Chaitanya D. Joshi
Director, Bansi S. Mehta & Co. Chartered Accountants
Background:
Today, the whole world is facing the wrath of global warming, extreme climatic conditions etc., thanks to
the fast-growing economies which is the outcome of globalization. If they say that the whole world has
now become a ‘global village’, then one will also, with sorrow, have to admit it that “it is the global
village which is “de-prospering or deteriorating”. The human species, being blessed with the highest
intellect (as they self-proclaim) has woken up to the warning bell nature has rung, howsoever late in the
day it is, only to realise that it has now come to terms with what mother nature has to offer. ‘Necessity is
the mother of all inventions’, everyone knows this. So, this deteriorating ‘global village’ has sensed the
need for survival which has given birth to the concept called ‘Sustainability’ or ‘Sustainable Business’.
Over a period, although slowly and steadily, sustainability has gained momentum across the globe and is
now known more popularly as ‘ESG’, an acronym for ‘Environmental, Social and Governance’.
To a noteworthy extent, the large corporates have started reporting ESG compliances too. As a part of ‘Governance’ aspect, a company needs to be compliant with all laws and regulations including tax laws, more particularly, the income tax laws. Interestingly, the Global Reporting Initiatives (GRIs) have come up with GRI 207 which deals with ‘Taxes’ in general.
Now, for a good amount of time, everyone seems to be blaming only or largely the corporates for not doing the business in a responsible or sustainable way. But that, according to the author, is too harsh to blame corporates alone. This is because, ultimately it is the individual buyer of goods or consumer of service who gives rise to the demand that is responded to by the corporates, although with a profit motive.
Therefore, to entrust these companies alone with ESG compliance burden is not fair. Another way of looking at this could be that unless individual consumes goods or services or gets any incentive, the hunger / demand is endless and this goes on. Therefore, merely fixing issues at corporate level by whatever ESG compliance reporting/disclosures/assurance etc., will not be a foolproof measure. In short, it is a basic human instinct to follow or do something only to get something in return / get benefits, otherwise not. Hence, in the long-term interest, if individuals are not motivated, albeit with certain incentives, in the form of tax benefits / deductions / exemptions etc., the efforts companies are putting will short live.
If we look at the worldwide efforts or baby steps taken towards this end, we see a few countries have given tax benefits to the individual taxpayers, to the corporate employees to begin with. Let us have a look at some unique tax incentives from ESG perspective which the individuals of the following countries enjoy:
Mexico –:
Hiring persons with specified level of disability entitles the employer to enjoy the tax deduction to the extent of 25% of the salary paid to such employees. Similar deduction is also available for hiring senior citizens. This, from ESG perspective, promotes ‘diversity and inclusion’.
Portugal–:
‘Cycle-to-work’ scheme provides for tax exemption on benefit given in kind arising from provision of bicycle/associated safety equipment used by the employee for eligible work- related journeys.
Thailand–:
For promoting ‘Thai Environmental, Social and Governance’, the Thai Government introduced tax exemption to taxpayers investing in units of ‘Thai Mutual Funds for Sustainability’, known as Thai ESG Fund. The exemption is available upto 30% of annual taxable income and capped to 100,000 Baht with no minimum investment specified. The said tax exemption is available for the period of investment covering the tax years 2023 to 2032.
Present day tax incentives to individuals/corporates under the Indian Income-tax Act, 1961 (‘the Act’)
If these deductions / exemptions are blended with some sort of incentives which are linked with ESG,
rather to some sort of responsible / sustainable behavior, the same will achieve not only the collective
efforts towards sustainability at the grassroot level but may also garner more taxpayers to come forward,
file their income tax returns, at least for the sake of availing
personal tax incentives. From the tax department’s perspective, this will help widening the tax base. The authors have made an attempt to identify the possible incentives in the form of deductions / exemptions to Indian individual taxpayers having regard to the existing tax structure including the new individual tax regime. These are discussed in the ensuing paragraphs.
1. Motor Car Allowance:
The present Rule 3(2) provides for motor car allowance in case of mixed usage with certain criteria based
on cubic capacity. In line with the global trend, it is possible to amend Rule 3(2) to provide for allowance
based on electric vehicles usage in addition to the existing criteria. This shall contribute to CO2 emissions
reduction. Rather, if an electric car is provided by the employer, the same should be kept out of the
perquisites in the hands of the employees and the employer company should be allowed deduction of the
said expense fully.
