Corporate social responsibility (CSR) is the new buzzword in corporate circles, board meetings of companies and in management circles. The previous articles in this column have addressed various aspects of CSR in India. This paper will focus on examining whether the policy decision to make CSR mandatory is in some ways linked to or even an offshoot of tax evasion happening in the country.
The new guidelines for CSR pertain to “Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year” according to the recent Companies Act. Thus, the Act primarily focuses on the relatively larger companies. Underlying the responsibility of delivering social goals there is an innate notion of which companies are capable of undertaking the responsibility in terms of resources. There is another important aspect to targeting the larger companies. This is the widely prevalent fact of tax evasion and tax avoidance.
According to a recent PTI report, there is a shortfall of about 88,000 crore in the indirect tax collection target of 5.05 lakh crore for the fiscal year 2012-13. Indirect taxes include service tax, excise and customs duties. The figure is astoundingly large and is shocking in its effect. In percentage terms it works out to approximately 17.5% of the target. It is important to keep in mind that this is actually an estimate and the target itself is calculated based on information that is not completely available to the authorities. In the circumstances, even 20% may not be a wrong estimate. The first reaction, of course, is that some actions have to be taken to bridge this gap. The most immediate one that is planned by the government is to reduce this shortfall and collect the remaining amount on a fast track basis. How much of this will be done is anybody’s guess. Interestingly, we do not have even a rough estimate of tax avoidance as, unlike tax evasion, this is not technically unlawful. Tax avoidance is a clever manipulation and interpretation of existing tax rules and regulations to avoid coming under the tax net. If all these aspects are taken into consideration the taxes that the government fails to get adds up to an exorbitant amount.
While ensuring better tax compliance is very important, clearly some new innovative solutions are the need of the hour. CSR could be one of them. It targets exactly those companies that are earning good profits and have to pay various direct and indirect taxes. If the companies comply with the provision in the Companies Bill that states, “the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years”, the amount spent on CSR annually by each company would be fairly substantial. In a small but significant way it would compensate for any tax evasion and avoidance that the company has done in the same or previous financial years.
The discussion till now can be spelt out in even more simple terms as follows. One of the core purposes of collecting taxes by the government is to plough back the money into various welfare and development initiatives. These could be meeting basic needs of food security, housing, water and sanitation or the ones that will gradually lead to a better quality of life such as education, vocational skills and livelihood opportunities, resources to start small enterprises and so on. By acting as the agency to collect taxes and to implement these programmes and initiatives, the government becomes an intermediary. In CSR, to a large extent, this intermediary is eliminated. The government has only a guiding and overseeing function. The companies directly employ their resources to initiate social welfare and development programmes.
Why is the government planning to make CSR mandatory?
Is it as it appears because funds are short for development activities? or
Is it about spreading the commitment to work for change among all stakeholders including companies?
The truth lies in both the above reasons. When tax evasion and avoidance takes place the resources at the disposal of the government for public spending gets restricted. It has already been stated that tax evasion has become a regular and widespread feature of the Indian economy. Further, the rapid population growth ensures that the same resources have to be divided among an ever increasing number of people. It is a well known fact that a very small number of people corner most of the wealth and resources in our country leaving the large majority of the population at a disadvantage. The responsibility of the government has thus, increased multifold but the resources available with it has not. Further, with the inflationary trend, the cost of implementing development programmes is constantly spiralling upwards. Mandatory CSR is a means to make the companies directly utilise a part of their resources to benefit the section of the population that is disadvantaged. When resources are utilised to improve the lot of the disadvantaged we also directly contribute to solutions towards greater equity and equality that is the foundation of a developed nation.
Tax evasion and avoidance are both symptoms of resistance on the part of some companies to pay their dues to the government. Many have raised the question – will there not be a similar resistance by those companies to the idea of a mandatory CSR? To borrow a popular expression, ‘only time will tell’ how CSR provisions are dealt with by various companies in the coming times. Stricter provisions may ensure better compliance to CSR regulations.
As stated above CSR is also about spreading the commitment for social welfare and development beyond the government. In development parlance, it is the process of identifying, defining and involving all ‘stakeholders’.
Why are companies seen as stakeholders?
They are a significant and influential section of the country and therefore, do have some responsibilities towards these challenges facing the country. Surely, meeting various development goals is one of the key challenges facing our country.
Being part of the country and setting up industry or any other form of enterprise they end up liberally using various infrastructures such as water, power and roads. This also obligates them to return in small part what they gain from the country’s resources.
By creating access to educational and vocational skill opportunities to the poor and disadvantaged, companies create a bank of employable talent.
By increasing awareness and overall economic standards, companies contribute to the growth of the consumer base for their own products and services.
Companies are, therefore, important stakeholders in the country’s path towards social development. CSR provisions recognise and define the role of the company as stakeholder by assigning it two critical responsibilities. This is because the CSR guidelines would entail both (a) an allocation of funds and (b) through human and knowledge resources directly working towards these goals that are priority in the development of the country.
Tax evasion and avoidance have to be dealt with firmly when it is evident that the same companies are using their enormous profits to expand their own business interests. CSR is a significant step in the right directions to make companies more accountable for the physical and social environment they thrive in. This is a great challenge which Indian companies must be prepared to accept wholeheartedly.