Column: Shades of grey in CSR

Mar 13 2014, 03:09 IST
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SummaryTax treatment of CSR spends is still unclear & confusion persists on the appointment of independent directors

The most talked about provision of the Companies Act, 2013, relating to corporate social responsibility (CSR), has finally got notified. That the CSR provision has been notified before other provisions of the Act shows the government’s urgency in bringing it to effect before April 1, 2014.

The Act mandates a disclosure regarding CSR, than the CSR spend per se. The 2013 Act follows a ‘comply or explain’ approach. As per the provisions of section 135, a company with a turnover of R1,000 crore or more or of a net-worth of R500 crore or more or reaping a net profit of R5 crore or more in any financial year shall constitute a CSR committee and is required to spend at least 2% of its average net profits of the past three years on CSR activities. Further, the 2013 Act provides that if, for any reason, a company is unable to spend 2% of their average net profit on CSR, they are required to explain the reason for not doing the same.

Under section 467 of the Act, the government has invoked the power to amend schedule VII significantly. A ‘clause X’ in the earlier schedule VII, which empowered the government to prescribe “any other matters”, has been removed.

Schedule VII states that certain new activities could be classified as CSR activities—protection of national heritage, art and culture, including restoration of buildings and sites for historical importance and works of art, setting up of public libraries, promotion and development of traditional arts and handicrafts, measures for the benefit of the armed forces veterans, war widows and their dependants, rural development projects, training to promote sports, funds to technology incubators, etc. The scope of certain existing activities has been enhanced—the scope of promoting education also includes special education. Further, the schedule elaborates on certain activities. For example, environment sustainability, which includes ecological balance, maintaining quality of air, water and soil, conservation of national resources, etc.

Activities aimed to help only the company’s employees or families of the company’s employees won’t be considered as CSR activities and political contribution/funding won’t be considered as CSR expenditure.

The definition of CSR, as prescribed in rule 2(c), seems to be an ‘inclusive’ definition, although at several other places it clearly states that those CSR activities falling under schedule VII will only qualify as CSR expenditure by a company. This will create ambiguity. If someone takes up a project, other than that permitted

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