Context
The Ministry of Corporate Affairs (“MCA”) introduced the concept of Corporate Social Responsibility (“CSR”) for the first time through the Voluntary Guidelines on CSR, 2009. These guidelines encouraged companies to formulate policies to undertake CSR, provide for its strategic planning and a roadmap for its CSR initiatives. As a mandatory legal requirement, CSR was first codified in Section 135 of the Companies Act, 2013 (“CA 2013”). As recognized in the 21st Report of the Standing Committee on Finance on the Companies Bill, 2009, this was the first time in India, and also probably in the world that CSR was being introduced as a mandatory requirement.
As per Section 135(1) of CA 2013, every company having a net worth of rupees five hundred crores, turnover of rupees thousand crores or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a CSR Committee. As per Section 135(5), the Board of every company specified in Section 135(1) shall ensure that the company spends at least two per cent of the average of net profits for the preceding three years on activities related to its CSR policy in each financial year.
The provisions related to CSR under Section 135(5) also prescribe that every company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.
CSR is a social welfare legislation with the objective of promoting states and areas that are less developed and for the benefit of the less privileged/ marginal class. However, due to the inclusion of the proviso relating to local area preference, maximum CSR money is spent in economically advanced states, and the states that need funding for economic development are getting meagre amounts of allocation as most large corporates are located in Western India. This is evident from the statistics on CSR in the Annual Report 2024-2025 published by the MCA (“Annual Report”). In this blog, we are making a case for revisiting the scheme for CSR spending and for incentivising companies to spend their CSR money in less developed states by way of tax benefits.
The Law, its Objectives and Statistics
Law
The language of the proviso indicates that companies shall give preference to local areas, but they are not mandated by law to only incur the CSR spend in the local area. The Frequently Asked Questions on CSR (“CSR FAQs”) issued vide General Circular 14/2021, dated August 25, 2021, also explicitly clarify that “the spirit of the Act is to ensure that CSR initiatives are aligned with the national priorities and enhance engagement of the corporate sector towards achieving Sustainable Development Goals (SDGs). Thus, the preference to local area in the Act is only directory and not mandatory in nature and companies need to balance local area preference with national priorities.”
Objectives
Although formally introduced in 2013, CSR finds its roots in the concept of ‘lok-kalyan’, which suggests that it is the duty and responsibility of capable people, who are in the position, to work for the collective upliftment of society. The Supreme Court envisaged the extension of this concept to companies in as early as in 1951, in Chiranjit Lal Chowdhuri v. Union of India[1], where they held that, “we should bear in mind that a corporation, which is engaged in production of a commodity vitally essential to the community, has a social character of its own, and it must not be regarded as the concern primarily or only of those who invest their money in it.”
This idea was further reaffirmed by Justice Bhagwati in National Textile Workers’ Union v. P.R. Ramakrishnan[2], where he opined that, “…social scientists and thinkers regard a company as a living, vital and dynamic, social organism with firm and deep-rooted affiliations with the rest of the community in which it functions. It would be wrong to look upon it as something belonging to the shareholders…. A company, according to the new socio-economic thinking, is a social institution having duties and responsibilities towards the community in which it functions.”
Statistics
Detailed statistics on state and sector-wise CSR spending by companies are published in the Annual Report. The Annual Report provides detailed data on cumulative amount spent by companies for financial years 2014-15 to 2022-23, as per filings made up to March 31, 2024, in the MCA21 registry. Some excerpts of CSR spendings as per the Annual Report are illustrated below:
(in Rs. Cr)
| Sr. No. | State/UT | Amount Spent FY 2019-20 | Amount Spent FY 2020-21 | Amount Spent FY 2021-22 | Amount Spent FY 2022-23 | Cumulative amount from 2014-15 to 2022-23 |
| States receiving highest CSR spending | ||||||
| 1 | Maharashtra | 3,353.24 | 3,464.81 | 5,380.07 | 5,494.77 | 29,531.31 |
| 2 | Karnataka | 1,448.16 | 1,277.81 | 1,839.73 | 1,985.23 | 11,006.31 |
| 3 | Gujarat | 984.37 | 1,461.60 | 1,603.93 | 1,982.26 | 9,809.48 |
| 4 | Tamil Nadu | 1,072.26 | 1,174.07 | 1,432.06 | 1,558.66 | 8,459.93 |
| 5 | Andhra Pradesh | 710.23 | 719.81 | 656.79 | 954.63 | 6,718.77 |
| States receiving lowest CSR spending | ||||||
| 1 | Mizoram | 0.25 | 0.97 | 6.94 | 10.99 | 23.10 |
| 2 | Nagaland | 5.10 | 3.57 | 12.46 | 13.57 | 41.23 |
| 3 | Tripura | 9.40 | 9.29 | 15.91 | 19.26 | 82.77 |
| 4 | Sikkim | 10.99 | 17.28 | 28.24 | 36.18 | 114.91 |
| 5 | Meghalaya | 17.65 | 17.63 | 19.63 | 21.73 | 123.36 |
Data up to March 31, 2024, which is a cut-off date of CSR filings for FY 2022-23 [Source: Corporate Data Management Cell]
