New CSR Regime – Is It Philanthropy Or A Tax Levy

Apart from casting onerous legal obligations on the company, the new CSR regime provides for the imposition of stringent monetary penalties for non-compliance with the CSR mandate. Under Section 135(7), stringent penalties can be imposed on the company, and every officer in default. Although Section 135(7) has been ‘decriminalised’, it is among the few provisions of the Act where the quantum of ‘penalty’ has not been significantly reduced.

Within a span of eight years, there has been a major departure from the original objective of CSR, which was envisaged to encourage corporate philanthropy. During the parliamentary debate on the Companies Bill, the then Minister for Corporate Affairs had given a categorical assurance to Parliament that CSR expenditure shall only be voluntary. With the notification of the new CSR regime, the CSR obligation is now akin to an additional tax liability imposed on companies.

Obligating companies to spend 2% of net profits on CSR, but not allowing tax deductibility of such legitimate expenditure is harsh and unfair to companies – particularly when such expenditure could be availed as a tax deduction under various provisions of the Income Tax Act, prior to the introduction of Section 135. The CSR obligation is applicable only when one carries on business through a company registered under the Act. Other forms of business organisations like partnerships, LLPs, and sole proprietorships do not have to fulfill this obligation even if they have bumper profits. One could argue that this is arbitrary and unreasonable. It is doubtful whether this provision will pass the test of judicial scrutiny, if one were to challenge its constitutional validity under Article 14 and 19(1)(g) of the Constitution.


[1] Explanatory Notes to the provisions of the Finance Act, 2014, Central Board of Direct Taxes Circular No. 01/2015, issued on January 21, 2015.

[2] The MCA had set-two High Level Committees on to examine the CSR framework, in 2015 and 2019.

[3] State of Rajasthan v. Basant Agrotech (India) Limited, (2013) 15 SCC 1; Mahabir Vegetable Oils Private Limited v. State of Haryana, (2006) 3 SCC 620; M.D. University v. Jahan Singh, (2007) 5 SCC 77; State of Madhya Pradesh v. Tikamdas, (1975) 2 SCC 100.

[4] Under Section 469(1), the Central Government may, by notification, make rules for carrying out the provisions of this Act. Section 469(2) states as follows – “Without prejudice to the generality of the provisions of sub-section (1), the Central Government may make rules for all or any of the matters which by this Act are required to be, or may be, prescribed or in respect of which provision is to be or may be made by rules”.

[5] The term “ongoing project” defined under Rule 2(1)(i) of the CSR Rules (as amended on January 22, 2021). Under Rule 2(1)(i), – “Ongoing Project” means a multi-year project undertaken by a Company in fulfilment of its CSR obligation having timelines not exceeding three years excluding the financial year in which it was commenced, and shall include such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the board based on reasonable justification.

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