India’s New CSR Law is a Grand Experiment in Decentralized Tax Distribution

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Image Source: dansinhifi / Creative Commons

 

It hit me today, as I re-read India’s newly released rules regarding the mandatory CSR portion of the country’s revised Company’s ActIndia has decentralized the distribution and decision making process of some corporate tax dollars and empowered companies to determine what’s best for some money that would otherwise be taxed.

Now, hear me out.  Certainly, there is a lot of frustration surrounding the controversial idea that companies of a certain criteria must contribute 2% of their profits to society. I can understand why.  It’s essentially a new tax, on top of the regular corporate taxes – but the government refuses to call it a tax.

I don’t blame the companies for complaining, or the politicians for refusing to call it a tax!  It’s political suicide to introduce new taxes, plus who wants to be told that they have a new tax, and that the money generated must be given to qualified charities and/or force the company to go above a socially acceptable minimum requirement for ethical employment?  The whole thing reminds me of the scene in Office Space where Jennifer Aniston’s character gets chastised by her manager for only wearing 32 pieces of flair.  Companies, just as Aniston was in the movie, are now being required to go above minimum acceptable standards of operation, in order to do business in India.  The understandable knee-jerk reaction by companies is to scoff and tell off the government.

But can this type of legislation be a good thing?  Can the requirement be viewed as a positive and innovative way of looking at how governments operate?

A lot of pontificating is focused on the topic of how the designated money will / will not benefit India’s poor and enhance the country’s ecosystems.  What hits me as I read through the legislation and rules is that the country could’ve simply increased corporate taxes, like every other country, and done the usual inefficient wealth distribution to society.  Instead, it appears as though India actually listened to the companies and did what taxpayers requested.

Be careful what you wish for.

When I worked in Washington, DC at a major and influential corporate trade association, we’d often lobby Congress and the Administration to ease up on taxes because our corporate members would “do the right thing, and put money into projects when it’s needed.  It should be the company’s decision to do what it wants with its money, not a politician’s… so don’t tax the companies, they’ll do the right thing without pesky tax legislation.”  I eventually left the trade association to go work for Congress, where I continued to hear the equivalent to: “it’s my / my employer’s money, we should get to choose how to spend it.  The decision should not be left up to some no-good-unqualified-corrupt politician.”  When I was a corporate grantmaker, I heard the same thing from internal corporate leaders who wanted my budget to make them look good to certain audiences, and from charities that didn’t want to completely fill out request forms: “just give us the money and we’ll spend it wisely.”  And today, I still hear it as I advise donors around the world: “it’s our money, we’ll tell the charity how to use it” (by dictating that the charity must meet outcomes goals in order to receive the money).  Everyone wants to control how his or her money is spent.  Me included.

Well, I think India is calling the bluff.  By putting forward Section 135 in the revised Company’s Act, India’s government effectively said: “Yes, companies, it is your money, but it’s our country.  You get to put the money where you’d like within the CSR space, and we (the government) get to tell you what the minimum amount should be, what the CSR space looks like, and what qualities a decision maker on this important matter must have.”

India… effectively decentralized the distribution of tax dollars, by putting the money and decision making process directly back into the hands of the companies that made the money in the first place.  Brilliant.

The debate surrounding how much money will go into the country’s social sector doesn’t matter.  What does matter is that the legislation is disruptive in today’s tax and spend government world.

Effectively, the legislation kills the complaint that politicians shouldn’t be calling the shots on how to spend tax dollars, because the politicians are, presumably, unqualified to make the decision of what programs work or don’t work.  Even more seriously, it kills the assumption that politicians are corrupt, unqualified decision makers, and are funneling these tax dollars to their friends who are running a charity.

But with power comes responsibility.  Companies have the opportunity to demonstrate trust to the government.  I hope that they do so effectively.  Because, if companies can demonstrate that, in fact, they are qualified to more efficiently and successfully distribute tax dollars, as opposed to politicians and the government machine, then the precedent is set to expand the concept to more and more areas of tax law.

Just think, if this works, someday all taxpayers might be able to set aside part of a tax return for public benefit projects that are important to them, and not the politician whom we all can agree should never have been elected in the first place.

At their basic level, all governments have the goal to provide protection and social services for its population.  Governments must raise money to do this.  But that doesn’t mean that governments are always the best qualified to distribute money to achieve these goals.  Sometimes, the taxpayer is better positioned.  If an enabling environment is created where money is raised through governmental action to achieve goals, but the middleman handling the money and deciding where it’s used is removed, then more money is available to achieve those goals.  In social sectors, money put into programs is typically tied to success, and more programmatic money leads to more success.   India’s government removed the middleman and took it to the next step of saying that the taxpayer gets to also decide who gets the money and how it’s spent, within reason.

I know that if I had the opportunity to earmark 2% of my earned income for specific public benefit projects OR increase my tax rate to benefit government programs, I’d take the former over the latter every time.

India’s conducting a grand experiment, and one that I hope succeeds.

 

This post first appeared on the blog 2851 Communities on February 28, 2014. See the original post here.

About the Author

Leith Robotham HeadShotLeith Robotham is a global corporate community engagement specialist, assisting companies large and small to improve corporate image, brand and reputation among multiple stakeholders. Currently, Leith directs the corporate services and engagement activities of Kordant Philanthropy Advisors. Previously, he established Caterpillar Foundation’s international grants program. Follow Leith on Twitter @global_donor