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Socially Responsible Business

Mandatory CSR in India: A Bad Proposal

Looked at from the perspective of the political right, and the left, and the center, the proposed law making CSR mandatory is a really bad idea.

Companies all over the world are under increasing pressure to demonstrate that they are responsible citizens, with about 70 percent of large companies in Europe and the Americas reporting on their corporate social responsibility (CSR) initiatives. Despite this, the very concept of CSR remains controversial and has attracted strong opinions on both sides from academics, executives, social activists, and NGO officials. One point of controversy is whether companies should be legally required to report on their CSR activities. There already are mandatory CSR reporting requirements in several countries, including Sweden, Norway, the Netherlands, Denmark, France, and Australia. Going one large step further, the Indian government is seriously considering making CSR activities mandatory.

The lower house of the Indian parliament has passed a new Companies Bill that requires companies above a certain size to ensure that they spend at least 2 percent of annual profits on corporate social responsibility (CSR) activities. The upper house of the parliament is likely to pass the bill into law soon. Ernst & Young, the audit and advisory company, estimates that the law would cover about 3,000 companies in India and about $2 billion of expenditures on CSR activities. This will likely be the first time in history that a government has implemented mandatory CSR spending for a large number of companies.

Looked at from the perspective of the political right, and the left, and the center, the proposed law is a really bad idea.

Attack from the political center

The concept of CSR is controversial and experts do not even agree on how to define it, but both critics and enthusiasts do agree that CSR is voluntary by its nature. If passed, the confused proposal would mandate that companies act voluntarily!

Sachin Pilot, India’s minister of State for Corporate Affairs, was quoted as saying that the aim of the proposed law was to encourage "firms to undertake social welfare voluntarily instead of imposing that through 'inspector raj' and [to] make India an attractive and safe investment destination." There, of course, is nothing voluntary about this. Continuing in a contradictory manner, Pilot also said that India would become the first country to mandate CSR through a statutory provision.

Mandatory CSR is inherently contradictory. CSR is fundamentally an inspirational exercise, and it is very difficult to legislate aspirations. Laws only set minimum standards; they do not create any impetus for positive action. For example, it would be difficult to mandate that companies “build excellent schools” or be “generous to the community.”

The proposed law can be attacked on the basis of pragmatism as ineffective. It does not even discuss, let alone define, an enforcement mechanism or penalties for non-compliance. The proposal would be an enforcement nightmare, exacerbating an already bad situation where many laws are poorly enforced in India and further undermining respect for law. Curiously, the proposal even includes a loophole. If the 2 percent allocation is not made in a given fiscal year, the CSR committee has to submit an explanation to avoid being penalized. There is no discussion of what explanations would be legally valid, opening up much room for corruption and extortion.

Given the controversy surrounding the concept of CSR, it is not surprising that the proposed law does not define CSR for the purposes of expenditures. The proposal lists only a few genres of CSR activities: "eradiating extreme hunger and poverty," "promotion of education," and "ensuring environmental sustainability." This is much too vague to work as a legal definition.

Attack from the political right

A mandatory expenditure is a tax. The proposed law essentially imposes an additional 2 percent tax on companies covered by the bill. This is a back-door way to increase corporate taxes without a transparent political debate. The corporate tax rate in India is 32.45 percent—already one of the highest, compared to a global average of 24.09 percent, according to KPMG. Increasing the corporate tax rate will certainly not lead to making India a more “attractive investment destination,” as Pilot claims. Given the emphasis on economic liberalization and economic growth, it is unlikely that the Indian polity desires an increase in the corporate tax rate.

India has been doing well under its liberal economic regime, especially in the last decade, and has been one of the fastest-growing economies in the world. While inequality is a major problem, even the poor have benefitted from the economic growth, and millions of people have risen out of poverty to join the emerging middle class. This increase in government regulation and taxation is bound to make India less attractive to foreign investors and large national companies. The proposed law and the implicit tax will put India at a competitive disadvantage in the global marketplace and slow its growth rate.

