The Income Tax Department has unearthed a suspected money laundering racket linked to CSR funds, where several companies are alleged to have routed their mandatory CSR spending through bogus trusts, only to receive the money back in cash or via layered transactions.
According to sources, the raids began in Delhi earlier this month and covered 11-12 suspicious trusts, with plans to expand the crackdown to other metros. Officials believe the scheme exploits loopholes in CSR compliance norms under the Companies Act, 2013 and certain provisions of the Income Tax Act, 1961.
Modus Operandi of the Alleged Scam
As per initial findings, companies transferred CSR funds to certain fake trusts. These trusts then secretly returned most of the money in cash or through layered financial transactions. On paper, the companies showcased CSR obligations fulfilled, and in some cases even claimed wrongful deductions under Section 80G or 35AC of the Income Tax Act.
The returned funds were allegedly kept off the books, allowing companies to:
- Evade tax on the undeclared income received back.
- Wrongfully claim deductions for CSR 'donations'.
This resulted in a double blow to the exchequer - loss of revenue both from wrongful deductions and from non-payment of tax on undeclared funds.
Scale of CSR Spending in India
CSR spending has become a significant part of India's corporate governance framework. According to the National CSR Portal (Ministry of Corporate Affairs), 27,188 companies spent ₹34,908.75 crore on CSR in FY 2023-24.
Since the 2013 amendment to the Companies Act, India became the first country to mandate CSR, requiring eligible companies to spend 2% of their average net profits over the last three years on CSR projects. Between FY 2014-15 and FY 2021-22 alone, corporates in India spent ₹1.53 lakh crore on projects spanning education, healthcare, rural development and environmental sustainability.
However, under the Income Tax Act, CSR expenditure is not deductible as a business expense. This has led some companies to structure their CSR contributions in a way that attempts to unlock tax benefits through questionable routes.
Government Tightens Scrutiny
A government source familiar with the investigation said,
"Corporates are paying bogus trusts the CSR funds and getting money back. 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."
The exact scale of the suspected laundering network has not yet been quantified, but officials suggest the figure could be significant. With raids set to expand across major cities, tax authorities are expected to tighten scrutiny of CSR spending and associated tax claims.
What Lies Ahead
Experts believe the findings could lead to stricter enforcement and possible legislative changes to close loopholes that enable CSR-related tax evasion. The crackdown also signals a broader intent by the government to ensure CSR obligations genuinely contribute to social development rather than being misused as a tool for tax avoidance.
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