Ey Csr Opportunities and Challenges Tax Perspective

Corporate Social Responsibility (CSR) Opportunities and Challenges- Tax Perspective Tax Perspective .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 Page 2 CSR .Opportunities and Challenges. Applicability of CSR Applicable to all companies incorporated in India and having either of the following in any financial year – Section 135(1) 1. Net Worth of INR 500 crore or more.Opportunities and Challenges. Turnover of INR 1000 crore or more.Tax Perspective . Net Profit of INR 5 crore or more Page 3 CSR . OR 3. OR 2. the Scheduled Tribes. 1961 (Section 80G) I. towns or villages etc. (v) Combating human immunodeficiency virus. minorities and women. 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. (vii) Employment enhancing vocational skills. (viii) Social business projects. acquired immune deficiency syndrome. Following donation allowed subject to a maximum of 10% of the Adjusted Gross Total Income: A.Opportunities and Challenges.Permissible CSR activities Under the Companies Act. 2013 (Schedule VII) Eradicating extreme hunger and poverty. Donations to Government for promoting family planning etc – 100% allowed B. (iii) Promoting gender equality and empowering women. Governor's Relief Fund Approved university or educational institution of national eminence. malaria and other diseases. II. other backward classes. (ii) Promotion of education. and (x) Such other matters as may be prescribed (i) Page 4 Under the Income-tax Act. (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. etc.Tax Perspective . CSR . (vi) Ensuring environmental sustainability. Eligible for 50% deduction: • Donations to Government for other charitable purpose • Donation for housing accommodation/ improvement of cities. (iv) Reducing child mortality and improving maternal health. For the purpose of First CSR reporting the Net Profit shall mean average of the annual net profit of the preceding three financial years.000 Total (A) 5. Particulars Amounts (in INR) Page 5 Net Profit before tax as per books of FY 2013-14 2.733 CSR expenditure for the FY 2014-15 (B*2%) 34. computed as per section 198 of the Companies Act.500 Net Profit before tax as per books of FY 2012-13 1. 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 2014-15.67 CSR .200 Average of annual net profit of the preceding three financial years B (A/3) 1.Computation of CSR expenditure – Draft CSR Rules ► ‘Net Profit’ means net profit before tax as per books of accounts.Opportunities and Challenges.Tax Perspective .700 Net Profit before tax as per books of FY 2011-12 1. loans or advances Compensations/ damages in virtue of legal liability.permissible deductions: Income tax paid under Income Tax Act. For details.revenue expenditures.Tax Perspective . please refer Annexure 1 Page 6 CSR . income will be considered for the amount in excess of WDV but limited to difference between WDV and Original Cost) *Permissible Deductions: Usual Working Charges. 1961 Loss of Capital Nature Compensations/ Damages paid voluntarily XXX Net Profits as per Section 198 XXX *Illustrative list.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: 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 XXX (Provided when the asset is sold for a consideration higher than WDV.Opportunities and Challenges. bad debts written off… (XXX) (XXX) (XXX) (XXX) *Non. bonus or commission Abnormal or Special Tax Interest on debentures. CSR and Tax Benefits to the Society CSR eligibility Meeting Point? Tax deductibility Benefits to the Business Page 7 CSR .Opportunities and Challenges.Tax Perspective . Opportunities and Challenges. in which year would the expense be deductible? Can deduction be claimed on the basis of provision towards this expenditure.Tax Perspective . 1961? ► Does it make any difference to the proposition if expenditure is perceived to be a capital expenditure? ► If considered to be deductible. whether the deduction can be allowed under Section 37 of the Income-tax Act. without having actually incurred the expenditure? CSR .Tax issues on CSR Tax issues on CSR Page 8 ► Whether CSR is charge or appropriation of profits? ► In the absence of specific provision for deductibility of CSR expenditure. 1961 No carry forward of unspent amount No investigation into the books of the company Possible defenses ► ► ► From financial reporting perspective.Tax 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 ► ► Page 9 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 CSR . hence character of appropriation No provision under Income-tax Act.Tax issues on CSR - Denial of CSR expenditure ► Legal obligation ► ► ► Appropriation v/s charge to profit + CSR to be incurred only by specified class of companies.Opportunities and Challenges. Opportunities and Challenges. 1961 Denial of CSR expenditure ► ► + Possible defenses ► ► ► Capital expenditure Page 10 + Essence for deductibility under section 37 .Expenditure must 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 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) CSR .Tax issues on CSR Deductibility under Section 37 of the Income-tax Act.Tax Perspective . Opportunities and Challenges.Tax Perspective . 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 Page 11 CSR .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. Specific provisions of ITA to improve prospects of deductibility of CSR Sr. university college or other institution to be used in social science or statistical research.75 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 1.25 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 35CCC Expenditure on agricultural extension project Any expenditure on agricultural extension project notified by CBDT 1. 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.Tax Perspective .Opportunities and Challenges.5 Times of sums paid 6 35CCD Expenditure on skill development project Any expenditure (not being expenditure in the nature of cost of any land or building) on any skill development project notified by CBDT 1. 