Attack from the political left

While India has experienced rapid economic growth, the benefits of this growth have not been distributed equitably. Inequality, which was already high, has increased even more. India's Gini coefficient, the official measure of income inequality, has gone up from 0.32 to 0.38 in the last two decades. For example, about 50 percent of children in India are malnourished due to pervasive poverty. Trickle-down economics are not working. The proposed law does not go far enough in reducing inequality and helping the disadvantaged. Without a coercive enforcement mechanism, it is unlikely that the law will result in widespread compliance. In other words, “mandatory” CSR will remain largely voluntary.

Many activities that companies undertake are both profitable and good for society. Companies would undertake these activities regardless of the law, since they are profitable activities. Under the new law, they will be able to classify these activities as CSR with no real change in social welfare. Would a corporate training program qualify as “promotion of education”? Would making a profitable investment in an energy-efficient machine qualify as “ensuring environmental sustainability,” even if the firm made that investment on purely financial grounds? This is what is often derisively referred to as “greenwashing.” The proposed law would likely increase greenwashing with no real increase in green activities.

Even to the extent that there would be a real increase in socially beneficial activities, the spending would not go to democratically determined priorities, but rather to whatever the companies prefer to emphasize. It is the government's responsibility to determine high-priority needs of society and target public expenditures in these areas. With the proposed law, the government is abdicating one of its primary functions. It would be preferable for the government to impose a tax on companies and use the additional funds to provide public goods and reduce inequality in a systematic and democratic manner.

Conclusion

If the proposed bill passes, India would be the first country to mandate CSR expenditures. There is sound logic—from the left, right, and center—behind why other countries have not done this, and India shouldn’t either.

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COMMENTS

  • Joydeep Mukherjee's avatar

    BY Joydeep Mukherjee

    ON May 23, 2013 08:07 AM

    The article body presents a very compelling point of view. However, the opinion that a higher tax would be better could be debated on the grounds that what India needs today is a marked improvement in tax collection and simplification of tax processes, rather than an increase in taxes . That would in fact further slow down investment in an economy where there is already considerable dampening of growth rates in the past couple of years.

    That being said, total agreement on the point that a 2% CSR mandate is a really bad idea.

    Thanks Professor, for another fine analysis!

  • BY Dr Elijah Ezendu

    ON May 23, 2013 10:27 PM

    There’s a new movement for change in corporate governance compass, requiring mandatory recognition and reward to other providers of capital instead of only focusing on providers of financial capital (shareholders).  Check http://www.slideshare.net/ezendu/corporate-investment-structure-for-governance-analysis-by-elijah-ezendu

  • BY Piyush Shah

    ON May 24, 2013 06:29 AM

    A seemingly biased and cleverly written article. First, the author poses as a representative of all directions (left, right and centre) and passes off a judgement of this being a bad idea. There is a lot a criticism, but not a single suggestion of an alternative. So, if this was a bad idea from all directions, we need to invent a fourth dimension to represent the proposer of this bill. The professor is so intent in proving the judgement that he contradicts his own points (e.g: if the benefits have accrued to the poor) and cites examples and numbers that are not very accurate.

    There are debates on every single issue. Just that there is no agreement does not mean that there should be no action. I agree that the term “CSR” should be accurately defined. But the absence of a definition cannot be a constraint. The idea could be for the government to create a better definition and then go ahead with the tax.

    The idea here is for companies of indulge in CSR activities of their choice. So from this point there is a significant flexibility and companies can voluntarily choose their spends.

    To compare taxation from the KPMG report is again not a correct way. Instead of comparing just one number (corporate tax) it is better to calculate and compare the effective rate of tax. For example, in India there is no tax on dividend income. In other countries this is not so. Taking this into consideration, the effective rate might work out to be lower in India.

