2% CSR mandate may incentivise spending over impact, says Nithin Kamath
Zerodha CEO Nithin Kamath suggests increasing corporate tax instead of the 2% CSR mandate to ensure better social impact across India.
Zerodha CEO Nithin Kamath has raised critical questions regarding India's mandatory 2 per cent Corporate Social Responsibility (CSR) spending requirement. He suggested that the current system might be prioritizing the mere deployment of budgets over the actual creation of meaningful social change.
Impact Over Expenditure
In a recent post on X, Kamath argued that the conversation surrounding CSR needs to shift. Instead of focusing on the sheer volume of money companies are required to spend, the emphasis should be placed on the long-term results those funds generate. He highlighted a significant risk: when the primary goal becomes fulfilling a regulatory budget, there is a much higher chance of resources being wasted or misused.
Kamath noted that many corporations lack the specific expertise or specialized resources required to identify which social projects will yield the highest returns in terms of human or environmental welfare. This lack of expertise often leads to a narrow focus, where companies choose projects simply because they are easy to execute or located near their own business operations.
The Problem of Geographical Concentration
The current mandate may be creating an imbalance in how social aid is distributed across the nation. Kamath pointed out that CSR spending tends to cluster in economically developed states like Maharashtra, Gujarat, and Delhi. Because companies often fund projects in the areas where they operate, regions with the most urgent social needs may end up being overlooked in favor of more convenient locations.
Measuring Success: Beyond the Numbers
One of the most striking parts of Kamath's critique involves how companies measure their "success." He argued that businesses often gravitate towards short-term, easily quantifiable targets that do not reflect true progress. To illustrate this, he provided several examples:
- Environmental Efforts: A company might set a target to plant a specific number of trees, which looks excellent on a report. However, the real measure of success is whether those trees are native species and whether they actually survive for a decade.
- Education: Constructing a new school building is a simple metric to track, but the true indicator of impact is whether the children inside those buildings are actually receiving a quality education and learning effectively.
Kamath warned that social problems are often complex and require long-term commitment, whereas corporate metrics are frequently biased toward immediate, visible results.
A Proposed Alternative: Higher Corporate Tax
As a potential solution to the inefficiencies of the CSR mandate, Kamath suggested a structural change to how social funding is handled. He proposed increasing the corporate tax rate from 25 per cent to 27 per cent.
Under this model, the additional revenue collected by the government could be allocated by the state to various regions and sectors. Kamath argued that this approach could theoretically spread resources more equitably across the entire country, rather than allowing funds to be concentrated only where profitable companies happen to be situated.
The 'Anchoring' Effect
Finally, the Zerodha chief touched upon an unintended psychological consequence of the law, which he termed an "anchoring" effect. He observed that many companies may have begun to view the 2 per cent requirement as a definitive target to hit, rather than a minimum floor. This mindset might prevent companies from voluntarily increasing their social contributions during particularly profitable years, as they become psychologically tethered to the mandated figure.
"Maybe the real question shouldn't be how much companies spend on CSR. It should be how much long-term impact the money creates," Kamath concluded.