Corporate Social Responsibility : A Mandatory spending is nothing but Tax

AN INTRODUCTION

The Companies Act, 2013 (‘2013 Act’), enacted on 29 August 2013 on accord of Hon’ble President’s assent, The new law will replace the nearly 60-year-old Companies Act, 1956 (‘1956 Act’).  The 2013 Act emphasis on improving corporate governance, Corporate Social Responsibility, enhanced disclosure norms, enhanced accountability of management, audit accountability, protection of minority shareholders and much more.

The 2013 Act is more of a rule-based legislation containing only 470 sections, which means that the substantial part of the legislation will be in the form of rules. There are numerous sections in the 2013 Act where rules are being prescribed and the first set of draft rules (16 chapters released) for 2013 Act are currently available for public comments. It is widely expected that the 2013 Act and indeed the rules will provide for phased implementation of the provisions.

 

CSR

The 2013 Act has introduced several provisions which would change the way Indian corporate do business and one such provision is spending on Corporate Social Responsibility (CSR) activities. CSR, which has largely been voluntary contribution, by corporates has now been included in law.

CSR is the process by which an organization thinks about and evolves its relationships with stakeholders for the common good, and demonstrates its commitment in this regard by adoption of appropriate business processes and strategies. Thus CSR is not charity or mere donations. CSR is a way of conducting business, by which corporate entities visibly contribute to the social good. Socially responsible companies do not limit themselves to using resources to engage in activities that increase only their profits. They use CSR to integrate economic, environmental and social objectives with the company’s operations and growth.

As per Section 135 of Companies Act, 2013

1.       Every Company having

a.    Net Worth of Rupees 500 Crore or more; or

b.    Turnover of Rupees 1000 Crore or more; or

c.    Net Profit of Rupees 5 Crore or more

During any financial year, shall constitute a Corporate Social Responsibility (CSR) Committee consisting of 3 or more directors, out of which at least 1 director shall be an Independent director.

2.    The Board Report of the Company shall contain the disclosure on the Composition of CSR Committee.

 

3.    Following are the Activities that may be included in CSR Policy of the Company on the recommendation of CSR Committee by the Board:

a.    eradicating extreme hunger and poverty;

b.    promotion of education;

c.    promoting gender equality and empowering women;

d.    reducing child mortality and improving maternal health;

e.    combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;

f.     ensuring environmental sustainability;

g.    employment enhancing vocational skills;

h.    social business projects;

i.      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; and

j.      Such other matters as may be prescribed.[not prescribed till yet]

  

4.    The Board shall ensure that the amount to be spent ,in every Financial Year shall be, at least 2% of the Average Net Profit(Profit before tax) of the Company made during the 3 immediately preceding financial years, in pursuance of its CSR Policy.

5.    Also the Company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.

6.    However if the Company fails to spend such amount on CSR Activities, the Board shall disclose the reasons for the same in the Board Report.

 

MANNER OF CONDUCTING CSR ACTIVITIES

CSR activities may be conducted as projects or programmes (either new or ongoing).                 The CSR Committee shall prepare the CSR Policy of the company which shall include the following:

(a) The projects and programmes that are to be undertaken.

(b) CSR Policy of the company should provide that surplus arising out of the CSR activity will not be part of business profits of a company.

(c) CSR Policy would specify that the corpus would include the following:    

        (i) 2% of the average net profits(Profit before tax),

        (ii) Any income arising there from,

        (iii) Surplus arising out of CSR activities.

(d) The CSR Committee shall prepare a transparent monitoring mechanism for ensuring implementation of the projects / programmes / activities proposed to be undertaken by the company.

 

WAYS OF IMPLEMENTING CSR PROGRAMMES

Ø  For conducting CSR activities companies can set up an organization which is registered as a Trust, or Society or Foundation or any other form of entity operating within India to facilitate implementation of its CSR activities in accordance with its stated CSR Policy, or

Ø  A company may also conduct its CSR activities through Trusts, Societies, or Section 8 companies operating in India, which are not set up by the company itself but attached condition is that such organizations should have an established track record of atleast 3 years in carrying on activities in related areas, or

Ø  Companies may collaborate or pool resources with other companies to undertake CSR activities and any expenditure incurred on such collaborative efforts would qualify for computing the CSR spending.

Ø   Only such CSR activities will be taken into consideration as are undertaken within India and   are not exclusively for the benefit of employees of the company or their family members.

 

TAX IMPLICATION

Tax treatment of CSR spend will be in accordance with the Income Tax Act as may be notified by the Central Board of Direct Taxes (CBDT)

 

POSSIBLE IMPLICATIONS

EFFECT ON MAT COMPUTATION

 Companies which are subject to the Minimum Alternate Tax (‘MAT’) are likely to get benefit under MAT, As MAT is calculated on Book profits of the company and CSR expenditures are to be debited in profit & loss account which will ultimately result in reduced MAT liability.

 

DEDUCTION IN RESPECT OF DONATIONS (U/S-80G OF INCOME TAX ACT)

There are certain activities under draft rule 13 which are included in CSR spending deductions in respect of these activities can be claimed u/s 80G of Income tax Act.

Following are illustrative activities for socio-economic development and relief and contribution towards Central or state govt funds-

1)    Contribution to Prime Minister National Relief Fund - 100% deduction

2)    National Foundation for communal Harmony           - 100% deduction

3)    National/State Blood Transfusion Council                - 100% deduction

4)    State govt.fund for Medical relief to poor                  - 100% deduction

5)    National Cultural fund                                               - 100% deduction

6)    Chief Minister’s Relief Fund                                      - 100% deduction

7)    ……

 

DEDUCTION’S UNDER OTHER SECTIONS OF INCOME TAX ACT

 

Ø  Expenditure on eligible project or scheme for the social and economic welfare of or the Upliftment of the public u/s 35AC – 100% Deduction under head Profits and gains of business and profession.

 

 

Further as per proposed Draft Comp rules 2013-

 

Ø  Tax treatment of CSR spend will be in accordance with the IT Act as may be notified by CBDT.

Mint & The Wallstreet Journal reported that companies in India that would come under the purview of CSR spending would likely spend Rs.18,000 crore on CSR activities. The potential dent to the government’s tax revenue could therefore be to the tune of Rs. 6,000 crore, if the government does grant income tax exemptions to CSR spending.

 

By-CA Ishan Sharma