    The compulsion on wearing of seat belts may seem an infringement of democratic rights, but it is still imposed. Similar is the case with CSR. Without adequate CSR long term sustainability of these very firms would be a problem. Since companies are not doing this on their own, the government is being forced to step in.

    It is natural and normal for humans to have an inclination in a particular direction. It is close to impossible for the same person to look at one issue from the left, right and centre. A good idea in writing would be to let those biases be known so that the reader can make her own informed choice. Using good written communication skills to get one’s own point of view approved suits a politician and not a professor.

  • BY Aditi Gupta

    ON May 27, 2013 01:05 PM

    This article has ignored a lot of arguments in favor of mandatory CSR and is not compelling because it just gives one side of the story. I am only convinced of the disadvantages of reduced FDI attractiveness and complication of implementation (and hence maybe increased costs for the government and maybe increased scope of corruption).

    I see a huge potential in this bill, if of course the details are not as vague as mentioned above. Sure, a lot of companies will try to find the most ‘effective’ ways of doing CSR (effective for themselves) and will try to game the system, but the overall effect will not only be increased corporate spending on development, but also increased partnership from the most ‘efficient’ sector of our society. Companies will also be able to gain from the increased scope of public support and confidence and this competition will drive quality CSR further. Passing this bill might also actually enhance India’s world wide image as being a partner in serious developmental work. India will be looked as a pioneer and might inspire other countries to follow suit.

    These are just some of the arguments in favor of this bill. Even though there is a high probability of the final details being vague and full of loop holes, I believe that this is a step in the corrective direction and we are better with it than without.

  • jagdeep s sindhu's avatar

    BY jagdeep s sindhu

    ON May 27, 2013 11:26 PM

    Rightly summed up by Dr aditi . at least some initiative will start happening in CSR direction !

  • Business Houses should start giving back to the society. Its sad that to do so it has to be made mandatory. Another angle to CSR that Business Houses should consider is Cause Marketing. But it doesn’t end there. They also need to be a little more sensitive about the society through carefully figuring the impact their advertising might have.  And this is what should be made mandatory.
    A blog that totally had me agreeing to it was one by Nita Kapoor of Godfrey Philips India and her take on the same. Definitely a must read: http://causeitworks.wordpress.com/2013/05/27/sex-sells-time-for-introspection/

  • Prof. Prabha Panth's avatar

    BY Prof. Prabha Panth

    ON June 13, 2013 09:01 PM

    It is not just that CSR is to be made mandatory. It is also important to know the overall economic and social aspects of the corporate sector. For example, a Tobacco company can easily allot 2% of its profits to ‘education’ while continuing to produce cigarettes. Many top companies in India, such as Tatas have a bad social record, recall the farmers agitation in West Bengal against the Nano project. But Tatas has the largest allotment to CSR! Fertiliser companies take up tree plantations while continuing to ruin the environment, pesticide companies provide ‘child care’. The govt authorities themselves run amok when villagers and social activities fight for environmental protection. So is a mandatory 2% CSR enough to ‘greenwash’ these evils?

  • Dr Ajit Nigam's avatar

    BY Dr Ajit Nigam

    ON June 15, 2013 02:59 AM

    This is a Game Changer legislation. A must for India where contribution of Corporate houses for Society is so critical. But it can be made meaningful only if all the stakeholders viz. corporate world, NGOs and Government join hands to convert intent into action. It needs mind of corporate and heart of NGO.
    This is bound to change ecosystem of development sector and make NGO more professional.
    Following is essential to get bet return for the country:
      Accreditation of NGOs
      Professionalisation of NGOs
      Moving form Charity paradigm to strategy paradigm for corporates
      Innovative projects for CSR
      Evolution of CSR Consulting and Evaluation agencies

  • See Mauritius for a similar 2% CSR tax. They made CSR mandatory since 2009 and the results are worth analyzing.