2. Transport Allowance:
Like motor car allowance, even transport allowance can be streamlined with global trend of providing allowance to the employees using public / shared transport, commuting by electric vehicles / electric bicycles / scooters etc. As per the existing Rule 2BB, allowance for commuting between the place of residence to the place of work is taxable in the hands of the employees. Therefore, apart from conveyance in performance of office duties, even the conveyance for commuting between the place of residence to the place of work should be provided as exempt if the same is using the shared / public means of transport including electric public transport like e-buses / e-cabs etc. This too shall contribute to CO2 emission reduction.
3. Scholarship to meet the cost of children’s education and Children Education Allowance:
Education is one of the fundamental means to combat most of the social issues. Hence, assistance provided in the form of scholarships or children’s education allowance etc. should be to enjoy the benefit of exemption even if the employee opts for the new tax regime u/s. 115BAC.
4. Deduction u/s. 80EEB for loan availed for purchasing electric vehicle:
Under the existing provisions contained in s. 80EEB, an individual taxpayer is entitled to claim interest expense upto INR 1,50,000/- every year towards interest on loan availed from any financial institution for purchasing an electronic vehicle, provided the loan has been sanctioned during 01/04/2019 to 31/03/2023.
Firstly, this sunset clause for ‘period of loan sanction’ needs to be done away with since the use of EV is going to be the future. Or at least, this period needs to be substantially extended say upto 31/03/2030.
Now, if the corporates are expected to extend their move towards offering fleet of EVs to their employees, then deduction under this section also needs to be extended to other class of assessees namely firm, company etc.
Also, the term ‘for purchase of an electronic vehicle’ used in section 80EEB indicates a single electronic vehicle! This is something similar to the controversy that arose in relation to deduction u/s. 54 wherein similar phraseology i.e. ‘a house property’ was deployed which led to a lot of litigation.
5. Deduction u/s. 80JJAA for creation of employment:
Although the existing provisions u/s. 80JJAA giving benefit of deduction for employment creation seem to be contributing to ESG to a certain extent, there is still some room for improvement.
As per Employment Exchange Statistics 2023 covering data for the calendar year 2022, 4.57 crore of Indian population is registered to be looking for employment. Of the said numbers, around 7.02 lakh differently abled population of India is in the hunt for employment. Surprisingly, these statistics also show that 0.3% of the said population represents the age group of 60 years and above! Indeed, these numbers are only the registered ones, and the real numbers would be much more. Considering this, additional deduction can be allowed to the eligible assessees creating employment opportunities for physically handicapped / differently abled employees. Deduction for differently abled should ideally be straightjacket inasmuch as it should be simple weighted deduction say at 150% of the salary paid to differently abled employees without any calculation complications as are currently provided for other employees. Further, the procedural aspects like insistence on certification of such differently abled employees to be obtained only from government recognized hospitals / medical establishments should be done away with and any certificate from any registered medical practitioner with say 10 years of practice should suffice the purpose of such certification. This will only reduce the hassle for these people.
Similar deduction can be further extended for those creating employment opportunities for senior citizens, seeking their bread and butter in their latter part of life.
Both the above deductions should be over and above the normal employment creation covering population other than these two categories. Equally true it is, at least for a country like India, that some sort of balance will have to be struck as employment generation for youth is on a national priority.
6. Additional deduction u/s. 80C for investment in eligible ESG mutual funds:
Apart from the existing deduction available for investment in the specified instruments like ELSS funds, an additional deduction should be provided for investment in ESG mutual funds which channelize the funds for various projects under ESG. This will help in inculcating and fostering the urge of contributing to ESG at individual level while giving a benefit of tax concession.
7. Depreciation u/s. 32 on energy saving assets/devices:
While many corporate assessees have opted for new tax regime enjoying lower tax rate, the rate of
depreciation for assets like energy saving devices, alternate energy devices, waste management devices
etc. has been reduced to 40% from the earlier rate ranging from 60% to100%. For the players promoting
energy saving / carbon emission reduction, the depreciation rate should be retained on the higher side
although such assessees have opted for a new tax regime.