As per the data, a whopping INR 1,84,222.87 crores was spent by companies from 2014 to 2023 on CSR activities and projects across India. While the amount seems to be staggering, a finer examination of the data highlights that the CSR spending has not been uniform or evenly undertaken amongst all the states. Maharashtra has received the most CSR spending during the eight-year period, at INR 29,531.31 crores being spent of CSR activities. Other states that received a major chunk of the CSR spending are Karnataka (INR 11,006.31 crores), Gujarat (INR 9,809.98 crores), Tamil Nadu (INR 8,459.93 crores), Andhra Pradesh (6,718.77 crores) and Delhi (INR 6,694.70 crores). A stark contrast can be seen in the CSR spending trends in smaller states. Mizoram received the least CSR spending (amount spent on CSR activities) during the eight-year period with just a mere amount of INR 23.10 crores being spend on CSR activities. A similar downward trend in CSR spending can be seen in other smaller states, such as Nagaland (INR 41.23 crores), Tripura (INR 82.77 crores), Sikkim (INR 114.91 crores), Meghalaya (INR 123.36 crores), Manipur (INR 127.58 crores) and Arunachal Pradesh (INR 234.42 crores).
Therefore, only a miniscule share of four per cent of the total CSR spending during the eight-year period was received by the above-mentioned seven states. Additionally, on examining the year after year CSR spendings through the eight-year period, an upward trend and exponential growth can be seen in the bigger states, such as Maharashtra, Karnataka, Gujarat, etc., while the CSR spending in smaller states have continued a downward trend or stayed stagnant.
Reform required
The statistics highlight that while the overall CSR spend has been increasing year-on-year, there is disparity in CSR spending in large states, such as Maharashtra, vis-à-vis smaller states, such as the seven sister states in Northeast India. This, in our view, can be majorly attributed to the proviso pertaining to local area preference, as larger industries and conglomerates are housed in the former. While we understand that the objective of the proviso may be to consider the local public and environment as additional stakeholders and spend on projects that may benefit them, it undermines the broader social objectives as enshrined in the Directive Principles of State Policy of the Constitution.
To bridge this gap, in our opinion, the MCA must every year, identify and notify states (“Identified States”) that can better use CSR funds, and incentivise both, public and private sector companies to allocate their CSR budget to these Identified States. Such incentives to the corporates may be by way of fiscal and non-fiscal benefits and recognition.
One such incentive may be to allow such expenditure as tax deduction, by amending Section 37(1) of the Income Tax Act, 1961 (“Income Tax Act”). As it stands, Explanation 2 of Section 37(1) states that, “for the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135…..shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.” In our opinion, an amendment to Section 37(1), carving out an exemption for CSR expenditure in Identified States will be sufficient to legitimise the incentive.
Such encouragement to spend more in underdeveloped areas is also in furtherance to the ‘socialist’ nature of the State and Article 38 of the Constitution, that requires the State to promote the welfare of its people. It obliges the State to strive to minimise inequalities in income, and endeavour to eliminate inequalities in status, facilities and opportunities, not only among individuals, but also among groups of people residing in different areas. Article 39 requires the State to frame its policy in a way that the operation of the economic system does not result in concentration of wealth and means of production to common detriment, and ownership and control of the material resources of the community are so distributed as best to subserve the common good.
The Government may also consider certain non-fiscal benefits such as recognition and national awards for companies that promote CSR spends in less developed states.
Constitutionality
In our opinion, such an amendment to Section 37 of the Income Tax Act will stand the test of judicial scrutiny on grounds of reasonable classification and rational nexus theory as interpreted by the Supreme Court of India for Article 14, dealing with right to equality. Moreover, such an amendment is in furtherance of the Directive Principles of State Policy as enshrined in Articles 38 and 39 of the Constitution.
Concluding Thoughts
Geographically, India is a large country with diverse population and has 28 States and 8 Union Territories, at different stages of economic development. For historical reasons, Western India has always been far more advanced in terms of economic development as compared to the Northeast, or even Eastern India. The current provision has led to developed states getting more and more allocation of CSR funds as most large corporates are in that region. To promote equality and equitable distribution of resources, it would be better if Parliament was to relook Section 135 and various tax provisions to incentivise and promote the development of lesser developed states. Amendment of Section 37 of the Income Tax Act to incentivise companies to allocate CSR funds to lesser developed states will be a small step in that direction.
[1] AIR 1951 SC 41.
[2] (1983) 1 SCC 228.
