Most sector experts say CLC’s recommendations on corporate social responsibly are welcome as they provide clarity
An increase in the portion of expenditure on corporate social responsibility (CSR) that companies can set aside for ‘overheads’, a five-year time frame for reviewing implementation by them and defining net profit for calculating CSR were among the changes suggested by the Companies Law Committee (CLC).
The changes, part of recommendations made to the ministry of corporate affairs (MCA) on 1 February, include amendments to around a dozen provisions of Section 135 of the Companies Act 2013, dealing with CSR.
The much-debated Section 135 had earlier been reviewed by a high-level committee headed by former urban development secretary Anil Baijal, which submitted its recommendations in September 2015. The CLC was mandated to review these and other committee reports on the Act.
As of 1 April 2014, when the CSR Rules took effect, companies with a net worth of Rs.500 crore or revenue of Rs.1,000 crore or net profit of Rs.5 crore needed to spend 2% of their average profit of the three preceding years on social development-related activities as defined in the Rules.
Many provisions of these Rules were contested, so much so that though notified in April 2014, it was not till October of that year that the MCA—the nodal agency overseeing the Companies Act and CSR Rules—issued the final letter for all companies to implement the rules.
The CLC, chaired by secretary, MCA, had former Delhi high court judge Reva Khetrapal, representatives from the Institute of Chartered Accountants of India, the Institute of Cost Accountants of India, the Institute of Company Secretaries of India and the Reserve Bank of India and Securities and Exchange Board of India.
Most sector experts are of the view that the CLC’s recommendations are welcome as they provide clarity but some point out that they are silent on certain critical aspects of Section 135.
“A big positive takeaway from the CLC’s recommendations is the fact that it has suggested that the overhead costs be increased from 5% of the CSR budget to 10%,” said Sudhir Singh, partner at consulting firm PwC India.
“The CLC recommendations bring in a lot of clarity on the CSR rules—from the definition of net profit, to which year net profit is to be calculated and which companies constitute foreign to the flexibility awarded for the CSR initiatives to companies.” He also explained that 5% of the total CSR spend was too small an amount to meet administrative and logistics costs of various activities undertaken by businesses.
Those critical of its recommendations point to the lack of clarity on what actually constitutes overhead costs.
A representative of a CSR consultancy firm, explained, “The portion of CSR corpus allotted to overhead costs is not the only concern — the real issue to be addressed is the need to define what qualifies as an overhead cost and what does not.”
Another aspect not mentioned in the CLC recommendations is the varying tax treatment of different CSR activities. For example, any company undertaking skill development, research and educational activities gets tax rebates from respective nodal ministries whether such activities are covered under CSR or not.
“It is unclear how the government aims to address this as the CLC has made no mention of the varying tax treatment of activities covered as CSR,” Singh said.
The Baijal committee report had emphasised on the need for uniformity in tax treatment, as reported by Mint earlier (bit.ly/20Jy2XJ). But those recommendations find no mention in the CLC report.
A representative of a firm specialising in CSR and social sector consulting, suggests this could be due to the upcoming budget. “As tax varies from year to year, so do tax rebates and, in all likelihood, the 2016-17 budget scheduled at the end of February will throw light on the tax elements of CSR Rules.”
This article was taken from here.