8. Taxation of Carbon Credits / Carbon Offsets:
Carbon Credits find their roots way back in 1997 which was introduced by the landmark moment popularly known as ‘Kyoto Protocol’, an international treaty. Over a period, many MNCs have been dealing in carbon credits which gave a substantial traction to the carbon trading and carbon markets. India INCs have been claiming these carbon credits as capital receipts, not chargeable to tax under the Act. Although the tax department always wanted to tax these receipts as revenue receipts, most of [1]the appellate forums held the same to be capital receipts and therefore immune from income tax in the early phase of litigation on this issue. However, over a period, divergent views were taken on the very issue and eventually vide Finance Act 2017, the transfer of carbon credits was brought to tax at the rate of 10% w.e.f. AY 2018-19 under section 115BBG falling under Chapter XII. To add insult to the injury, no deduction is allowed in respect of any expenditure incurred in connection with the transfer of such carbon credits. However, one wonders as to whether there could be any entity which runs the business of earning carbon credits! Indeed, there won’t be any such players. This is for a simple reason that these companies endeavor to run their core manufacturing and/or service businesses and parallelly make an attempt to reduce carbon emissions which give rise to carbon credits that are eventually sold to those entities creating more carbon emissions.
It is highly unfathomable to levy tax on something which itself has been put in place, not only by India but also globally, to combat the climate change by reducing carbon emissions and whatever incentive the India INCs get for doing climate friendly acts, they end up paying income tax on it. Therefore, this acts as a rumble in pursuit of initiatives taken for saving the climate. This is irony in the present-day Indian tax regime where a pure “incentive” is being taxed instead of “benefit”. Indeed, an incentive no longer remains an incentive anymore! Taxation under section 115BBG would run counter productive to India’s ‘Net-zero by 2070’, pledge at the Glasgo Climate Summit.
Interestingly, there is no amendment made to the definition of income under section 2(24) nor is the same has been included within the ambit of business income under section 28 of the Act.
9. Taxation of Government Grants and Subsidies:
Up till AY 2015-16, most of the major corporates were enjoying tax exemption, although after long drawn battle with the tax department including upto the Supreme Court, in respect of grants/subsidies received from the government for setting of unit in underdeveloped area / creation of employment etc. The said benefits were in the form of sales tax and other indirect tax subsidies and concessions, technology upgradation subsidy etc. These subsidies arose largely from the respective state industrial promotion policies the core aim of which was dispersing industries to remote areas to reduce regional imbalance, create employment for the local population and other fundamental objectives. Applying the ‘purpose test’ as laid down by the Supreme Court in series of decisions, these large corporates, especially the manufacturing concerns, used to enjoy these incentives in the form of government subsidies/grants. However, w.e.f. AY 2016-17, by inserting clause (xviii) to section 2(24), the definition of income has been amended to enlarge the scope of income in the form of such government subsidies too.
Now, with increasing significance of ‘inclusive growth’ aspect which forms part of Principle 8 of National Guidelines on Responsible Business Conduct (‘NGRBC’) issued by the MCA in 2019, the spread of industry to under/less developed regions is vital. Huge capital outlays are also made by the corporates towards this horizontal expansion. Apart from this, the Sustainability Development Goals (SDGs) also contain interalia, Goal 8 (Decent Work and Economic Growth), Goal 9 (Industry, Innovation and Infrastructure), Goal 10 (Reduced Inequalities) which are also interlinked with one or the other NGRBCs. Therefore, companies putting efforts at regional, national and international level to cope up with the requirements of these NGRBCs read with SDGs, will have to pay taxes on the government grants/subsidies even if the ‘purpose test’ is positive. Hence, like taxation of carbon credits, even taxation of subsidies runs counter-conducive to a certain extent.
