Open Items / Gaps in Indian CSR Legislation

Today is a landmark day for our nation as the new Companies Act 2013 makes it mandatory for certain companies to spend 2% of their average net profit of last three years on Corporate Social Responsibility (CSR). See my other blog on the opportunities we have in front of us and where we are vis-à-vis the global trends in CSR.

However, there are still a few gaps in the new legislation as explained below.

1. Taxability of CSR Spend:
   1. Under section 37(1) of the Income-tax law, an expenditure is deductible only if incurred for the purposes of business. As far as 2% spend on CSR is concerned, the Income Tax department has not yet clarified its position.
   2. There have been so many previous instances where a company has been left in disarray with regard to treatment under two equally applicable statutes. (courtesy: HBL)
2. Scope of CSR Activities:
   1. While the MCA has expanded the scope of activities that can be carried out under CSR, it has not expressly clarified that the list is only suggestive and that the companies may choose activities outside of the Schedule as well.
   2. This contradicts with the statement made by Mr. Sachin Pilot, the Hon’ble Minister of State for Corporate Affairs, on 5th Nov 2013 at a function organised by the Shiv Nadar Foundation in New Delhi. He had said, ““It is for the board of a company to decide whether to allocate the mandatory CSR funds to a religious trust or philanthropic causes. The government would not like to say where they must spend. If the board of a company decides it wishes to contribute CSR funds to the Vaishno Devi Trust, so be it.”
3. Conflict with FCRA (Foreign Contributions Regulation Act, 2010)
   1. A Foreign Source (e.g., a company formed abroad, a subsidiary of a foreign company, an Indian who has acquired foreign citizenship, PIO card holders, Government of any foreign country, international agencies other than UN, IMF, World Bank etc as notified, etc) cannot donate / contribute to an NGO unless the Receiver obtains the prior permission of the Ministry of Home Affairs, or gets itself registered with the Central Government.
   2. One may be surprised to note that ICICI Bank, Britannia, Maruti Suzuki, IDFC Ltd, HDFC Ltd, ING Vysya Bank Ltd and many such companies that are perceived to be Indian are actually ‘Foreign Source’ as per FCRA. In such a situation, It might become difficult for many development organizations receiving CSR donations from Indian Companies to track their ownership/shareholding (Foreign Source status). It might lead to a frequent involuntary FCRA violations and litigations.
   3. Also, if both Foreign and Indian Sources are allowed to donate on account of CSR, then it will create conflict between FCRA and the Companies Act.
4. Contributions to the Prime Minister Relief Fund
   1. The Prime Minister’s National Relief Fund should be excluded from the schedule because it is not a Government body and is not even answerable to either houses of the parliament.
   2. The new Companies Act prescribes that the CSR activities undertaken within India will only be considered as valid for the purpose of compliance. Whereas the PM National Relief Fund contributes towards various domestic and international charitable causes as well.
5. Financial Disclosure of Average Profit by Private Limited Companies
   1. The new CSR law is applicable to both private and public limited companies. It prescribes a detailed operating framework, formation of CSR Committee,  CSR policy, monitoring of the CSR pool, projects & programs to be undertaken etc, and publishing of all the details on companies websites.
   2. Most of the private limited companies don’t disclose their financials in any form to the public. So this is a concern for many people I have interacted with on this subject.

I am sure these issues – and there could be more – will all be addressed by the MCA in due course. Please feel free to provide your feedback, if any.