The drafters of corporate social responsibility related laws have failed to take into account intended and unintended consequences of CSR policy decision
With the enactment of the Industrial Enterprise Act (2016) and its regulations, the mandatory corporate social responsibility (CSR) is now set for implementation. As per the provisions made in the law, all medium and large scale units and small scale units with a turnover of Rs 150 million are obliged to allocate minimum one percent of their net profits into CSR budgets every year. Failing to do so, they are liable to pay a penalty of 0.75 percent of their sales turnover. All companies have to submit CSR budgets, CRS plans and programs along with progress report of the previous year within three months after the lapse of the fiscal year.
The Industrial Enterprise Regulations (2019) categorically lists eight areas where CSR budgets can be allocated. These areas include rescue and relief operations during the natural disasters, community health, preservation and promotion of cultural heritage, livelihood and empowerment programs for the minorities and marginalized groups, support to community schools and universities, environmental programs, programs to control “social bads” like smoking, drinking and other social ills, rural drinking water and other infrastructure works (Article 37). Besides listing areas of CSR, the regulations also specify four conditions for implementing CSR activities. First, the companies have to allocate a minimum of 25 percent of their CSR budget in those areas affected by the business. Second, the companies have flexibility, not exceeding 10 percent of CSR budget, to allocate the money to a specific fund as designated by the official holding authority to register the company. Third, CSR programs have to be implemented in coordination with the local-level. Fourth, the companies are barred from undertaking those CSR activities that directly contribute to increasing their profits.
Unlearning from India
The drafters of this new law have borrowed or rather copied the idea from India which implemented the mandatory CSR from April 2015. India is the first country in the world to implement such a policy. In India, the eligible companies are required to allocate two percent of their average net profits of three preceding years and they do not have penalty provisions. Several evaluation studies on the experience of India are now available in the website. The drafters of the law have failed to learn the lessons from India before seeking to enforce such policy in Nepal. The debate that is being raised in India is whether this mandatory CSR policy is going to squeeze out civil society space from undertaking development activities. The battle is between businesses and NGOs. Civil society organizations are particularly worried by business encroaching on their areas. The businesses are also against this mandatory CSR taking a form of tax.
Going by principle, CSR is a voluntary effort. Starting from Adam Smith to Milton Friedman to The Economist survey of CSR in 2005, the reasoning that “the business of business is to do business” is still kicking. At the international level, the proponents of CSR question: Why pay taxes to the government which spends money buying arms, violating human rights or pocketing money through corruption? The arrival of Sustainable Development Goals (SDGs) has put CSR into a limelight as it is mandatory for multinational and transnational companies to publish sustainable reporting.
Ambiguities of law
Anybody reading the couple of paragraphs at the start of this writing can figure out serious flaws and ambiguities keeping doubts on proper implementation of this new mandatory CSR policy. Let me cite here a stark example. Unilever Nepal is the subsidiary company of Unilever which, fundamentally, believes in sustainable business. In 2016/17, it had a net profit of Rs 965 million and sales turnover of Rs 4.44 billion. As per the mandatory CSR, the company is obliged to allocate Rs 9.65 million (one percent of Rs 965 million) on CSR activities. Failing to do so, according to the law, the company is liable to pay a fine of Rs 33.3 million (0.75 percent of Rs 4.44 billion). From a cost benefit perspective, it will be sensible for the company to allocate Rs 9.65 million on CSR activities than to pay a fine of Rs 33.3 million. What if the company’s current CSR budget is substantially lower than Rs 9.65 million, say Rs 1.1 million? Definitely, the company is in CSR docks. The drafters have failed to take into account intended and unintended consequences of CSR policy decision. Sooner or later, business people will be on the streets to fight against this new legal provision.
There are numerous ambiguities and flaws in the new laws. First, no one is sure whether CSR amount is tax deductible or not. If it is not tax deductible (as mentioned by the word to be charged on the net profit) it will act like an additional tax. Only difference is that it is at the discretion of the company. Second, it is absurd to impose 0.75 percent penalty to be imposed on company sales turnover. Other than significantly magnifying penalty amount, one will never understand why provisions for CSR have to be based on net profit and penalty on sales turnover. One cannot impose penalty to push company to do good things. Penalties are good for refraining companies from doing bad things. The good performance calls for rewards, not punishments. Third, what will happen to those companies whose threshold CSR allocations are too small, say Rs 10,000, justifying management intervention? The cost of implementing Rs 10,000 CSR program may be far greater than the benefits to be secured. Fourth, categorical listing of CSR activities may invite lots of debate. As per the regulations, the companies are prohibited from spending CSR money on those activities that will help increase their profits or are related to business promotion. What will happen if Binod Chaudhary distributes “Wai-Wai” instant noodles to flood victims in Tarai? As per the new regulations, this will not be counted as CSR activities. The provision like “a minimum of 25 percent of CSR budget to be spent on those areas impacted by the industry” makes one go crazy. What do you mean by areas impacted by the industry? Does it reflect specific location, community, or only on mitigating negative externalities?
To understand the state of CSR in Nepal, I will request the readers to take a walk from Kupandole to Pulchowk and count on the number of trees being planted at the sidewalks and also the names of the sponsoring companies. I wonder why so many companies are interested in planting trees in that limited stretch of road. The new CSR policy is definitely going to produce anomalies and absurdities. When you force somebody to do something which he or she is already doing on a voluntarily basis, it is definitely going to produce a lot many unintended consequences, if not the negative ones.