csr in india regulations kpmg
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CSR in India - A Changing Landscape
March 2014
2 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Mandatory CSR spend under the Companies Act, 2013
CSR rules notified and CSR provisions notified to become effective from 1 April 2014!
December 2012 August 2013 August 2013
The New Companies Bill, 2013 (‘the Bill’)
passed by Lok Sabha
The Bill passed by Rajya Sabha
Presidential assent on the Bill obtained
Discussion Draft
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Net profit > INR 5 crores Turnover > INR 1000 crores Net worth > INR 500 crores
1 2 3
OR OR
If any of the above financial strength criteria is met, every company is mandatorily required to spend 2% of average net profits* of last 3 years on specified CSR activities
Every company of certain financial strength
CSR spend – trigger points under the Companies Act, 2013
Discussion Draft
* Average net profit to be computed as per provisions of the Companies Act, 2013 (‘the Act’) and final CSR rules in order to determine quantum of CSR spend..
Financial strength criteria
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Eradicating hunger, poverty and malnutrition, promoting preventive healthcare and sanitation and making available safe drinking water
Promotion of education, including special education and employment enhancing vocation skills especially among children, woman, elderly and the differently abled and livelihood enhancement projects
Promoting gender equality, empowering women, setting up homes and hostels for women and orphans, setting up old age homes, day care centers, and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups
Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro- forestry, conservation of natural resources and maintaining of quality of soil, air and water
Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up of public libraries, promotion and development of traditional arts and handicrafts
Measures for the benefit of armed forces veterans, war widows and their dependents
Training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports
Specified CSR Activities – Schedule VII revised (1/2)
Discussion Draft
5 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women
Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government
Rural development projects
Specified CSR Activities – Schedule VII revised (2/2)
Discussion Draft
Critical for companies to devise effective CSR policy to make their CSR spend count
6 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CSR Implications
Constitution of CSR Committee of the Board (3 or more directors, having atleast 1 independent director*)
Formulate and recommend CSR
policy (preference to be
given to local area)
CSR Committee shall:
Recommend CSR activities and
expenditure on the same
Monitor CSR policy from time to
time
Disclose composition of CSR Committee
Approve CSR policy and report
Ensure CSR activities are undertaken by company
Ensure spending on CSR activities and reporting of non-compliance
Responsibilities of the Board Compliances
Penal consequence: Failure to spend on CSR activities and failure to report would attract penalty on the company of maximum INR 25 lakhs and probable imprisonment of officer which may extend to 3 years
Discussion Draft
Board has to disclose in Director Report. Failure to report would attract penalty on the company of maximum INR 25 lakh
and probable imprisonment of officer which may extend to 3 years
* Requirement of independent director relaxed in final CSR rules for unlisted companies and private companies
7 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Global scenario – CSR requirements in few countries
Disclaimer - The above data is collated from public domain
Sr. No
Name of Country Whether CSR spend / reporting mandatory
Countries not having mandatory guidelines for CSR spending / reporting
1 U.K Voluntary guidelines in place for CSR Reporting
2 U.S.A Voluntary reporting by companies in Sustainability reports
3 China Voluntary reporting by companies in Sustainability reports
4 Germany Voluntary reporting by companies in Sustainability reports
5 Australia Voluntary reporting by companies in Sustainability reports
Countries having mandatory guidelines for CSR spending / reporting
1 France Mandatory reporting for listed companies in Annual reports on CSR activities
2 Denmark Investors and state owned companies to include information on CSR in their annual financial reports
3 Sweden Mandatory reporting by state-owned companies
4 Indonesia Natural Resource based companies must allocate budgets for CSR programs and the programs must be run according to government regulations
5 Malaysia Compulsory for companies listed on Bursa Malaysia to disclose their CSR activities or practices
“India would become the first country to mandate CSR through a statutory provision” - Corporate Affairs Minister, Mr. Sachin Pilot
Discussion Draft
8 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CSR rules notified – some of the salient features (1/2)
Applicability: – CSR provisions are also applicable to foreign companies having branch / project office in India if it meets
the financial strength criteria – Every company ceasing to meet CSR criteria for three consecutive years need not comply till it meets the
criteria again Net profit:
