CSR for CEO’s

ContentsWhat is CSR?...................................................................................................................................................2

The New CSR Legislation:...............................................................................................................................2

Compliance Framework..................................................................................................................................2

A CSR Committee:...................................................................................................................................2

CSR Policy:..............................................................................................................................................3

Operating Framework:...........................................................................................................................3

Pooling of Resources:.....................................................................................................................................3

Activities included as per New Legislation......................................................................................................4

Allowability of CSR expenditure as per the 1961 Income Tax Act:.................................................................4

Specific provisions of ITA to improve prospects of deductibility of CSR:........................................................5

Deduction of CSR expenditure: Relevant case laws........................................................................................5

Institutions Approved by the National Committee:........................................................................................5

Sources:..........................................................................................................................................................7

Page 1 of 7

©2014, CSRnext.org. All rights reserved.

What is CSR?Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (“Triple-Bottom-Line- Approach”), while at the same time addressing the expectations of shareholders and stakeholders. In this sense it is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy. Even though the latter can also make a valuable contribution to poverty reduction, will directly enhance the reputation of a company and strengthen its brand, the concept of CSR clearly goes beyond that.

The New CSR Legislation:As on 1st April 2014, the government passed a new legislation Section 135 in the Companies Act, 2013, for mandated 2% spend of net profits towards CSR activities. Every company is mandatorily required to spend 2% of average net profits* of last 3 years on specified CSR activities, which meets the following criteria of financial health:

Net Worth greater than or equal to INR 500 Crores or Turnover greater than or equal to INR 1000 Crores or Net Profit* greater than or equal to INR 5 Crores

*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.

Companies need to explicitly state which expenditure have been incurred specifically for CSR purposes and which are part of the normal course of business. Expenditure part of the normal course of business, though incurred for CSR purposes will not be counted as CSR expenditure.

Compliance Framework

The Companies Act mandates CSR activities for both Indian companies and foreign companies registered in India. In addition, the new rule also requires involvement of senior level staff as well as mandatory disclosure of these activities and the creation of:

A CSR Committee: It must comprise of 3 or more directors, having at least 1 independent director. The committee shall formulate and recommend CSR policy (preference given to local area), recommend CSR activity and expenditure on the same, and monitor CSR policy from time to time.Responsibilities of the Board:

Disclose Composition of CSR committee Approve CSR policy and report Ensure CSR activities are undertaken by the company

Page 2 of 7

©2014, CSRnext.org. All rights reserved.

CSR Committee Operating Framework CSR Policy

Ensure spending on CSR activities and reporting of non-compliance

The board has to disclose all CSR related activities in the director’s report. Failure to do so would attract penalty on the company of maximum INR 25 lakh and probable imprisonment of officer which may extend to 3 years.

CSR Policy: Specify the projects and programmes that are to be undertaken. Prepare a list of CSR projects/programmes which a company plans to undertake during the

implementation year, specifying modalities of execution in the areas/sectors chosen and implementation schedules for the same.

CSR projects/programmes of a company may also focus on integrating business models with social and environmental priorities and processes in order to create shared value.

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.

Operating Framework: CSR activities may generally be conducted as projects or programmes (either new or ongoing)

excluding activities undertaken in pursuance of the normal course of The CSR Committee shall prepare a transparent monitoring mechanism for ensuring

implementation of the projects / programmes / activities proposed to be undertaken by the company.

A company may also conduct/implement its CSR programmes through Trusts, Societies, or Section 8 companies operating in India, which are not set up by the company itself.

Such spends may be included as part of its prescribed CSR spend only if such organizations have an established track record of at least three years in carrying on activities in related areas.

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

family members shall be considered as CSR activity. All companies falling under the provision of Section 135 (1) of the Act shall report, in the

prescribed format, the details of their CSR initiatives in the Directors’ Report and in the company’s website.

Pooling of Resources:The new rules have given legitimacy to the idea of pooling of resources, enabling companies to enhance their spend capacity to take bigger CSR project is now a provision under the rules.

Companies belonging to the same group can set up a trust of not for profit company to undertake CSR.

Companies can also join hands with other companies to undertake CSR projects jointly

Activities included as per New Legislation

Page 3 of 7

©2014, CSRnext.org. All rights reserved.

i. Eradicating hunger, poverty and malnutrition , promoting preventative health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation* and making available safe drinking water;

ii. Promoting education including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;

iii. Promoting gender equality , empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and other such facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;

iv. Ensuring environmental sustainability , ecological balance, protections of flora and fauna, animal welfare, agro forestry, conversation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund setup by the Central Government for rejuvenation of river Ganga.*

v. Protection of national heritage , art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;

vi. Measures for the benefit of armed forces veterans, war widows and their dependents;vii. Training to promote rural sports , regionally recognized sports, Paralympics sports;

viii. 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, minorities and women;

ix. Contributions or funds provided by technology incubators located within academic institutions which are approved by the Central Government; and,

x. Rural development projects .xi. Slum area development (Slum area shall mean any area declared as such by the Central

Government or any State Government or any other competent authority under any law for the time being in force.)*

*Items in bold are the further amendments made to schedule VII of the Companies Act 2013.

