Clear the air on CSR

Feb 19,2014

The corporate sector will need to formulate a sustainable and long-term strategy for its social welfare activities from the next fiscal starting April 1, 2014, as this is the date from which a large number of companies will need to set aside at least 2% of their net profits for mandatory spends on Corporate Social Responsibility (CSR) activities.

The rules which are yet to be framed on Section 135 of the Companies Act 2013, which deals with CSR, are already pending before the Delhi High Court, which has sought clarity from the Ministry of Corporate Affairs in the case, Mohd. Ahmed (minor) vs UoI.

April 1, 2014 is also the date from which all the provisions of the new Companies Act, 2013, are expected to be enforced replacing the old Companies Act, 1956. The canvas for CSR activities is wide and companies may engage in a variety of causes—eradication of hunger and poverty, promotion of education, promoting gender equality and women empowerment, reducing child mortality and improving maternal health, combating HIV/AIDS, malaria and other diseases, ensuring environmental sustainability, imparting employment-enhancing vocational skills, social business projects, contribution to the Prime Minister’s National Relief Fund (PMNRF).

According to Ernst and Young research, the CSR-spending stipulation is likely to apply to at

least 2,500 companies. Industry estimates show the total spending on CSR activities may cross R20,000 crore within the next few years. It is, therefore, not difficult to gather why a section of India Inc sees this “must comply” regulation as a burden.

For example, the new law in this context does not give the freedom to companies to zero-in on what they think is CSR activity. If Company A wants to donate all its funds to a religious body or a charitable trust, it can not be classified as CSR any more. But writing a cheque towards the PM National Relief Fund makes the entire amount expenditure undertaken towards CSR, making Company A eligible for tax benefits.

So far, the government has also not decided on giving tax breaks on CSR funds, as has been demanded by India Inc. It feels that the tax implications of the mandatory spending on CSR activities has many flaws.

According to tax experts, if India Inc sets aside this large sum from its net profit, there could be a dent in the tax collection figures to the tune of R5,000 crore especially if the government does grant income tax exemptions to CSR spending.

“Clarifications with respect to classification of CSR activities and its impact on taxation of the company needs to be made by the government,” says Kaustubha Mani, associate, PXV Law Partners.

As per the new Company Act, 2013, all companies beyond certain financial threshold will need to allocate at least 2% of their average net profit of preceding three years on CSR. Therefore, all companies that are over the set threshold of net worth (over R500 crore), revenue (above R1,000 crore) or net profit (over R5 crore) will be mandated to implement the CSR clause of the new law.

While a company is required to give preference to the local area and areas around it where it operates for CSR spend, the rules do not clearly specify what percentage should be spent on CSR activities in local areas and what percentage can be donated.

The corporate sector has been less than enthusiastic about the CSR spending diktat, saying charity cannot be forced upon but rather should be voluntary. “Spending 2% on CSR is a lot, especially for companies that are trying to scale up in these difficult times. It must not be imposed,” Azim Premji, the philanthropist and tech tycoon, had said last year. Premji has donated 8.7% from his personal stock-holding in Wipro as endowment to the Azim Premji Foundation.

It is high time that the government clarifies the ambiguities on the key issues raised by the corporate sector on CSR clause, especially when it is relying on the industry to contribute towards the country’s welfare.