual framework that analyses the various ways in which the corporate community can pay back or return to society a portion of the profits they derive from it. This usually takes the form of social welfare and other measures taken in and around the geographical area where the company operates. The benefits from such CSR measures would accrue to the public at large, and not necessarily to those who depend on the company.

If rightly applied, CSR can be an engine, driving the economic and social upliftment of society.

Arising from this, a participant wanted to know whether there was any tax incentive for companies engaged in CSR activities. While sections like S. 80G of the Income Tax Act, 1961, are, no doubt, available, they are, in my view pathetic and inadequate to truly incentivize CSR from a fiscal perspective. For example S 80G restricts the deduction on contributions to Charitable Trusts to 50% of 10% of Gross Total Income. Thus if a company, having a Gross Total income of Rupees Twenty-five lakhs, has contributed Rs. 5 Lakhs to an NGO engaged in social upliftment in a remote tribal village, the company would get a tax write off of about Rs.1.25 lakhs! Let us remember that this figure is the total amount that this company would get as a tax incentive for that year irrespective of the total donations made.

Moreover, there is no tax incentive for amounts sent by companies directly on Rural Development as such amounts may be considered as not spent wholly and exclusively for the purpose of business!

There is, therefore, a serious need for providing tax incentives on amounts spent by companies directly on alleviating the sufferings of the people in their local community as fulfillment of their social responsibility.

For example, a company may build a school for children of a village in the vicinity of the factory. At least eighty per cent of this amount should be allowed as a tax deduction. The utilization and benefit arising from this activity shall be documented and certified by a designated NGO as well as five independently selected beneficiaries who are not part of the local government.

Thus companies would spend directly on social welfare amounts that are being unnecessarily paid to the Government as tax which is misued or improperly or inneficiently used by a combination of corrupt and lethargic bureaucratsand politicians.