India’s Answer To Corporate Apathy — The CSR MandateGuru Prasad | June 16, 2015
In 2013, the Government of India passed a mandate that made CSR spending obligatory for many organisations in the country. By and large, this rule ushered in a new era of corporate social responsibility and pumped some coin into the cobwebbed coffers of Indian nonprofits. The organisations that tirelessly sought to make a difference now had plenty of resources to do so, thanks to the big corporates that were eager to lend them funds.
But most nonprofits had inadequate capacities and weren’t capable of effectively handling the sudden surge of financial aid. This meant that corporates also needed to help their beneficiaries with capacity building—monetary aid wasn’t the only answer. In order to do this effectively, organisations had to first create clear-cut CSR policies that defined core objectives. Moreover, they also required measurement models that could accurately evaluate the efficacy of social programs.
As many corporates weren’t fully aware of the intricacies within the CSR domain, they sought professional help. Vardaan has been providing end-to-end consulting services to organisations in this regard.
The CSR mandate has resulted in a number of positive changes all over the country. But before we get right into them, let’s take a look at how the Act actually works.
The 2% Mandate
If a company has a net profit of ₹5 crore or more per year, then it needs to spend at least 2% of its average net profits from the preceding three years on social initiatives. The rule also applies to companies that have annual turnovers of ₹1000 crore or are valued at over ₹500 crore. Now, corporates pay a 30% tax in India, which can turn out to be quite a hefty figure for companies with large incomes. But the CSR mandate states that corporates need to pay 2% of their profits before being taxed. Which means that they shell out almost 2.857% of their profits in reality.
A company’s CSR spending cannot be deducted from its taxable business income. This is because CSR expenditure is seen as an application of income, which is not tax-deductible under Indian law. Apart from increasing corporate spending, one of other main aims of the 2013 act was to bring SMEs into the CSR mix.
Large-Scale Contribution Of The SME Sector
SMEs undoubtedly have a large influence on the country’s economy, and they can potentially be just as impactful in bringing about social change—according to a 2013 survey, nearly 40% of India’s workforce is employed by these organisations. Many SMEs conduct their business activities in proximity to rural communities and are collectively more aware of the community’s needs. This allows them to tailor realistic social programs that create the necessary impact.
After the 2013 mandate, any company with a net profit of ₹5 crore or more had to participate in CSR activities. The Act ensured that these organisations could collectively pool their resources in order to create a sizeable CSR fund. This kind of an alliance proved to be highly beneficial to SMEs, allowing them to reduce their operational costs. In addition, they have also been able to focus more on developing long-term projects that need more resources to be accomplished. Due to the CSR mandate, SMEs in the country are today promoting a variety of causes such as education, environmental sustainability and gender equality.
Increased Domestic CSR Expenditure
Given their higher levels of regulation, it may be understandable that foreign companies end up spending more on CSR initiatives than Indian organisations. The average CSR expenditure by foreign firms has been significantly more than their Indian counterparts in both, 2011 and 2012. But in 2013, the average CSR expenditure by Indian firms rose by about 700%, comfortably outstripping foreign MNCs. In one way, the mandate has definitely improved the engagement levels of Indian organisations in social causes.
Although the CSR mandate has created a positive impact in India, there’s still a lot that needs to be done. Tackling the inadequate capacities of Indian nonprofits is a particularly major challenge. After all, nonprofits are ever at the forefront of social change, and in better shape, they can help corporates work some real CSR magic.