Issues for Indian companies and NGOs
This is the second of two blogs (see part one) by Network Partner Pankaj Jain of Impact Law Ventures looking at India’s new CSR legislation. This will look at some issues and challenges for companies and NGOs arising from it.
A limited definition of CSR
The most glaring shortcoming of the new law is its limited definition of CSR. The ten areas specified under Schedule VII inexplicably seems to exclude a number of activities that may be just as crucial to social development in India, such as social businesses, promoting financial literacy and road safety. This makes life difficult for those unfortunate NGOs that previously received CSR contributions but whose activities are not listed under Schedule VII. It is a matter of active debate whether it was prudent of the legislature to remove the autonomy afforded by a catch-all clause of ‘such other matters’, which existed in the draft version of the law.
Another deficiency is that CSR is measured under the new law by expenditure, not actual impact. It takes into account only actual spending and excludes the value of any services a company may contribute to the social sector. NGOs often welcome such services, which allow them to leverage private sector expertise in key areas such as skills and technological support. Companies, too, may find it more meaningful and convenient to contribute services rather than capital. The fact that the new law does not provide for such flexibility means that any services a company may choose to contribute will have to be over and above its obligatory CSR expenditure.
Similarly, the definition excludes activities undertaken by companies in the normal course of their business. Companies often undertake CSR initiatives that are closely linked to their business (training, for example) because their contributions are likely to have the most impact in those areas. However, the new law might not allow for this and does not adequately explain what may be deemed to be the ‘normal course of business’.
No mandate to spend
A disappointment for NGOs is that the new law only makes it mandatory for companies to comply or disclose. This means that while the new law will certainly lead to greater transparency and reporting on CSR activities, it may not actually result in improved levels of impact from CSR. On the contrary, it may dissuade companies from being imaginative about their CSR initiatives and instead cause them to do the minimum required under the new law. However, the legal duty to disclose is expected to press the right moral buttons and create some healthy competition among companies to outdo each other in terms of the CSR initiatives they boast of in their annual reports, in order to appease shareholders and customers alike.
Implications for foreign companies
The new law is also likely to get into some gnarly entanglements with other Indian legislation. The biggest concern is the Foreign Contribution (Regulation) Act 2010 (FCRA) and its wide definition of the term ‘foreign source’, which has not been addressed under the new law. A local arm of a multinational company or a company with an overseas shareholding of more than 50 per cent will find itself coming up against the FCRA every time it wants to contribute CSR funds to any NGO in India. The FCRA implications of each donation to an NGO from a ‘foreign source’ company will have to be thoroughly evaluated to prevent an inadvertent breach of the law.
Tax treatment of CSR contributions
The tax treatment of CSR contributions is also a grey area at the moment. Typically, companies are allowed tax deductions for donations or contributions made for charitable purposes to entities that have 80-G registration under the Indian Income Tax Act 1961. Now that CSR spending has been made mandatory, it remains to be seen whether contributions will continue to be viewed as contributions made for a charitable purpose. On the other hand, since CSR contributions exclude expenditure incurred in the ‘normal course of business’, will companies be permitted to deduct their CSR expenditure as business expenditure while calculating taxable income? Only time will tell.
Overall, the new law is a commendable step in the right direction towards bringing about the change that we wish to see in this world. Companies and NGOs will undoubtedly experience some growth pangs and the devil lies in the detail in so far as efficient execution of the CSR framework is concerned; but that may be a small price to pay for the mature and healthy relationship between the Indian private and social sector that is likely to be forged in time as a consequence. Any financing, including grant of CSR funds, is a function of ‘ability to give’ and ‘ability to receive’. How organizations institutionalize their processes to give and receive responsibly in order to foster inclusive growth and reduce poverty is what remains to be seen.