10. Expenditure on Corporate Social Responsibility under section 135 of the Companies Act, 2013:
Under the mandate of s. 135 of the Companies Act, 2013 (CA, 2013), the specified companies are under an obligation to incur expenditure to the extent of specified percentage of their net profits every year towards the Corporate Social Responsibility (CSR) activities. After introduction of the said s. 135 of the CA, 2013, India has seen commendable contributions being made by the large corporates for the social cause. However, by insertion of Explanation 2 to section 37(1) vide Finance (No. 2) Act, 2014 w.e.f. 01/04/2015, the CSR expenditure has been put out of the tax-deductible expenditure, causing permanent disallowance in the hands of the companies. As per CSR database[2] available for FY 2021-22, about 19043 companies have expended around INR 26,671.78 crores in FY 2021-22.
Assuming these companies had opted for new tax regime under section 115BAA, then the tax burden absorbed by these companies on the CSR expenditure would be nearly INR 6,613.82 crores considering 25.168% as effective tax rate as applicable under section 115BAA. If one goes to find out the rationale for insertion of Explanation 2 in Finance (No. 2) Act, 2014; the reasons stated in the Explanatory Circular No. 1/2015 dated 21/01/2015 are firstly, CSR expenditure is not incurred for the purpose of assessee’s business and hence not allowable as this application of income and secondly, CSR is nothing but sharing of Government’s burden by corporates and if such tax deductibility is allowed on CSR spend, then it would amount to subsidizing about 1/3rd of such expenses by the Government by way of tax expenditure. Now this is quite intriguing. Is it not true that the Indian corporate history has seen pro-bono acts on the part of the business houses for ages? Even when there was no obligation cast under the corporate laws, corporate sector has contributed to the wellbeing of the society. All big business houses namely Tatas, Birlas, Ambanis etc. have been shelling out monies towards various social causes, drives and initiatives for the local and national good. One such celebrated tax case is of the Delhi Cloth & General Mills Co. Ltd[3]. (then popularly known as ‘DCM’) wherein the Delhi High Court had upheld the allowability of expenditure incurred by a textile manufacturing company towards sponsoring the football tournaments, simply for the reason that such sponsorships add to the advertising value for the company and therefore is for the purpose of the assessee’s business. We do see around us beautification and maintenance of city streets, parks, monuments by way of plantation, lightings at main traffic islands, sponsorship of marathons etc. by different companies. These activities are nowhere near to their business activities. Yet they undertake these. The obvious reason is to push their brand via constant visibility to the public and creating a holistic image of the company’s brand and of the company and the Group which they represent in the minds of the general public, who are the ultimate consumers of the company’s products and services. Indeed, therefore this kind of expenditure has nexus with the business of the assessee and therefore arguably allowable as revenue expenditure u/s. 37(1).
Looked at it differently, we have judicial precedents holding that any expenditure incurred to comply with government directives or to comply with the provisions of any Act for the time being in force, is an allowable business expenditure[4]. Courts have gone to the extent of holding expenditure to be an allowable expenditure even though the same has been incurred voluntarily and out of pure commercial expediency and without warrant of any statute[5]. The Supreme Court has, in series of decisions, held that for allowability as revenue expenditure, what is essential is incurring expenditure ‘for the purpose of business’ and ‘not necessarily to earn profit[6]. Now once it’s a mandatory for the companies to spend towards CSR u/s. 135 of the CA, 2013, can it be said that it is not for the purpose of the assessee’s business?
Therefore, CSR which is one of the important components of ESG is interlinked with the business only. Mandating certain quantum of CSR spend under the Companies Act on one hand and disallowing the same under the Income Tax Act only demonstrates myopic and hand-handed approach of the Government.