Allowability of CSR expenditure as per the 1961 Income Tax Act:Section 35AC of the Act provides for deduction of expenditure incurred by way of payment by an assessee of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme. The said provision further provides that the assessee may either make payment aforesaid to the entities referred in above or either directly make payment of any sum to the eligible project or schemes. In other words, the provisions of section 35AC recognise the features of CSR provisions i.e., of allowing the Company to either make contribution to the eligible organisations/entities that undertake eligible projects or schemes and/or incur expenditure directly by itself on eligible projects or schemes. The eligible projects or schemes as referred in section 35AC are recommended under Rule 11K of the 1962 Rules. On perusal of Rule 11K, one may find that the significant guidelines of activities as recommended are in consonance to the subjects as prescribed under Schedule VII to the 2013 Act.

Specific provisions of ITA to improve prospects of deductibility of CSR:

Page 4 of 7

©2014, CSRnext.org. All rights reserved.

Deduction of CSR expenditure: Relevant case laws

CSR expenditure was held deductible in the following cases: Funds provided for establishing drinking water facilities and providing aid to school meant for

residents of the locality in which the taxpayer operated1. Expenditure on community assistance programmes and welfare measures undertaken in the vicinity

of taxpayer’s manufacturing unit2. Installation of traffic lights in the vicinity of taxpayer’s office to improve traffic situation, serving dual

purpose of benefitting the employees as also social commitment3. Trips to Bhuj and Jamnagar post earthquake for relief work4. Construction of hockey stadium for use of local residents5. Sponsorship of sports tournaments bearing the sponsor’s name on banners and association with the

trophy6. Contributions made by Pharma Company to health care society and science foundation allowed as it

would bring Goodwill to the assessee7.

Institutions Approved by the National Committee:

Name of the Institution

Project or scheme Maximum cost allowed as deduction under section 35AC (for 3 financial years)

Page 5 of 7

©2014, CSRnext.org. All rights reserved.

Sir Sayyad Educational Society.

Assistance for running schools, madarsas & Maktabs with full fledged facilities of hostel, canteen, library, provision of uniforms and text books, to the children.

Rs. 14.17 crore

Red Plus Society Tejaswini (Protecting orphan and abandoned children with abilities and differing abilities).

Rs. 1.00 crore

Gram Bharati Samiti (GBS)

A research on the endangered plant species of medicinal values found in the Aravalli region in district Jaipur and their use in Ayurvedic medicines.

Rs. 3.40 crore

Shree Navchetan Andhjan Mandal

Maintenance of Activities Rs. 7.38 crore

Jamia Islamia Ishaatul Uloom,

Maintenance of the Assalam Hospital. Rs. 23.51 crore

Subhash Anna Kool Shikshan Prasarak Mandal

“Jyotiba Phule Gramin Gunvataa Shiksha Abhiyan”.

Rs. 5.11 crore

Umang Charitable trust

Vocational Training for unemployed rural women, entrepreneurship training to school leavers.

Rs. 1.05 crore

Manakchand Prabhudan Charitable Trust

Smile Train Project & Oral Cancer Project. Rs. 3.10 crore

VAANI, Deaf Children’s Foundation

Comprehensive Services for Deaf Children, their families and professionals who work with deaf children.

Rs. 2.90 crore

Sree Lakshmi Jabbi Reddy Charitable Trust

Rural Health Mission. Rs. 20 crore corpus fund

Rewachand Bhojwani Foundation

Expansion of project” Vidyadan for genetic and mental retarded schooling.

Rs.5.40 crore including a corpus fund of Rs. 193 Lakh

Lions Club Care Foundation Charitable Trust

Integrated Community Health Programmes, Medical Camps & Eye Camps for poor people.

Rs.3.22 crore

Sources: 1. CSR Legislation and reporting specifications:

Page 6 of 7

©2014, CSRnext.org. All rights reserved.

http://www.csrwire.com/blog/posts/1290-the-birth-of-a-new-ecosystem-india-s-mandatory-csr-rule-becomes-a-reality

2. CSR in India: A changing Landscape:http://www.kpmg.com/CH/Documents/Blog/pub-20140430-csr-india-changing-landscape-en.pdf

3. Circulars from the Ministry of Corporate Affairs on CSR Legislation:http://www.mca.gov.in/Ministry/pdf/Amendment_Notification_06082014.pdfhttp://www.mca.gov.in/Ministry/pdf/Amendment_Notification_24102014.pdf

4. Schedule VII, Section 135 of Companies Act, 2013:http://www.cuts-international.org/pdf/Draft-CSR_Rules_2013.pdf

5. What is CSR?http://www.unido.org/

6. Section 35AC of Income Tax Act- Notified eligible projects or schemes:http://taxguru.in/income-tax/section-35ac-read-explanation-thereto-incometax-act-1961-eligible-projects-schemes-expenditure-notified-eligible-projects-schemes-notification-noso406e-dated-932012.html

7. Tax allowability on CSR: https://www.bcasonline.org/articles/artin.asp?1136

8. Tax deductibility on CSR:http://www.ey.com/publication/vwluassets/ey-advisory-csr-opportunities-and-challenges-tax-perspective/$file/ey-csr-opportunities-and-challenges-tax-perspective.pdf

Page 7 of 7

©2014, CSRnext.org. All rights reserved.