Wednesday, February 3, 2016

MCA clarifies on 12.01.2016 the provisions of Corporate Social Responsibility

MCA has issued a Circular No.01/2016 dated January 12, 2016 on Frequently Asked Questions with regard to Corporate Social Responsibility under section 135 of the Companies Act, 2013 .
Sec 135 of the companies Act 2013,Schedule VII of the Act and Companies CSR policy Rules,2014 read with General Circular dated 18.06.2014 issued by the MCA provide the broad contour within which eligible companies are required  to  formulate their CSR policies including activities undertaken and implement the same in the right earnest.

CSR Provisions of the companies 2013, is applicable to the companies  registered under the companies Act and satisfies any of the  following condition during the  financial year.(Financial year means as referred under sub section (1) of section 135 of the Act ,in any of the 3 preceding financial year).
- Net Worth of Company is Five hundred Crore  or more.
- Turnover of company is one Thousand Crore or more.
- Net profit of company is Five Crore or more.

Further as per the CSR Rules, the provisions of CSR are not only applicable to Indian companies, but also applicable to branch and project offices of a foreign company in India.
Note I) Net profit of the company taken will be the profit before Tax(PBT).
II) Every qualifying company requires spending of at least 2% of its average net profit for the immediately preceding 3 financial years on CSR activities.
III) An excess amount  spent in excess of 2% the average net profit           of the thre preceding years by the company cannot be carried forwarded to the subsequent years and adjusted against that years CSR expenditure.
 Iv) Further, the qualifying company will be required to constitute a committee (CSR Committee) of the Board of Directors consisting  of 3   or more directors.

Expenditure spent by the company towards CSR  shall not deemed to be an expenditure incurred by the assessee for the purpose of business or profession .So that amount of CSR cannot be claimed as business expenditure by the company.
No specific tax exemption can be availed  for the expenditure made  for the purpose of CSR.As per the finance Act,2014 also clarifies that expenditure on CSR does not form part of business expenditure. While no specific tax exemption has been extended to expenditure incurred on CSR, spending on several activities like contributions to Prime Minister’s Relief Fund, Scientific Research, Rural development projects, skill development projects, agricultural extension projects, etc. which find place in Schedule VII, already enjoy exemptions under different sections of the Income Tax Act, 1961.
The activities that can be done by the company to achieve its CSR obligations 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.
Funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women and such other matters as may be prescribed.
Otherwise, The activities performed by the company only for the health of the company is not regarded as Expenditure towards the CSR. The expenditure on following activities will not be considered as CSR expenditure.
i)The CSR programs or activities that benefit only to the employees of the companies and their families.
ii)Activities such as Awards/charitable contribution/advertisement /Sponsorships of TV program.
iii)Contribution made directly to indirectly to the political parties.
iv)The project or program or activities undertaken outside India.
v)Expenses made by the company for the fulfillment of Statutory Liabilities(Labor Laws, Land Acquisition Act 2013,).
Major Points to remember for CSR Compliance:
The company can also make the annual report of CSR activities in which they  mention the average net profit for the 3 financial years and also prescribed CSR expenditure but if the company is unable to spend the minimum required expenditure the company has to give the reasons in the Board Report for non-compliance so that there are no penal provisions are attracted by it.
A contribution of money to a trust /Society/section 8 companies by a company be treated as CSR expenditure of company.
(a) The Trust/Society /section-8 company is created exclusively for the undertaking CSR activities.
(b) Whether the corpus is created exclusively for a purpose directly related a subject covered in Schedule VII of the Act.
Government has no role to play in monitoring implementation of CSR by companies. The main spirit of the law is not monitor but to generate conducive environment for enabling the corporate to conduct themselves in socially responsible manner.
The holding or subsidiary of the company  does not have to comply with section 135(1) unless the holding or subsidiary itself fulfils  the criteria.
The Involvement and Contribution  of employees in CSR activities of the company will no doubt generate interest /pride in CSR work and promote transformation from corporate social responsibility as an obligation to socially  responsible corporate in all aspects of their functioning .Therefore, The company will encouraged to involve their employees in CSR activities.
The any money spent by company in kind  Will not be treated as CSR expenditure. It means the company have to spend in cash.
The provision of this scheme is indeed to involve the corporate in discharging their social responsibility with their innovative ideas and management skills and with greater efficiency and better outcomes .Therefore, CSR should not be interpreted as a source of financing the resources gap in Government  Scheme . Use of corporate innovations and management skills in the delivery of public goods is at the core of CSR Implementation by the companies .CSR projects should have a larger multiplier
Lastly, CSR is based on the ideology of give and take. Companies take resources in the form of raw material, human resources etc  from the society and the companies are giving something back to the society. This concept says that 98% of the profit will be distributed to the shareholders where as 2% will be distributed for the health of the company. So that, Society will become a stake holder of the company.
The board of directors of the company after taking the recommendation of CSR committee approve their CSR policy for the company  will have to be displayed in website of the company.

 Consequently, CSR is an appropriation of profit rather than expenses. The MCA has clarified the doubt regarding the corporate social responsibility. Hence, Now that things have been clarified, one can refer the same and proceed accordingly.
Further amendment has been done by MCA by issue of FAQs vide General Circular No.01/2016, The following changes are presented in tabular form.

As per old Rules
As per New Rules
While determining the eligibility for qualifying for CSR consider 3 preceding financial year.
While determining the eligibility for qualifying for CSR, consider preceding financial year.

The companies was required to have independent directors to constitute a CSR committee.
  The requirement for such companies to have independent directors to be removed.

Earlier it was provided that a company even if ceases to be eligible for CSR to undertake
it for a minimum of 3 years
This to be amended so that once a company ceases to be eligible it need not spend on CSR.

Contributed by Mr Roshan Paudel ( CA Finaist )