International Business Articles
By: Atul Dua, Esq.
Seth Dua & Associates
New Delhi, India
The Ministry of Corporate Affairs ("MCA") has constituted a High Level Committee ("HLC/Committee") to suggest measures for monitoring the implementation of Corporate Social Responsibility ("CSR") policies by the companies under section 135 of the Companies Act, 2013 ("Act"). The HLC comprises of six members including representatives from MCA, Industry, NASSCOM and Department of Public Enterprises.
Following is the synopsis of recommendations made by the HLC to MCA:
- It is recommended to include an omnibus clause so as to include various left-out activities within the ambit of CSR simply because certain development concerns, needs, and priorities cannot be anticipated.
- It is recommended that the Board of the Company implementing CSR projects has to ensure that only sustainable programmes/projects are taken up for optimal benefits of the poor and under privileged sections of the society.
- It is recommended that leniency may be shown against the companies for non-compliance of CSR in initial two/three years to enable them to a culture of compliance.
- As regards of CSR contribution to Prime Minister’s National Relief Fund ("PMNRF") by companies, the Committee recommended that there should be uniformity in tax treatment for CSR expenditures across all activities because differential tax treatment for expenditure on various activities covered under Schedule VII may create unforeseen distortions in the allocation of CSR funds across development sectors. In light of the fact that there could be a temptation on the part of companies to direct at least a part and possibly a substantial part of their CSR budget to PMNRF to avail tax incentives under section 80G of the Income Tax Act, 1961.
- It is recommended that there should be two models of implementation strategies for CSR i.e. (i) for companies that have CSR expenditure more than INR 50 Million and (ii) for smaller companies with CSR spend of less than INR 50 Million. Smaller companies need not take CSR programme. Such companies can take up any activity provided under the omnibus provision of "Public Purpose". Further, smaller companies could take up project based activities depending upon their CSR spend from year to year. Such companies should be encouraged to combine their CSR programmes with other similar companies. Also, it is suggested that, threshold of INR 50 Million should be reviewed and adjusted for inflation every three years and this figure may be rounded off to the nearest crore.
- It is recommended that private companies must be permitted to carry forward unspent balance of CSR funds. However, there should be a sunset clause of five years, after which the unspent balance should be transferred to one of the funds listed in Schedule VII.
- It is recommended that the ceiling on administrative overhead cost should be increased from 5% to not more than 10% of the CSR expenditure of the Company.
- It is clarified that administrative overhead expenditure of the company on CSR should not include expenditure incurred on capacity building of the implementation agencies.
- It is also recommended that the CSR provisions should not be applicable to Section 8 Companies i.e. Non Profit Companies.
- It is observed that there is a need of further clarity on applicability of CSR provisions to foreign companies.
- It is also felt that it is necessary to clarify the definition of Net Profit used under CSR provisions i.e. Act and as well as the CSR Rules whether it will be before profit or after depreciation and tax. Further, reference to ‘any financial year’ in section 135 (1) of the Act needs to be re-examined by the MCA so as to clarify whether it is to be seen on year on year basis or average of past three financial years.
- The Committee encourages companies to involve their employees in its CSR activities, however, the Committee decided not to recommend monetization of the services of corporate employees for counting towards CSR expenditure of the Company. Further, the Committee has turned down the suggestions from companies and other stakeholders that contributions made in kind be counted as an eligible CSR spend.
- The Committee also recommended that the Government should not maintain a databank of implementing agencies for undertaking CSR Activities.
- The Committee also recommended that all information relating to implementation of CSR by companies including amount spent, activities undertaken, geographical areas covered etc., as reported by the Companies in their report to MCA need to be collated by the MCA and places in the public domain.
- Further, in order to incentivize corporate to undertake their CSR mandate in right earnest, the Committee recommended setting up of annual awards for each category of companies i.e. large and small.
It is expected that MCA will take up the above recommendations for review and bring out the necessary clarifications/amendments in the existing CSR provisions under the Act and rules there under.
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