– Profit arising from overseas branches (whether operated as a company or otherwise) of the company – Dividend received from other companies (provided the other companies are covered under and complying
with CSR provisions)
Net profit computed under Companies Act, 1956 need not be recomputed in accordance with the provisions of Companies Act, 2013
Mode / manner of conducting CSR activities: – CSR activities to be conducted as per stated CSR policy as projects or programmes (either new or
ongoing), however, excluding activities undertaken in pursuance of the normal course of business of a company
– Company can undertake CSR activities through a registered trust, society or section 8 company – no three years track record for these not-for-profit entities if set-up by the company itself
– Company may also implement CSR programs through other not-for-profit organizations that are not set up by the company itself provided it has an established track record of three years and company has specified the project / programs to be undertaken, modalities, monitoring and reporting mechanism
– Companies may also collaborate or pool resources with other companies to undertake CSR activities in such a manner that each companies are in a position to report separately on such CSR projects Discussion Draft
9 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CSR rules notified – some of the salient features (2/2)
CSR policy to include: – List of CSR projects (related to activities included in Schedule VII) planned to be undertaken, modalities of
carrying out such project, implementation schedules, monitoring process, etc. – CSR policy to provide that surplus arising out of the CSR activity will not be part of business profits of a
company
CSR expenditure: – Eligible CSR expenditure: All expenditure, including contribution to corpus and spend on building CSR
capacities of own personnel / personnel of implementing agencies (upto 5% of total CSR spend) – Ineligible CSR expenditure: Expenditure not in conformity with activities specified in Schedule VII, CSR
activities undertaken outside India, CSR projects that benefit only the employees / their families and contribution to political parties
CSR reporting: Necessary to report content of the CSR policy and annual CSR return in specified format in
Board’s report and companies website
Others key aspects: – “Shared Value Concept” removed in the final CSR rules – Requirement of appointing independent directors in CSR committee relaxed for unlisted public company /
private companies – Private company having only two directors can constitute its CSR committee with two such directors – CSR committee to institute a transparent monitoring mechanism – Tax treatment of CSR not discussed in the final CSR rules
Discussion Draft
Guiding principle – CSR is not charity or mere donations
10 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Modalities of carrying out CSR activities
Company
Govt Schemes /
Independent NGOs
Donation to government schemes / independent NGOs
Company
In-house CSR activity
Group Company 1
Group Company 2
Group Company 3
Not-for-profit arm of the
group
CSR activities to be carried out through employees
Alternate 1 Alternate 2 Alternate 3
Corporate group forms separate not-for-profit arm to carry out CSR activities
Discussion Draft
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Typical entity options available for separate not-for-profit arm
Section 25 Company Society Trust
Entity options for separate not-for-profit arm of the group
Discussion Draft
12 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Other aspects / issues
What constitutes CSR activities
CSR spending – Calculation and
continuity
Whether incidental / indirect benefits to company’s employees or business would be regarded as CSR activities? – Employees residing in local area benefited due to local area
preference for CSR activity – whether eligible? – Quota reserved for children of employees in school run by the
company or its not-for-profit arm?
Can meeting of CSR obligation as a consequence of business activity be regarded as CSR activity? – Water management project carried on by a company as a business
activity – Companies manufacturing eco-friendly products – whether
considered to carry on CSR activity?
CSR activities specified under Schedule VII – Whether exhaustive?
Allocation of common business expenditure towards CSR goals? – How to allocate salary paid to manager devoting his time into
business as well as CSR activities? – How to allocate lease rentals if premise is used for business as well
as education purpose?
Can excess CSR spend of a particular year be carried forward and offset against CSR spending obligation in future years?
Discussion Draft
13 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Tax considerations
Alignment of CSR activities with definition of ‘charitable purpose’ under Income-tax Act, 1961
Deductibility of expenses towards CSR projects as revenue expenditure – Whether 2% CSR spend allowed as deductible tax expenditure? One view is that tax deduction not available as CSR spend not incurred for business purpose Other view is that tax deduction available as CSR spend is incurred due to statutory levy
− If expense deduction towards CSR project of 2% of average net profit available due to a statutory levy, whether expense incurred beyond 2% would be allowed as revenue expenditure?
− If expense deduction not available, issues relating to allocation of common expenses incurred towards business as well as CSR projects?