  • Mandatory CSR is indeed a right kickstart proposal.
    inspite of the economy of India it is well know how much of “tax evading” business are being operated in every corporates.
    When a corporate body try to evade a tax theres no harm to mandate them a CSR expenditure.
    still they will try to evade csr expenditures also. it has to be scrutinized by Income Tax department with a dedicated audit body which should also reflect in the growth of India’s development

  • Narayanan PV's avatar

    BY Narayanan PV

    ON July 31, 2013 10:23 AM

    I would not go to the extent of saying it is biased - just a fair set of opinions I suppose - , but surely the writer could have spent some time going through the issues thoroughly. The drafting of the bill took place with wide consultation.  I agree that CSR has an inspirational element to it and is not exactly a business act necessarily requiring a legislation. Things are not so clear cut with Indian companies when it comes to social commitment whichever way you look at it. To its credit,  the thrust of the bill is on encouraging corporates to take part actively in community affairs and development. The focus is on mandatory disclosure.  The bill requires ratification in the Upper House.  Also, though it is believed that India is the first country to have gone the ‘mandatory’ way, it is not true. Mauritius perhaps has that ‘distinction’.

    http://www.welovemauritius.org/node/29

  • I’ve heard quite a number of views about people’s view of this rule as an additional “tax” and am of the opinion that CSR has to be voluntary. But the author could have connected the Bill to its history and other developments like the National Voluntary Guidelines and guidelines for the Central Public Service Enterprises… and like some persons pointed out, to its positive points and where the bill becomes fuzzy in its language.

    By the way, the Draft Rules are available for comment on public domain.

  • BY Emma Tomkinson

    ON November 3, 2013 08:59 PM

    There are no mandatory requirements in Australia that we can find. Sustainability reporting seems to be voluntary http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Browse_by_Topic/ClimateChange/responses/economic/Sustainability unless you can enlighten us with a reference to the contrary?

  • Siddharth's avatar

    BY Siddharth

    ON November 28, 2013 03:58 AM

    The professor should read the Act more carefully. It explicitly mentions that the spend should be on community members, not employees. Therefore, examples like corporate training and buying new machines don’t hold much water.

  • Krupa Desai's avatar

    BY Krupa Desai

    ON March 11, 2014 02:21 AM

    Dear Sir,

    although I am quite late to comment, there are some points I would like to put forward:
    1. How many companies are engaged in CSR as a mission in India?
    2. According to a research work in 2010, out of 500 top corporates in India, only 271 companies reported on CSR, which is only 54% of the total, and that too, their efforts are not directed towards a long term structured program.
    3. in a country where companies even do not intend to pay legal taxes as per required norms (*the reason we often see Income Tax department, service tax department, central excise department raid companies for recovery or say confirmatory transaction check); it would be too much to expect them doing CSR on regular and long term bases.
    4. being from Gujarat, there are many requirements I see from lots of companies operating here in Gujarat, India, towards the uplift of people and society but I am not at all happy to say that barring a few exceptions, no large scale organization is doing any great in the field of CSR.

    I would definitely FAVOUR a compulsion on corporates to spend 2% of their profits to CSR and not only that, they should be asked to create specific committees in one particular region (a common fund used to benefit society )and operate like corporates to ensure the utilization of funds.

    comments welcome !

  • Mihaela C's avatar

    BY Mihaela C

    ON March 17, 2014 10:24 AM

    India is not the first country in the world to adopt such a measure. In Indonesia CSR is mandatory since 2007 and in Mauritius since 2009. I believe that before arguing in favor or against such measures one should look at how mandatory CSR works (or not) in other countries and learn valuable lessons.

    Furthermore I recommend studying the case of FECHAC (Mexico) for a brilliant approach to CSR that leverages the best of both mandatory and voluntary CSR regimes.

     

  • Its so nice how CSR activities has been made mandatory, its a very good step on part of the Government. I was looking for a few articles on <a >CSR activities in India</a> and I came across yours inspiring read.

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