India’s CSR Mandate

Legal Forum

Provisions in the Companies Act 2013 make India the first country to mandate Corporate Social Responsibility. Dimpy Gulati finds out more

The concept of Corporate Social Responsibility (“CSR”) has been introduced by the government to enable corporates to shoulder their responsibility towards society. The concept of CSR is not new to the people of India as many big corporate houses contribute to bring about change in the lives of socially backward people. However, the addition of CSR in Company Law makes India the first country in the world to make CSR activity a legally binding obligation. This article highlights the key points of the applicability, and the impact of such a clause on companies operating in India.

CSR Activities

Compliance under Section 1351 of the new Companies Act, 2013 (New Act) is based on monetary limits thresholds irrespective of the nature of the company, viz. public or private. Schedule VII (Schedule) in the New Act lists activities which can be considered as CSR activity. These include:

• Eradicating hunger and poverty;

• Promotion of education;

• Promoting gender equality and empowering women;

• Reducing child mortality and improving maternal health;

• Ensuring environmental sustainability;

• Social business projects, expenditure for the benefit of armed forces veterans;

• War widows and their dependents.

Recently, the Ministry of Corporate Affairs issued a notification dated August 6 to include slum area development as a permissible CSR activity.

Past trends reveal that companies give priority to all-round development of people residing in and around the company’s area of operation. Big corporates have set an example as responsible corporate citizens to bring overall development in the economy. For example, P&G’s CSR programme ‘Shiksha’ was launched in 2005 to contribute towards the cause of educating under-privileged children. Till date, Shiksha has helped 280,000 under- privileged children access their right to education. Novartis pharmaceuticals has focussed on the treatment of leprosy and distributed free medicines to the affected people, curing close to 4.5 million patients with this initiative. Citi Group has focussed on women empowerment, rehabilitation, education and health. SAIL India contributed in the AIDS awareness programme, education, medical facilities, health development of small scale/ancillary industries, agriculture, poultry and fisheries.

The activities enumerated under the said schedule form an inclusive list. However, no such activity which is undertaken for the ultimate benefit of the company shall be given due importance of being a CSR activity. Also, activities and one-off events such as marathons, awards, charitable contributions, advertisement, sponsorships of TV programmes, expenses incurred by companies for fulfilment of requirement of any Act/statute of regulations shall also be outside the purview of a CSR initiative.

Disadvantages

Companies which are now required to spend on CSR activities may now have to bear a heavier tax burden. The Finance Bill, 2014 has clarified that CSR expenditure will not be treated as business expenditure since such an allowance will directly reduce the taxable profits of the company. Expenditure incurred on CSR is considered as appropriation of profits of the company. However, tax benefits are available if specific provisions of the Income Tax Act cover the expenditure. For example, if the expenditure is covered under Section 30 to 36 of the Income Tax Act, and includes repairs, depreciation and expenditure on wide variety of notified projects like skill development, it would be allowed as business expense. But companies will still face challenges as the projects are not notified on timely basis.

Many big conglomerates have made considerable contribution to improve the overall quality of life of people as a part of good governance practices. In order to eradicate deep-rooted social evils, it becomes imperative that all corporates join hands not only as a means to satisfy legal requirements, but also to have real impact on the community at large.



Go to Content Page

Author

Dimpy Gulati

Dimpy Gulati is Partner, Head, Financial Desk & Head of the Chicago Office of Legal Imperials. For all queries, please write to us at dimpy@legalimperials.com.

  • +

    References

    1 The company shall be required to undertake expenditure on CSR activities of at least two percent of the average net profits* if any of the below mentioned threshold is met:
    • Net Worth of at least `Five hundred crore (approx.. $80 million);
    • Turnover of at least `One thousand crore (approx. $ 160 million); or
    • Net Profits of at least `Five crore (approx. $800,000)
    *Average net profits are calculated on the net profits of the company for the preceding three years.

Back to Top

Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.

Search