11. Philanthropy on ‘Education’:
Goal 4 of SDG deals with ‘Ǫuality Education’ whereunder the ‘Target’ is to ‘ensure inclusive and equitable quality education and promote lifelong opportunities for all’. Now, this implies three facets of education namely; (a) education for all; (b) quality education; and (c) promotion of lifelong opportunities for all. For more than five decades, those working in the field of education as charity as well as their tax consultants have been guided by the principles laid down by the Supreme Court in Sole Trustee of Loka Shikshana Trust[7]. The soul of the said decision is as to what amounts to ‘education’ in order to qualify for the benefit of exemption under section 11 of the Act. In the words of their Lordships in the said case, “The sense in which the word "education" has been used in section 2(15) in the systematic instruction, schooling or training given to the young is preparation for the work of life”. The core words ‘preparation for the work of life’ are essence of the famous saying “give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime”. A computer training institute imparting basic and/or advance computer knowledge, a music institution creating musicians of future; a swimming academy creating swimming athletes or swimming coaches for future; a tailoring / fashion designing institute creating future tailors/fashion designers etc., do fall under the category of the entities who give systematic training to the youth for preparing them for the work of life. Don’t they? Most of these institutes impart knowledge even without conducting any formal certification course. Yet, the student acquires something which he can use to monetize and earn income. This guiding touchstone set by the Supreme Court in Sole Trustee of Loka Shikshana (supra) has now somehow been shaken by the Supreme Court’s recent decisions in New Noble Education Society[8] and Ahmedabad Urban Development Authority (‘AUDA’)[9]. These decisions have turned the tables mostly in favour of the tax department by unsettling some of the earlier rulings of the Supreme Court. In New Noble Education Society (supra), it has been held that for seeking registration under section 10(23) which entitles the trust / institute to tax exemption, it is a must for such trust / institution to be ‘solely engaged in education’ and it must also be registered under respective governing local laws without which registration and consequently tax exemption will not be available. Also, in AUDA’s case, the Supreme Court has laid down that the activities incidental to the main object of such trusts should generate only marginal surplus. There are number of vocational training institutes in this country which enable the youth to earn their bread and butter. The parameter now set by the Supreme Court in the aforesaid recent decisions are likely to be narrowly interpreted by the tax officers while dealing with the registrations and exemptions of these trusts/institutions engaged in such vocational education. Although these decisions have not laid down the exact expanse of the term ‘education’, clearly chalking out the precise manner in which ‘education’ is to be imparted in order to qualify for the benefit of exemption, the tax department is likely to strictly interpret it to fall under pure academic and classroom teaching and therefore this still remains litigious area for trusts/institutions engaged in these activities. Whether ‘education’ would also include ‘vocation’ is uncertain. Nobody can deny that like for a quality product or quality service, sizable cost is incurred by the product manufacturer or service provider and the same is realized from the customer/consumer, for a quality education also, significant cost is required and the same is charged in the form of teaching / coaching fees. This cost could be in the form of state-of-the art facilities, trained teachers, tutors, coaches etc. Of course, there are bound to be costs and associated margins with it. Therefore, these ‘quality education institutes’ may fall under the mischief of the ‘marginal surplus’ parameter laid down by the Supreme Court without actually stating as to what amounts to ‘marginal surplus’! This would indeed lead to drifting away from the Targets under SDG 4 in terms of 3 facets stated above and India’s commitment to adhere to these Targets. Looking at the larger canvas of ESG which includes ‘education for all as well as quality education for all and creating opportunities throughout lifetime of people’ as one of the most important elements, the Taxman needs to look at it from a liberal lens. in order to undo the probable evil effects of mis/strict interpretation of these recent Supreme Court decisions, these trust- related provisions need to be re-aligned with the SDGs which in turn shall enable India to stick to and achieve its global ESG commitment. Otherwise, these trusts/institutions will have to keep battling with the tax department on their entitlement to exemptions, keeping the true philanthropists in anxiety all the time.
12. Tax incentives for e-waste management players:
Targets set under SDGs, especially target 3.9, 8.3, 8.8, 11.6, 12.4 and 12.5 relate to issues associated with e-waste. E-waste arises from the consumption of electrical and electronic equipment (‘EEE’). India is one of the largest consumers of EEE. The consumption pattern of EEE in India is such that e-waste generation and management is very critical. In 2022[10], Indians have generated 4100 million kg of ewaste whereas there are around 400 authorized e- waste recyclers across the country. With every day passing by, this EEE consumption is going to move northwards and so would the e-waste generation. Therefore, it is imperative to have in place well equipped e- waste management players who will manage the e-waste as per the internationally accepted standards. However, due to lack of adequate awareness amongst the masses using EEE and creating e-waste about the safe disposal and management of ewaste, despite having enough and good recycling capacity, many e-waste players are not fully utilized and face financial difficulties. In order to lend support to these e-waste management players, tax incentives can be provided to such e-waste disposal players on an ongoing basis since generation and disposal of e-waste is going to be all pervasive.
13. Miscellaneous:
