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Taxation on CSR activities

There is a lot of confusion about whether companies can deduct any expenditure on CSR activities from their income – if they can offset this expenditure from their income, it at least has the benefit of reducing their tax liability.
However, the Finance Act, 2014 has clarified that any contribution made on the activities related to CSR under the Companies Act will not be considered as business expenditure, because it is an ‘application of the income’ and not expenditure. There will be no tax deduction available for such contribution (the provision will be applicable from 1 April 2015).
However,the Finance Act also clarified that if a company spends on any of the expenditure described in sections 30 to 36 of the Income Tax (corresponding with the listed activities in Schedule VII, like skill development projects, programmes for rural development, programmes for conservation of natural resources, agricultural extension projects) other than capital expenditure or personal expenses of the assesse, it can be deducted as a business expense.
There is no clear clarification on whether the contribution made to a charitable trust which carries on any of the activities listed underSchedule VII of the Companies Act, 2013 will be liable for tax deduction under Section 80-G of the Income Tax Act.There are two views on this (you can see this video from Moneycontrol here):
  1. If the contribution relates to Schedule VII and is made to a charitable trust which is capable of furnishing an 80-G certificate, then it will be treated as a CSR contribution. A tax rebate can also be obtained.
  2. The second view (articulated by Mr. Shardul Shroff in the video) follows from the wording of the MCA clarification, which states that ‘corpus’ contributions to a trust, society or non-profit company constitute as CSR. Now, section 80-G donations are typically charitable in nature and different from corpus contributions which are essentially a capital contribution. These corpus contributions essentially amount to giving away a large monetary sum to the capital of an entity, and are not in the nature of ‘expense’ on a particular activity.
Another interesting understanding of the impact of this provision is that, as the CSR expense would be calculatedabove the net profit of the company, the actual CSR spending would be higher than 2 % of the net profit.Until there is a clear notification, it is suggested that companies can indulge in activities which would coincide with the activities under Sections 30-36 for the contributions upto 2 % in charitable trusts and spend rest amount for activities with charitable trusts which are subjected to deductions under section 80G.

This creates a very complex situation, so we have created a mindmap to help you:

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