Thread by @menakadoshi

Make no mistake. This is a tax. A terrible one at that. Because it's disguised. #CSR

https://twitter.com/nsitharamanoffc/status/1156214500783034368

So after companies have paid tax on their taxable income, they have to pay a tax on the profit too. #CSR

No small amount. 2% every year.

So far #CSR was a "comply or explain" provision. Probably the first one in Indian company law.

That means - the company must comply with the provision or explain to shareholders why they haven't complied.

Common in corporate governance provisions in the west.

Now an amendment to the Companies Act, 2013 seeks to make #CSR contribution mandatory.

That is, if you don't spend it Mr. Company, please hand it over to government funds.

By the way...#CSR according to company law is to be spent on a defined list of activities. While that's a good safeguard against promoters squirrelling it away, it also limits the causes a company can support under this provision.

But, that's not the main point of this thread.

It’s nobody’s case that companies should not do their bit towards nation/society/community building.

Increasingly, aware or ‘active’ shareholders are demanding that companies not only avoid doing any harm (environment, displacement, discriminatory behaviour) but also consciously participate in, or fund, activities that make the world a better place.

Many self-aware companies are doing #CSR voluntarily.

If they aren't, a comply-or-explain provision allows shareholders to nudge companies towards that.

There's peer pressure too.

So, shaming companies into #CSR was enough, most might say.

Besides, there have been challenges of deployment, scale, monitoring completion/outcomes.

Spending money is no easy task. And for some of the larger companies the spends have been substantial.

In FY18,
Reliance Industries spent Rs 745 crore, more than prescribed.

TCS spent Rs 400 crore, less than prescribed.

Finding the right #CSR projects that can absorb such large amounts in one year is super tough. Shareholders would be enraged if outcomes were not commensurate.

Often companies, like TCS and RIL, would pace themselves...such that they'd meet the #CSR goal over a few years.

But now they may not have that option.

They either spend it that year, unless earmarked for an ongoing project, or give it away to a government specified fund.

For a company that's not sure about being able to deploy the #CSR money efficiently and effectively in the year, instead of spending on poor outcomes, it would rather give it to a government fund.

Or else it may stand accused of frittering away the money.

Already PSUs do that.

In FY17, of the Rs 535 crore that ONGC spent on #CSR, over Rs 100 crore went to the Pradhan Mantri Ujjwala Yojana.

You're wondering what the big deal is about a few hundred crores going to a government fund.

Well, it's a few thousand crores.

In 2014-15, 16,785 Indian companies spent Rs 10,066 crore towards #CSR

The number rose to over 22,000 companies and Rs 18,000 crore the next year.

In FY17 over 21,000 companies spent Rs 14,242 crore.

And in FY18, 3,117 companies spent Rs 8,365 crore.

The spends are ofcourse linked to economic/financial performance in that year but are also lumpy, based on project execution etc.

Now companies may no longer have that luxury.

Spend or give it away.

Or, and here's the clincher, go to jail.

The companies act amendment bill provides for sending every officer of the company to jail in case of #CSR non compliance.

Read this.

So now India will jail corporate officers for failing the philanthropy test.

That's not #CSR. It's the kind of punishment they hand out to tax evaders.

So, why not just call it a tax?

I couldn't agree more with everything @VUmakanth has said in this op-ed. But in a kinder tone.

bloombergquint.com/opinion/new-cs…