1.25 times of sum paid 3 35(1)(iii) Donation based Sum paid to research association. college or other institution to be used for scientific research 1.5 Times of sums paid 7 35AC Donation based Sum paid to public sector company/local authority/etc for carrying out any eligible notified project for promoting social and economic welfare of the public 1Time of sums paid Page 12 CSR . Society 3. Section 8 Company Page 13 CSR . Public Trust 2.Opportunities and Challenges.Alternative forms of business Key parameters for evaluating alternative forms of legal presence: • Minimal procedural/ compliance implications • Other Commercial Drivers Typical forms of legal presence in India for setting up a “Charitable/ Not-forProfit” institution: 1.Tax Perspective . that other person has to uphold the trust reposed in him An association of persons united together by mutual consent to deliberate. if the society is registered under section 12AA Page 14 CSR .” with no profits objective Objective Social Benefits and charitable Literary. science. Charitable. determine and act jointly for some common purpose A company with limited liability formed for “promoting commerce. If a person. religion. charity or any other useful object.provided utilisation for funds for the charitable purpose Section 8 company’s income is exempt under the Act.Tax Perspective . entrusts his property to the care of another person for a specific purpose or period.Alternative forms of business Public Trust Society Section 8 Company (Section 25 of Companies Act.Opportunities and Challenges. art. out of free will. Scientific and resource oriented Non-profit Activities Benefits to Donor Deduction of 50% of donation from the taxable income Deduction of 50% of donation from the taxable income Deduction of 50% of donation from the taxable income Taxability Income exempt under section 12 of the Act.provided used for the charitable purpose Income of a society is exempt under section 12 of the Act. 1956) Form of entity The concept of ‘trust’ flows from the faith of one person in another person. Tax Perspective .Opportunities and Challenges. Necessary to claim deduction ► Current CSR programs need to be viewed and evaluated for compliance with CSR guidelines Page 15 CSR .Key Takeaways ► There is a need to develop appropriate CSR policy ► Fulfillment of CSR is the need of the hour ► Deduction of CSR expenditure for tax purposes will be an important consideration ► Documentation to reflect some connection / benefit to business. [email protected]@in. Associate Director pradeep.ey.ey.com Aditya [email protected] Ritika Loganey [email protected] Prashant [email protected] Tejas Desai Partner tejas.com Riad Joseph. Associate Director sheetal. Senior Manager aditya.ey.com Delhi Hyderabad Kolkata Rajiv [email protected]. Associate Director mitesh. Partner prashant. Partner riad.sanghvi@in. Senior Manager chetan.ey.com Mitesh [email protected] Page 16 . Partner [email protected]@in. Associate Director riitka.com Mumbai Mumbai Pune Jaideep Kulkarni.com Jayesh [email protected] Dinesh Agarwal.ey.com Deepa Bhatia [email protected]@[email protected]. Partner jaideep.ey.ey.com Sheetal Shah. Partner dinesh.com Dhinal Shah.ey.com Vidya Nagarajan. Associate Director deepa.ey.com Chetan Kakariya.Key Tax Contacts Ahmedabad Bangalore Chennai Sunil Kapadia. Partner [email protected] Pramod Achuthan. Partner pramod.joseph@in. Partner dhinal.com Rohit Bothra. Partner vidya.com Pradeep Narayanan. Partner [email protected]@in.ey. Senior Manager rohit.gada@in. com © 2013 Ernst & Young All Rights Reserved.ey.Thank You This presentation provides general information existing at the time of preparation. It is recommended that professional advice be taken based on specific facts and circumstances. EY is a registered trademark . ERNST & YOUNG LLP www. This presentation does not substitute the need to refer to the original pronouncements. The presentation is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this presentation will be accepted by Ernst & Young. Detailed List as per Section 198 Deductions to be made ► ► ► ► ► ► ► ► ► ► ► ► ► ► Usual working charges Directors’ remuneration Bonus or Commission Any tax in the nature of a tax on abnormal or excess profits Any tax imposed for special reasons Interest on debentures issued by Company Interest on mortgages executed and on loans secured by a charge Interest on unsecured loans and advances Revenue expenses on repairs Outgoings inclusive of contributions under section 181 i. damages or payments made voluntarily otherwise than in virtue of a liability ► Loss of capital nature including loss on sale of undertaking not including any excess of Written Down Value over the Sale Price/ Scrap Value ► Any change in carrying amount of an asset/ liability recognized in equity reserves CSR . 1961 or any other tax not covered in other category ► Any compensation.Opportunities and Challenges. to bona fide charitable and other funds Excess of expenditure over income in previous years computed as per this section Compensations/ damages paid in virtue of legal liability Insurance premium Bad debts written off or adjusted Page 18 Annexure 1 Deductions not to be made ► Income tax and super tax paid by the company under the Income Tax Act.Tax Perspective .e. Lake Palace Hotels & Motels (P) Ltd. VeluManickam Lodge (123 ITD 25)(Chennai) 6 CIT v. serving dual purpose of benefitting the employees as also social commitment3. (7 ITR (Trib) 161](Delhi) Page 19 CSR .Deduction of CSR expenditure Relevant case laws Annexure 2 CSR expenditure was held deductible in the following cases: Funds provided for establishing drinking water facilities and providing aid to school meant for residents of the locality in which the taxpayer operated1.  Sponsorship of sports tournaments bearing the sponsor’s name on banners and association with the trophy6. Madura Coats Ltd. [24 DTR 24](Mad) 3 Infosys Technologies v. [293 ITR 281](Raj) 7 ACIT v. Ranbaxy Labs Ltd.Tax Perspective .Opportunities and Challenges.  Expenditure on community assistance programmes and welfare measures undertaken in the vicinity of taxpayer’s manufacturing unit2. [266 ITR 170](Mad) 2 CIT v. JCIT [109 TTJ 631](Bang) 4 Jindal Steel and Power Ltd.  Construction of hockey stadium for use of local residents5.  Trips to Bhuj and Jamnagar post earthquake for relief work4.  Installation of traffic lights in the vicinity of taxpayer’s office to improve traffic situation.  1 CIT v. [16 SOT 509](Delhi) 5 ITO v.  Contributions made by Pharma company to health care society and science foundation allowed as it would bring Goodwill to the assessee7. Madras Refinery Ltd.