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8/20/2019 CSR in India - Changing Landscape
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CSR in India - A Changing
Landscape
March 2014
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Mandatory CSR spend under the Companies Act, 2013
CSR rules notified and CSR provis ions notif ied
to become effective from 1 April 2014!
December 2012 August 2013 August 2013
The New CompaniesBill, 2013 (‘the Bill’)
passed byLok Sabha
The Bill passed byRajya Sabha
Presidential assenton the Bill obtained
Discussion Draft
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Net profit > INR 5 croresTurnover > INR 1000 croresNet worth > INR 500 crores
1 2 3
OR OR
If any of the above financial strength cr iteria is met, every company is mandatori ly
required to spend 2% of average net profi ts* of last 3 years on specified CSR activi ties
Every company of certain financial strength
CSR spend – trigger points under the Companies Act, 2013
Discussion Draft
* Average net profit to be computed as per provisions of the Companies Act, 2013 (‘the Act’) and final CSR rules in order to determine quantum of CSR spend..
Financial strength criteria
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Eradicating hunger, poverty and malnutrition, promoting preventive healthcare and sanitation and
making available safe drinking water
Promotion of education, including special education and employment enhancing vocation skills
especially among children, woman, elderly and the differently abled and livelihood enhancement
projects
Promoting gender equality, empowering women, setting up homes and hostels for women and
orphans, setting up old age homes, day care centers, and such other facilities for senior cit izens and
measures for reducing inequalities faced by socially and economically backward groups
Ensuring environmental sustainability, ecological balance, protection of f lora and fauna, animal
welfare, agro- forestry, conservation of natural resources and maintaining of quality of soil, air and
water
Protection of national heritage, art and culture including restoration of buildings and sites of
histor ical importance and works of art; setting up of public libraries, promotion and development of
traditional arts and handicrafts
Measures for the benefit of armed forces veterans, war widows and their dependents
Training to promote rural spor ts, nationally recognized sports, paralympic sports and Olympic
sports
Specified CSR Activities – Schedule VII revised (1/2)
Discussion Draft
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Contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central
Government for socio-economic development and relief and welfare of the Scheduled Castes, the
Scheduled Tribes, other backward classes, minorit ies and women
Contributions or funds provided to technology incubators located within academic institutions
which are approved by the Central Government
Rural development projects
Specified CSR Activities – Schedule VII revised (2/2)
Discussion Draft
Critical for companies to devise effective CSR policy
to make their CSR spend count
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CSR Implications
Constitution of CSR Committee of the Board(3 or more directors , having atleast 1 independent di rector*)
Formulate and
recommend CSR
policy(preference to be
given to local area)
CSR Committee shall:
Recommend CSR
activities and
expenditure on the
same
Monitor CSR
policy from time to
time
Disclose composition of CSR
Committee
Approve CSR policy and report
Ensure CSR activities are undertaken
by company
Ensure spending on CSR activities
and reporting of non-compliance
Responsibil ities of the BoardCompliances
Penal consequence: Failure to spend on CSR activities and failure to report would attract
penalty on the company of maximum INR 25 lakhs and probable
imprisonment of officer which may extend to 3 years
Discussion Draft
Board has to disclose in Director Report.
Failure to report would attract penalty on the company of maximum INR 25 lakh
and probable imprisonment of officer which may extend to 3 years
* Requirement of independent director relaxed in final CSR rules for unlisted companies and private companies
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Global scenario – CSR requirements in few countries
Disclaimer - The above data is collated from public domain
Sr.
