CSR won’t count employee benefits

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MUMBAI/NEW DELHI: Companies which were hoping to fulfill their corporate social responsibility (CSR) obligations, introduced by the recently enacted Companies Act, 2013, through the easy route of donations or activities that would exclusively benefit their employees and families are in for a rude shock.

The ministry of corporate affairs (MCA), which has released draft rules for the Companies Act, 2013 on Monday for public comments by early October, has asked corporate houses to set up a corpus, which will have 2% of the average net profits for the preceding three years as the seed capital. Every year, any income earned on the corpus and surplus arising out of CSR activities will be added to increase the size of the kitty and ensure that companies don’t add these earnings to their bottomlines.

The Companies Act, 2013, has called upon companies having a net-worth of Rs 500 crore or more; or a turnover of Rs 1,000 crore or more; or a net profit of Rs 5 crore or more to have a CSR spend of at least 2% of their average net profits of past three years.

While providing an indicative list of activities that are eligible for the CSR spend, the draft has proposed that contributions to the Prime Minister’s National Relief Fund and other Central or state government funds will continue to be eligible for CSR activities. The rules require that “CSR activities may generally be conducted as projects or programmes (that do not include normal business activities).” CSR committees of each corporate entity covered by these provisions are required to specify the projects and programmes that will be undertaken. In addition, the chapter on guiding principles contained in the draft rules, emphasize the need to adopt business process and strategies. The bottomline outlined in the guiding principles is: CSR is not charity or mere donations.

“At the same time, the MCA has not set down the ratio, if any, which a company could follow for making donations vis-a-vis engaging in CSR activities. This was earlier in the pipeline,” says a industry source close to the developments. The draft rules also specify that only activities that are not exclusively for the benefit of employees of the company or their family members will be considered as CSR activities. In other words, if a company provides elementary education for children of its plantation workers, such expenditure would not be eligible CSR spend.

Some of the draft rules will make it easier for companies to meet their CSR obligations. Companies are permitted to collaborate or pool resources with other companies for undertaking CSR activities. Companies can also engage in CSR activities through external agencies — such as NGOs. However, in such cases, the NGO must have an established track record of at least three years of carrying on activities in those areas.

CSR programmes by a company may also focus on integrating business models with social and environmental priorities. For instance, a company that has set up a vocational training centre can sell the products made by such centre. “It may be possible to utilize manufacturing by-products for making items such as soaps,” illustrates a CSR consultant. The only caveat in this case is that the profits if any, will not be part of the business profits of the company.

Several companies have set up foundations that engage in CSR activities. When the Companies Act came into being, there was apprehension that activities of the foundation would not count towards CSR spend. Companies can now, via the foundations set up by them engage in CSR activities. A monitoring mechanism will need to be in place. The draft rules specify that the tax treatment of CSR spend will be in accordance with the IT Act, and as may be notified by the CBDT. The list of activities eligible for CSR was specified in the Schedule to the Companies Act. These include eradicating hunger and poverty; promotion of education, women empowerment; reducing child mortality and improving maternal health; environmental sustainability; employment enhancing vocational skills or contributions to central or state government set up funds, including the PM National Relief Fund.

(Times of India)

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