Corporate Social Responsibility:
CSR as they are popularly known is after all the human face of business. Conceptually it recognises the solemn duty the business owes to the society. In a way it stands for the external conscience of the corporate sector based on a noble value system. It reiterates the need for the business to respond and repay what it can to the society as part of good governance. This is one duty the business is expected to do and it usually does on a voluntary basis. After considerable debates and discussions the government thought it fit to incorporate the essence of this social compulsion into a legally binding commitment in the newly enacted Companies Act.
Requirements pertaining CSR are found in Sec 135 and Schedule VII of the new Companies Act 2013. The government has put out the draft rules pertaining to CSR in the public domain inviting comments and suggestions thereon. Once the Rules are accepted and notified it will come into effect from the date so notified. It is expected that the entire scheme of things pertaining to CSR is likely to get implemented with effect from the financial year 2014-15.
The following categories of companies registered under the Companies Act would be covered by the provisions relating to CSR:
• A company having a net worth of Rs.500 Crores or more
• A company with a turnover of Rs. 1000 Crores or more
• A company with a net profit of Rs. 5 Crores during any financial year
Though the threshold limit of net worth and turnover are high the profit criteria is relatively low which would bring in a number of companies under the CSR ambit.
Companies which meet the above financial criteria will have to spend at least 2% of their average net profits of the past three years on any of the specified CSR activities. The draft Rules also specify the methodology of calculating the net profits for the purpose of CSR outlay. As per the draft Rules unspent amounts can be rolled over to the subsequent years, though it is unclear whether excess spent in a particular year can be carried forward and adjusted in subsequent years.
A committee of the Board of Directors of the company with at least three or more Directors with one or more Independent Director/s shall oversee the working of CSR activities. The Committee is charged with the responsibility of helping the Board to formulate a CSR Policy, the activities to be undertaken, preparing the budgets for various activities and monitor the implementation of the CSR policy of the company. The draft Rules gives an outline of the broad contours of the CSR issue.
The Board of Directors on its part have to review the recommendations made by the CSR Committee, approve a CSR Policy, publicise the policy and ensure that the company spends the mandatory 2% of the profits every year on approved activities. The Directors’ Report shall carry prescribed details about CSR activities as per the draft Rules.
A company which is mandated to spend on CSR as per Sec 135 of the Act fails to do so shall explain the reason for its inability to do so in any year. A failure to do so will attract a fine of not less than Rs. 50,000/- and not more than Rs.25,00,000/-.
Activities under CSR:
Schedule VII gives a list of activities which can be undertaken by the company who is mandated to spend on CSR. They include:
• Eradicating extreme hunger and poverty
• Promotion of Education
• Promoting gender equality and empowering women
• Reducing child mortality and improving maternal health
• Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases
• Ensuring environmental sustainability
• Employment-enhancing vocational skills
• Social Business Projects
Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the state governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women
Such other matters as may be prescribed.
The Tax Angle:
Having seen the provisions of the Companies Act let us now turn to the taxation impact of these provisions. The draft CSR Rules leave it to the CBDT to look at the taxation benefits which could accrue to the companies. Prima facie it looks as if companies would be able to bring the CSR spend under the Income Tax Act by contributing to approved scientific research purposes and through contributions to approved Universities for specific purposes.
The CSR initiative through the Companies Act could not have come in sooner. The corporate sector was being sensitised to the requirements on social spending in the past. This step by the new Act is a nudge to encourage them to return something to the society. Should it fail, which one hopes not, next stage may be a full line forcing by the government to get the corporates to spend on social causes.
CA Abhishek Malpani