Even as the Ministry of Industry under Minister Nabindra Raj Joshi is gaining praise for the speed of some important policy reforms, one recent event, however, indicates otherwise. In a programme held in early April, the Minister put forth a proposal to collect in a government fund all the money that the industrial enterprises are required to set aside for Corporate Social Responsibility (CSR) activities. This proposal would clearly make the CSR budget into a new tax. Therefore, this deserves shelving right away. The new Industrial Enterprises Act has introduced some very good provisions. Most notable is the concept of “No Work No Pay” as mentioned in Section 45 (6). Similarly, there is a promise made to help the industries to get land to set up their factories. Though there is still a big doubt about whether the facilities and concessions promised in this Act will be for real (as history is full of proof about promises made by Industrial Enterprises Acts being denied by the tax laws), these provisions should be welcomed as good intentions.
However, similar praise cannot be accorded to the provision of Section 48 related to the medium and big industries or industries that have an annual turnover of Rs. 150 million or higher. This section requires such enterprises to set aside at least 1% of their annual profit for CSR activities and submit a plan to the government (Ministry or Department of Industry) as to how the company is going to spend this money. It also requires that the money should be spent only in areas specified by the government. If an industry fails to comply, it will be fined 0.75% of its turnover.
There should be nothing objectionable about this provision, as all respectable businesses worldwide are spending hefty amounts on CSR. And Nepali companies too have been increasing such spending. However, the bad intentions of the government to usurp all the CSR budget of the industrial enterprises are all too clear here, so similar praise cannot be placed on this provision. And there are strong reasons for this. One, this CSR budget provision is applicable only to industrial enterprises, not to other companies, because, this provision is only in the Industrial Enterprises Act.
Second, the government seems to be convinced that it is better able than the private sector to make good use of the money. This is all wrong– theoretically as well as in practice. The concept of Deadweight Cost of taxation clearly shows how the same amount of money spent by the private sector does higher good to the society than when collected and spent by the government. This applies to all the governments of the world irrespective of their level of efficiency. The Nepali government is a bit more notorious in this. A glaring example of this is the money collected as social security tax for the past several years still lying idle in the government coffers.
Third, the compulsory CSR budget is a tax in all respects. And the private sector is already complaining that the effective tax rate in Nepal is much more than the stated corporate tax rates of 20%, 25% and 30% because there are several other similar compulsory payments/allocations to be made after profit. Examples are the bonus for employees, fund for employees housing etc.
Fourth, CSR spending is internationally regarded as part of the company’s corporate strategy. Thus, it is up to the management of the company to decide how much to spend and how to spend. This important management tool of the company will be snatched away if the proposal by the industry minister is implemented.