In a country where tens of millions persons live in abject poverty, suffer from acute malnutrition, live in unhygienic conditions and don’t get opportunity for even basic education, corporate social responsibility [CSR] is an idea which caught the imagination of the both the dispensations under UPA – II and Modi – 1.0/2.0 .
When, a company generates profits using the country’s resources besides relying on the capital and labor provided by the public, it needs to pay back to the society. This may be the underlying logic behind CSR levy. The government expects that a company above a threshold in respect of net-worth, turnover and net profit, should spend a given percentage of its net profit on activities such as sanitation, education, health care, poverty alleviation and the environment etc.
Accordingly, the Companies Act [2013] required that firms with a net worth of at least Rs 500 crore or revenue of Rs 1,000 crore or net profit of Rs 5 crore should spend at least 2% of their net profit on CSR activities. Until hitherto, the requirement was voluntary. This meant that even if a company failed to comply with the provision of law, all that it needed to do was to give an explanation in its Annual Report.
The experience has been far from encouraging. Just about half of a total of 22,000 companies falling within the purview of CSR obligations are complying with the law. Further, out a total of about Rs 72,000 crore set aside for this purpose between 2014-15 and 2017-18, around Rs 20,000 crore remained un-utilized. Of total spend [Rs 15,000 crore p.a.], a lion’s share 40% is spent in just six states – Maharashtra, Karnataka, Andhra Pradesh, Gujarat, Tamil Nadu and Delhi – which are all industrialized states [according to report of a committee under corporate affairs secretary, I. Srinivas].
These six states account for only 11% of 117 “aspirational districts” identified under the Aspirational District Programme [ADP] launched by Prime Minister, Narendra Modi on January 5, 2018 to rapidly transform underdeveloped districts lagging behind the rest of India on crucial parameters such as health, nutrition, education, financial inclusion, and basic infrastructure etc. On the other hand, 55% of the aspiration districts located in Jharkhand, Bihar, Chhattisgarh, Madhya Pradesh and Uttar Pradesh received a mere 9% of CSR money.
Meanwhile, the government has carried out amendments in the Companies Act [2013] which inter alia provide for imprisonment of the executives of a company if it is found to be not in compliance with the CSR related provisions. Prescribing jail term was based on the premise that absence of penal provision in the subsisting Act made the companies lax in discharging their obligation.
This led to consternation in the corporate circles who took strong exception to the change in law seeking to criminalize CSR violations. The government was quick to respond with the finance minister, Nirmala Sitharaman promising to do away with the jail term. Going a step further, a committee looking into the Companies Act [2013] seeks to decriminalize the CSR provision as also a host of other provisions which at present attract jail term [except extreme cases involving frauds, misappropriation of funds and other financial irregularities of a very serious nature].
These are moves in the right direction [it is perplexing as to what prompted Modi – government to rush through a legislative amendment that too to make in-road for a draconian provision such as jail term and that too when a committee reviewing the Act was still to finalize its recommendations] and hopefully, necessary steps will be taken to give effect to the promise immediately. Further, it needs to introspect whether the mandatory requirement of a certain percentage of profit on CSR should at all be continued.
There are valid reasons as why this levy needs to be dropped. First, after meeting all expenses and discharging all liabilities including taxes payable to the centre and states, the money left [read: profit after tax] belongs to the shareholders and it would be illogical and unfair for the government to take away a slice of that vide CSR levy. Second, the CSR is in the nature of yet another tax [on top of a plethora of other taxes already being paid by a firm on inputs, outputs and profit] and is therefore untenable.
Third, it gives a lot of discretion to the bureaucrats in determining as to which expenses are admissible. This can open up the floodgate for nepotism and corruption which goes against Modi’s philosophy of zero tolerance against this menace. Fourth, imposing the CSR levy glosses over an over-arching fact that running a business which involves giving jobs, welfare of employees etc by itself is an act of discharging social responsibilities. When, the companies are already contributing to the social welfare, why go after them imposing yet another levy?
As regards, the yawning gap between the mammoth resources needed for funding welfare schemes and development [Rs 100 lakh crore will be required for investment in infrastructure alone] on the one hand and available funds on the other, the concern of the government in this regard can be addressed by seeking participation of private companies. But, that can’t be done by issuing diktats such as CSR levy which anyway yields peanuts [Rs 15,000 crore annually] vis-à-vis the monumental gap.
The government should focus on creating a ‘conducive’ and ‘stable’ policy environment and take necessary steps to ensure sanctity of contracts as the way forward to attract investment from corporate including foreign companies.