No
Name of
Country Whether CSR spend / reporting mandatory
Countries not having mandatory guidelines for CSR spending / reporting
1 U.K Voluntary guidelines in place for CSR Reporting
2 U.S.A Voluntary reporting by companies in Sustainability reports
3 China Voluntary reporting by companies in Sustainability reports
4 Germany Voluntary reporting by companies in Sustainability reports
5 Australia Voluntary reporting by companies in Sustainability reports
Countries having mandatory guidelines for CSR spending / reporting
1 France Mandatory reporting for listed companies in Annual reports on CSR activities
2 DenmarkInvestors and state owned companies to include information on CSR in their
annual financial reports
3 Sweden Mandatory reporting by state-owned companies
4 Indonesia
Natural Resource based companies must allocate budgets for CSR
programs and the programs must be run according to government
regulations
5 MalaysiaCompulsory for companies listed on Bursa Malaysia to disclose their CSR
activities or practices
“ India would
become the first
country to
mandate CSR
through a statutory
provision”
- Corporate Affairs
Minister,Mr. Sachin Pilot
Discussion Draft
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CSR rules notified – some of the salient features (1/2)
Applicability:
– CSR provisions are also applicable to foreign companies having branch / project office in India if it meets
the financial strength criteria
– Every company ceasing to meet CSR criteria for three consecutive years need not comply till it meets thecriteria again
Net profit:
– Profit arising from overseas branches (whether operated as a company or otherwise) of the company
– Dividend received from other companies (provided the other companies are covered under and complying
with CSR provisions)
Net profit computed under Companies Act, 1956 need not be recomputed in accordance with the provisions
of Companies Act, 2013
Mode / manner of conducting CSR activities:
– CSR activities to be conducted as per stated CSR policy as projects or programmes (either new or
ongoing), however, excluding activities undertaken in pursuance of the normal course of business of a
company
– Company can undertake CSR activities through a registered trust, society or section 8 company – nothree years track record for these not-for-profit entities if set-up by the company itself
– Company may also implement CSR programs through other not-for-profit organizations that are not set
up by the company itself provided it has an established track record of three years and company has
specified the project / programs to be undertaken, modalities, monitoring and reporting mechanism
– Companies may also collaborate or pool resources with other companies to undertake CSR activities in
such a manner that each companies are in a position to report separately on such CSR projects
Discussion Draft
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CSR rules notified – some of the salient features (2/2)
CSR policy to include:
– List of CSR projects (related to activities included in Schedule VII) planned to be undertaken, modalities of
carrying out such project, implementation schedules, monitoring process, etc.
– CSR policy to provide that surplus arising out of the CSR activity will not be part of business profits of acompany
CSR expenditure:
– Eligible CSR expenditure: All expenditure, including contribution to corpus and spend on building CSR
capacities of own personnel / personnel of implementing agencies (upto 5% of total CSR spend)
– Ineligible CSR expenditure: Expenditure not in conformity with activities specified in Schedule VII, CSR
activities undertaken outside India, CSR projects that benefit only the employees / their families andcontribution to political parties
CSR reporting: Necessary to report content of the CSR policy and annual CSR return in specified format in
Board’s report and companies website
Others key aspects:
– “Shared Value Concept” removed in the final CSR rules
– Requirement of appointing independent directors in CSR committee relaxed for unlisted public company /private companies
– Private company having only two directors can constitute its CSR committee with two such directors
– CSR committee to institute a transparent monitoring mechanism
– Tax treatment of CSR not discussed in the final CSR rules
Discussion Draft
Guiding pr inciple – CSR is not charity or mere donations
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Modalities of carrying out CSR activities
Company
Govt
Schemes /
Independent
NGOs
Donation to
government
schemes /
independentNGOs
Company
In-house
CSR activity
Group
Company 1
Group
Company 2
Group
Company 3
Not-for-profit
arm of the
group
CSR
activities to
be carried
out throughemployees
Alternate 1 Alternate 2 Alternate 3
Corporate group formsseparate not-for-profit
arm to carry out CSR
activities
Discussion Draft
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Typical entity options available for separate not-for-profit arm
Section 25 Company SocietyTrust
Entity options for separate
not-for-profit arm of the group
Discussion Draft
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Other aspects / issues
What constitutes CSR
activities
CSR spending –
Calculation and
continuity
Whether incidental / indirect benefits to company’s employees or
business would be regarded as CSR activities?
– Employees residing in local area benefited due to local area
preference for CSR activity – whether eligible?
– Quota reserved for children of employees in school run by the
company or its not-for-profit arm?
Can meeting of CSR obligation as a consequence of business activity
be regarded as CSR activity?
