The mandatory clause for Corporate Social Responsibility (CSR) spending in the new company law has generated a large number of queries from India Inc and company law experts. The deadline for comments on the first tranche was to end on Tuesday but the Centre has now extended this time till Thursday.
Section 135 on CSR in the new law makes it mandatory for certain class of companies to set aside 2% of their average net profit for preceding three years for CSR.
The rules do not substantiate whether the unspent (surplus) amount of the specified CSR fund that will be rolled over to the next financial year will yield any credit to the company in the next fiscal, said Lalit Kumar, partner in law firm J Sagar Associates.
Section 135 of the Companies Act, 2013 provides CSR committee to consist of three or more directors. A private limited company only requires two directors.
“In case where a private limited company meets one of the criteria to attract the CSR provision, will it mean that the private company will specifically need to increase its board strength to three only for the purposes of the CSR Committee? This will be too harsh and can be relaxed for private companies,” said Kumar.
According to Harinderjit Singh, partner, Price Waterhouse, there are several aspects in the CSR rules where more clarifications would be required.
“The average of net profit of three years for the purpose of computing of 2% CSR spend does not specify how to calculate average of net profit where the company has a loss in one or more years in a block of three years,” Singh said.
The draft rules, experts said, do not substantiate the ability of the CSR committee to revise a CSR policy during the course of the year if there are contingencies like a natural disaster or an unforeseen changes in the implementation of a CSR project.
“In case a company has set up its own foundation, whether the requirement of three-year track record is applicable or not,” said Singh. Also, clarifications have been sought on whether a foundation set up overseas by the parent company or group can contribute on behalf of the group companies operating in India.
Rajiv Chugh, tax partner in EY, said the manner of computation of average net profits needs to be simplified to ensure that there is no controversy for the already beleaguered corporate India.
Chugh said: “The CSR rules link 2% CSR spending amount to be computed with reference to average net profits (before tax) akin to the manner in which managerial remuneration is to be computed, as per section 198, but using the block concept of profits of preceding three years. They also clarify that profits arising from branches outside India are to be excluded and the manner of computation needs to be simplified.”
According to Kumar of J Sagar Associates, one of the rules provides that CSR activities may generally be conducted as projects or programmes (either new or ongoing), however, it excludes activities undertaken in pursuance of the normal course of business of a company.
“This would become subjective and will depend upon facts of each case. It is better that there is some clarity on this,” Kumar said.
