Corporate Social Responsibility

Moral responsibility now being enforced through legal regulation

CSR was an old concept & much talk about subject since long back as much as the evolution of wealthy corporate houses after the industrial revolution, till the recent past when CSR took the shape of a legislation. Earlier it was being used as a tool of branding or improving corporate image; in a way, it stood for the corporate conscience based on a noble value system. Basically it reiterates the need for the businesses to respond and repay what it can to the society as cost of its business growth to the society.

This is one duty the business is expected to do and it usually does on a voluntary basis. After considerable debates and discussions; a larger step was taken by the Indian government this year, in the form of the Companies Act, 2013. This legislation requires companies to take action, make investments, and report against a number of metrics related to Corporate Social Responsibility (CSR).

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 comments and suggestions. 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 implemented; likely to from the financial year 2014-15.

Initially the following categories of companies shall be covered under CSR regime.

·         Companies with an annual turnover of 1,000 crore INR and more, or

·         Net worth of 500 crore INR and more, or

·         Net profit as low as five crore INR and more

Though the threshold limit of net worth and turnover are high the profit criteria is relatively low which would cover a number of companies under the CSR ambit. This will, in some cases also extend to small and medium sized enterprises (SME).

The Act encourages companies to spend at least 2 percent of their average net profit over the previous three years on CSR activities. Among the eligible activities included in the act are:

1. Eradicating extreme hunger and poverty;
2. Promotion of education;
3. Promoting gender equality and empowering women;
4. Reducing child mortality and improving maternal health;
5. Combating HIV, AIDS, Malaria and other Diseases;
6. Ensuring environmental sustainability;
7. Employment enhancing vocational skills;
8. Social business projects;
9. Contribution to the Prime Minister's National Relief Fund or any other fund setup by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, Scheduled Tribes, other backward classes, minorities and women;
10. Such other matters as may be prescribed.

In India, of course, there are pressing socio-economic issues including a dizzying level of economic inequality and the remnants of a caste system that, of course, publicly disavowed, undoubtedly still lives on quietly in the hearts and minds of many. While these issues of poverty and inequality are not directly addressed by the CSR actions, they will likely to be impacted by the promulgation of more open policies.

The act spells out specific actions for the board of directors including the formation of a CSR committee. The board must also approve the CSR policy and oversee its implementation. It also must monitor the 2 percent spend. If the spend level is not achieved, the board must explain why.

The CSR committee must contain three or more directors with at least one independent director. They are responsible for formulating the policy and recommending it to the board, as well as developing and monitoring the activities and expenditures.

Rules also says that 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 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 Rs.25, 00,000/-.

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. Having seen the provisions, it looks as if companies would be able to bring the CSR spending under the Income Tax Act by contributing, scientific research purposes and through contributions to approved funds for specific purposes.

All of this represents an important step, encouraging companies across a broad spectrum of Indian industry to fall into line with the many companies around the world that have committed to this path.