– Water management project carried on by a company as a business
activity – Companies manufacturing eco-friendly products – whether
considered to carry on CSR activity?
CSR activities specified under Schedule VII – Whether exhaustive?
Allocation of common business expenditure towards CSR goals?
– How to allocate salary paid to manager devoting his time intobusiness as well as CSR activities?
– How to allocate lease rentals if premise is used for business as well
as education purpose?
Can excess CSR spend of a particular year be carried forward and
offset against CSR spending obligation in future years?
Discussion Draft
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Tax considerations
Alignment of CSR activities with definition of ‘charitable purpose’ under Income-tax Act, 1961
Deductibility of expenses towards CSR projects as revenue expenditure – Whether 2% CSR spend allowed as deductible tax expenditure?
One view is that tax deduction not available as CSR spend not incurred for business purpose
Other view is that tax deduction available as CSR spend is incurred due to statutory levy
− If expense deduction towards CSR project of 2% of average net profit available due to a statutory
levy, whether expense incurred beyond 2% would be allowed as revenue expenditure?
− If expense deduction not available, issues relating to allocation of common expenses incurred
towards business as well as CSR projects?
−
If expense deduction not available, restrictive tax break (in form of 80-G deduction) available tocompany?
Allowability of depreciation claim on capital expenditure for acquiring assets to carry out CSR activities?
Taxability of donation made by third party to the company for furtherance of its CSR activity. Example, a
school run under the company umbrella for poor and needy children.
Discussion Draft
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ImplementationEvaluation
KPMG service offerings – regulatory and tax services
Understanding the facts
Reviewing the current CSRpolicy (if any), CSRactivities, sustainabilityinitiatives spread acrossdifferent units / groups vis-à-vis the new requirements
Analyzing the financialstatements andidentification of likelyimpact of CSR provisions
Phase - 0
Conceptualization
Assisting the company onthe applicability ofmandatory CSR provisions
Analyzing the allowabilityof CSR expenditure fromtax perspective andevaluating alternativeoptions to maximize the taxbenefit
Providing differentmodalities of carrying outCSR activities andproviding pro and cons ofeach options from tax andregulatory perspective
If CSR envisaged through
a separate not-for-profitarm, providing pros andcons of entity options i.e.trust, society or section 25company
Phase - 1 Phase – 2 Phase – 3
Finalising the modality ofCSR activity, investment,scaling up and replicationplans
Finalizing the appropriateCSR structure which isviable from a commercialas well as tax andregulatory perspective tomeet the current budgetperspective of thecompany
Finalising entity type forsetting up not-for-profitentity (if envisaged)
Assisting the company inpreparation / reviewing thedraft CSR policy preparedby the company from taxand regulatory perspective
Assisting the company insetting up of not-for-profitentity and obtainingnecessary approvals
On-going day-to-day taxand regulatory advisoryand compliance servicesfrom CSR perspective
Discussion Draft
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ImplementationDesign
KPMG service offerings – business advisory services
Inception
Reviewing the CSR &sustainability activities ofthe company
Identifying and conductingstakeholder interactions tounderstand theirexpectations
Submission of an InceptionReport (as-is)
Conceptualization
Identify the sectors and theenvisaged focus areas tomake CSR spend count
Assisting the company tostrategize for CSR policy
Assisting the company inpreparation of investment,
scaling up and replicationplans
Assisting the company inanalyzing Social Return onInvestment (SROI) on apilot basis of the CSRactivities
Submission of a ConceptReport (to-be)
Develop a draft CSRPolicy, which has
– Articulated CSR strategy
– Plan for the CSRinterventions (adaptedfrom the LFA) over a 3-5year horizon
Client discussion &feedback
Submission of the CSRStrategy Document
Conduct a detailed S-Ebaseline
Due diligence of partners
Develop effectiveCommunications Plan
Preparing for SustainabilityReporting
Assisting the company inimplementing the CSRpolicy
Assisting the company insetting up internal controls,monitoring and evaluationsystems to implement,assess, document andreport the impact of CSRactivities
Certification for CSR spend(if required)
Discussion Draft
Phase - 0 Phase - 1 Phase – 2 Phase – 3
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Thank You
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