“To enrich the quality of life in the society we operate in we need to give back to the society manifolds than what we get from it”- JRD TATA.
There are many stakeholders of a company and good corporate governance is satisfying all the stakeholder’s interests. Consumers that are the public are the most important stakeholder of a company as it is the decision of the consumers to use the product determines the profitability of a company. So it is very much important for a company to undertake activities to develop society. Corporate social responsibility is a corporate obligation and it is based on the policy of giving and take. All companies though registered as either a private or public company it is believed that all companies are social entities that have a moral obligation to improve and contribute to solving the social problems. However, the mandatory social responsibility obligation poses few challenges that can hinder the effective discharge of social responsibility.
What are corporate Social Responsibilities
Corporate social responsibility is defined as the responsibility of the enterprises for their impact on society. Enterprises should have in place a scheme to integrate ethical, social, environmental, and consumer concerns in their business and core strategy, in close collaboration with their stakeholders. The United National Industrial Development Corporation (UNIDO) defines Corporate social responsibility as a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. There are many definitions of corporate social responsibility but however the underlying idea is that corporate also being social entity should contribute some of its funds to improve the standard of living by solving social problems.
Existing laws for implementing Corporate Social Responsibility
Corporate social responsibility is a mandatory obligation that has to be followed by enterprises under Section 135 of Companies Act 2013. According to Section 135 of Companies Act every company
- Having a net worth of rupees five hundred crores or more, or
- turnover of rupees one thousand crores or more or a net profit of rupees five crores or more during any financial year
According to Section 135(5), the companies that satisfy the above criteria should spend 2% of their average net profits in the preceding three years towards net profits turnover on social causes in pursuance of corporate social responsibility. The companies Act 2013 mandates corporate social responsibility and if a company contravenes section 135(5) the company shall be punishable with fine not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both. The calculation of the net profits of an Indian company should be done in accordance with Section 198 of the Companies Act and any foreign company registered in India should calculate the net profits in accordance with section 381(1)(a) read with Section 198 of the Companies Act.
Schedule 7 of Companies Act 2013 is an inclusive list of agendas for which the companies could contribute to solving such social problems. Ministry of Corporate affairs through its General Circular No. 21/2014 clarified that the list is not exhaustive in nature and should be interpreted liberally. The list given in Schedule 7 is broad in nature to include any activity to upheld social responsibility and the circular also adds in some more agendas that could be considered as a corporate social responsibility. Some of the activities that are considered to be corporate social responsibility are
- Eradicating extreme hunger and poverty
- Promotion of education
3) Promoting gender equality and empowering women
4) Reducing child mortality and improving maternal health
5) Combating human immunodeficiency virus, acquired immune deficiency
syndrome, malaria and other diseases
- Ensuring environmental sustainability
7) Employment enhancing vocational skills
8) Social business projects
9) Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities, and women.
The implication of CSR under the Income Tax Act
Income tax act before 2015 amendment allowed to deduct the expense of CSR while computing tax under Section 37 of Income tax Act as business expenditure due to the argument that since it is a mandatory provision under Section 135 of Companies Act no business could avoid and thus an expense incurred for the purpose of conducting business. However, income tax act was amended in 2015 which added explanation 2 to Section 37 which explicitly states that any money spent by a company for the purpose of Corporate social responsibility under Section 135 of Companies Act shall not be deemed to be a business expenditure incurred by the assessee under Section 37. The main legislative intent behind such an amendment is that the government wants the corporates to share the burden of government in social upliftment. Thus CSR contribution cannot be claimed under Section 37 of Chapter 4.
However a company can deduct 50% of the amount given to a trust that conducts CSR activity under Section 80G which comes under chapter 6A. The explanation under section 37 applies to only chapter 4 and not to chapter 6A. Therefore CSR contribution to a trust involving in CSR activities can deduct 50% of the contribution under Section 80G.
Advantages of CSR
Carrying CSR activities by the company will increase the goodwill of the company. It will create a good image among the public and would develop the brand name of the company. For eg Tata is a well reputed brand because of its corporate social responsibility and it’s charity activities to various social causes. Goodwill among people would reduce the burden of the company’s funds on marketing as the people would themselves make the brand popular due to the company’s concern on social problems.
Due to increased goodwill and high brand image the company’s sales turnover could increase. Higher sales lead to an increase in dividends to shareholders which would encourage other investors to invest in the company. Good reputation among people will encourage them to buy more of the company’s products due to the trust of people in the company.
The government recognises the social activities done by the company and there are bright opportunities to expand the business by venturing into new areas with the established goodwill and brand name. The government could give the company many business opportunities in the form of government tenders and several other contracts that could increase the revenue of the company.
Challenges in CSR
For the implementation of CSR the cost tied up for proper implementation so high. It increases the cost of labour involved, workload if a separate team managing CSR activities aren’t employed. Since CSR is a mandatory legal obligation due diligence, proper planning is needed which calls for the need for professionals which increases the labour cost. Since CSR involves the public the company should not compromise on quality and should discharge its responsibility without any risk that might endanger the public. For eg if a company is engaged in distributing food packets to the poor in the agenda of eradication of hunger, the company should be very careful that the food packets are of good quality which doesn’t endanger the lives of people. Thus CSR is a very big commitment to the corporates which involves increased cost and workload for effective discharge of the obligation.
The main business objective of every corporate firm is to maximize profits. If the company also has the mandatory obligation of social responsibility which calls for more attention and due diligence then there are high chances that the company would not have enough funds to achieve the main objective of the company. The mandatory obligation creates a barrier that could dilute the main business objective. There are very high chances of conflict between the method to achieve the main objectives and the policies for discharging corporate social responsibility.
Due to a very high workload the staff would work beyond the working hours that could affect the productivity and efficiency of the staff that could have a drastic effect on the main objective of the company. Due to an increase in workload the staff might also expect higher pay that could increase the cost. If the company fails to pay more that could lead to staff turnover and shortage of labour. So the commitment involved in CSR could create a huge workload on the employees and could increase the labour turn over.
Shareholder’s interest gets affected because CSR directly affects the profitability of the company and which could lead to a lowering of dividends. Due to an increase in cost to discharge CSR activities the burden is shifted to the shareholders of the company that could be detrimental to the interest of the shareholders. Sometimes the policies recommended by the CSR committee could harm the interest of shareholders. The mandatory CSR obligation could discourage the shareholders and other investors to invest due to high cost and less rate of return.
In a competitive environment all firms in a particular industry will not satisfy the criteria under Section 135 for mandatory CSR obligation. However a company that is eligible under the act will incur more cost on production which would increase the price of the product. However, another firm which doesn’t have the obligation of CSR could enjoy the competitive advantage of low price compared to its competitor’s price. As a result the company has a high chance of losing customers and market position due to the high cost associated with CSR activities.
Corporate social responsibility is a mandatory statutory obligation that should be complied with by all companies. Though corporate social responsibility creates a huge burden on the company, a successful company is one that could always balance the social and corporate objectives of the company. Implementation of CSR might be a Herculean task but complying with CSR obligation can create more opportunities and goodwill among the people. “Dhanam” Is one of purest forms of charity in Hindu culture without expecting anything in return. Rather than seeing this as a mandate it is some moral obligation of the companies towards the people that could make a company a social entity.
- What is Corporate Social Responsibility?
- Is corporate Social responsibility a mandate under Companies Act 2013?
- What are the benefits and challenges of Corporate Social Responsibility?