SIMPLIFIED GUIDE TO CSR TAX IMPLICATIONS

In the realm of Corporate Social Responsibility (CSR), navigating tax implications is crucial for big companies. The Companies Act of 2013 mandates these companies to allocate 2% of their profits to CSR. This commitment, however, brings about tax complexities and alternative avenues for CSR fund utilization.

Changes in Tax Deductions

Traditionally, companies could deduct 100% of CSR expenses under Section 37 of the Income Tax Act, emphasizing the business-driven nature of these expenses. However, with the introduction of mandatory CSR requirements under Section 135 of the Companies Act 2013, direct CSR spending is no longer fully tax-deductible. This modification poses challenges for CSR managers, impacting both in-house and outsourced CSR activities.

Deduction under Section 80G

Section 80G of the Income Tax Act provides a 50% tax deduction for donations made to NGOs or Foundations for CSR projects. This includes corpus donations under Section 135 of the Companies Act. However, the company must ensure that the income from the corpus aligns with activities listed in Schedule VII. If not, creating an endowment fund for eligible purposes becomes a viable option.

TDS Applicability on CSR Expenditure

Whether a company executes CSR activities independently or through service agreements, Tax Deducted at Source (TDS) regulations apply. The nature of the payment, such as professional or contractual services, determines the necessity of deducting income tax or TDS for CSR expenses.

Choosing Between Grant and Donation

Considering the limitations on CSR expenses as regular business costs, companies must explore tax-efficient options. Grant agreements provide a fifty percent tax deduction under Section 80G, unlike commercial CSR contracts or agreements with NGOs, which lack tax advantages.

Understanding Grants and Donations

Differentiating between grants and donations is essential. Grants, with specific conditions and purposes, offer a structured approach to CSR funding. On the other hand, donations are more open and flexible. Companies opting for grant agreements enjoy tax benefits, while donations may lack certain tax advantages.

Considerations for NGOs

NGOs must exercise caution when entering service contracts with companies. If TDS is deducted for services under section 194J, the NGO might be considered a business operator, potentially jeopardizing their tax exemption status. NGOs should emphasize their charitable mission and formalize collaborations through grant agreements to maintain their nonprofit status.

For further inquiries, contact CA Siddharth Saraf at siddharth.saraf@sarkk.co.in or +91 940-722-0255.

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