Corporate Social Responsibility (CSR) - EY

1 Corporate Social Responsibility (CSR) Opportunities and challenges - Tax Perspective Page 2 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 Page 3 Applicability of CSR CSR - Opportunities and challenges - Tax Perspective Applicable to all companies incorporated in India and having either of the following in any financial year Section 135(1) Worth of INR 500 crore or more; OR of INR 1000 crore or more; OR Profit of INR 5 crore or more Page 4 Permissible CSR activities CSR - Opportunities and challenges - Tax Perspective 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.

2 (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: to Government for promoting family planning etc 100% allowed for 50% deduction: Donations to Government for other charitable purpose Donation for housing accommodation/ improvement of cities, towns or villages etc.

3 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. Page 5 Computation of CSR expenditure Draft CSR Rules CSR - Opportunities and challenges - Tax Perspective 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.

4 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%) Page 6 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.

5 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 (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.

6 For details, please refer Annexure 1 CSR - Opportunities and challenges - Tax Perspective Page 7 Meeting Point? CSR and Tax Benefits to the Society Benefits to the Business CSR eligibility Tax deductibility CSR - Opportunities and challenges - Tax Perspective Page 8 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? Tax issues on CSR Tax issues on CSR If considered to be deductible, in which year would the expense be deductible?

7 Can deduction be claimed on the basis of provision towards this expenditure, without having actually incurred the expenditure? CSR - Opportunities and challenges - Tax Perspective Page 9 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 - CSR - Opportunities and challenges - Tax Perspective Page 10 Tax issues on CSR Denial of CSR expenditure Essence for deductibility under section 37 - Expenditure must

8 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 - + Denial of CSR expenditure 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)

9 - + Deductibility under Section 37 of the Income-tax Act, 1961 Capital expenditure CSR - Opportunities and challenges - Tax Perspective Page 11 Tax issues on CSR Year of deductibility ie when actually incurred or on provision in books Denial of CSR expenditure 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 CSR - Opportunities and challenges - Tax Perspective Page 12 Specific provisions of ITA to improve prospects of deductibility of CSR CSR - Opportunities and challenges - Tax Perspective Sr.

10 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 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 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. 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 35 CCC Expenditure on agricultural extension project Any expenditure on agricultural extension project notified by CBDT Times of sums paid 6 35 CCD Expenditure on skill development project Any expenditure (not being expenditure in the nature of cost of any land or building)