The Income Tax Department has uncovered a CSR-linked suspected money laundering network where several companies allegedly channelled their mandatory Corporate Social Responsibility (CSR) funds into bogus trusts, in order to receive the money back as cash or layered transactions.
Sources have told Moneycontrol that these funds are then kept off the books, avoiding tax on the returned amount and, in some cases, wrongfully claiming deductions – dealing a double blow to the exchequer.
The raids, which began in Delhi earlier this month and targeted 11-12 bogus trusts, are expected to expand to other metros, it is learnt. Sources also said the practice exploits loopholes in CSR compliance norms under the Companies Act and certain provisions of the Income Tax Act.
“The income tax department has recently carried out raids on about 11-12 bogus trusts in Delhi. Trends have been identified. The income tax department plans to scale up raids at other metros. Corporates are paying these bogus trusts the CSR funds and getting money back. The amount identified is yet to be quantified. Since the money is received by the companies, it adds to their income on which tax is not paid. The entire CSR fund in a way is under the lens of income tax authorities,” one government source told Moneycontrol requesting anonymity.
According to the National CSR Portal maintained by the Ministry of Corporate Affairs, 27,188 companies spent a total of Rs 34,908.75 crore on CSR in FY 2023-24. While mandated CSR spending under the Companies Act is not deductible as a business expense under the Income Tax Act, some companies structure their contributions to unlock deductions by routing funds to specific registered entities.
CSR-related Tax Evasion
Companies are required by law to spend two percent of their average net profit over the past three years on CSR activities. Normally, CSR expenses cannot be deducted from taxable profits under the Income Tax Act, meaning companies still pay tax on that amount.
In the alleged case of misuse, a company ‘donates’ its CSR obligation to a fake trust, which then secretly returns most of the money in cash or through layered transactions. On paper, the company shows CSR obligation fulfilled and may claim tax deduction under Section 80G or 35AC for the ‘donation’.
The returned funds are kept off the books and not declared as income, resulting in two layers of evasion - wrongful tax deduction and non-payment of tax on undeclared returned money.
In 2013, India had become the first country to mandate CSR spending through an amendment to the Companies Act, which came into effect from April 1, 2014. The law requires certain companies to spend at least two percent of their average net profit from the previous three years on CSR activities. According to the Economic Survey of 2023–24, Indian corporates have spent a total of Rs 1.53 lakh crore on CSR projects between FY 2014-15 and FY 2021-22. The spending covers a range of sectors including education, healthcare, rural development, and environmental sustainability.
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