− If expense deduction not available, restrictive tax break (in form of 80-G deduction) available to company?
Allowability of depreciation claim on capital expenditure for acquiring assets to carry out CSR activities? Taxability of donation made by third party to the company for furtherance of its CSR activity. Example, a
school run under the company umbrella for poor and needy children.
Discussion Draft
14 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Implementation Evaluation
KPMG service offerings – regulatory and tax services
Understanding the facts
Reviewing the current CSR policy (if any), CSR activities, sustainability initiatives spread across different units / groups vis-à-vis the new requirements Analyzing the financial
statements and identification of likely impact of CSR provisions
Phase - 0
Conceptualization
Assisting the company on the applicability of mandatory CSR provisions Analyzing the allowability
of CSR expenditure from tax perspective and evaluating alternative options to maximize the tax benefit Providing different
modalities of carrying out CSR activities and providing pro and cons of each options from tax and regulatory perspective If CSR envisaged through
a separate not-for-profit arm, providing pros and cons of entity options i.e. trust, society or section 25 company
Phase - 1 Phase – 2 Phase – 3
Finalising the modality of CSR activity, investment, scaling up and replication plans Finalizing the appropriate
CSR structure which is viable from a commercial as well as tax and regulatory perspective to meet the current budget perspective of the company Finalising entity type for
setting up not-for-profit entity (if envisaged)
Assisting the company in preparation / reviewing the draft CSR policy prepared by the company from tax and regulatory perspective Assisting the company in
setting up of not-for-profit entity and obtaining necessary approvals On-going day-to-day tax
and regulatory advisory and compliance services from CSR perspective
Discussion Draft
15 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Implementation Design
KPMG service offerings – business advisory services
Inception
Reviewing the CSR & sustainability activities of the company Identifying and conducting
stakeholder interactions to understand their expectations Submission of an Inception
Report (as-is)
Conceptualization
Identify the sectors and the envisaged focus areas to make CSR spend count Assisting the company to
strategize for CSR policy Assisting the company in
preparation of investment, scaling up and replication plans Assisting the company in
analyzing Social Return on Investment (SROI) on a pilot basis of the CSR activities Submission of a Concept
Report (to-be)
Develop a draft CSR Policy, which has – Articulated CSR strategy – Plan for the CSR
interventions (adapted from the LFA) over a 3-5 year horizon
Client discussion & feedback Submission of the CSR
Strategy Document
Conduct a detailed S-E baseline Due diligence of partners Develop effective
Communications Plan Preparing for Sustainability
Reporting Assisting the company in
implementing the CSR policy Assisting the company in
setting up internal controls, monitoring and evaluation systems to implement, assess, document and report the impact of CSR activities Certification for CSR spend
(if required)
Discussion Draft
Phase - 0 Phase - 1 Phase – 2 Phase – 3
16 © 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CSR provisions notified to be effective from 1 April 2014 – Need of the hour!
1 31 March 2014
Board to constitute CSR committee
CSR committee to formulate
CSR policy
CSR committee to develop internal
operating structure and transparent
monitoring mechanism
1
CSR Committee to form Core CSR team
2
3
CSR committee to recommend amount
of CSR spend for FY 2014-15
4 Board to approve CSR Policy, including CSR spend and monitoring
mechanism) by 31 March 2014
6
5
If CSR activities envisaged to be carried out through separate CSR foundation, foundation set-up to be completed by 31 March 2014
CSR committee to formulate CSR policy along with internal CSR team
Board approval by circular resolution possible (if no physical meeting possible), which can be reconfirmed in board meeting post 1 April 2014
CSR team to be delegated with powers to do necessary compliances under the CSR provisions including formulations of CSR policy
CSR committee to consist atleast 3 directors, out of which at least 1 to be independent director
CSR committee to compute CSR spend along with internal CSR team
CSR committee to develop operating system and monitoring mechanism along with internal CSR team
CSR compliances to be completed immediately to ensure any spend from 1 April 2014 qualifies as eligible CSR spend
2 3 4 5 6
Discussion Draft
Thank You
Disclaimer: This presentation is prepared solely for informational purposes. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. In accordance with its policy, KPMG advise that neither it nor any of its director or employee undertakes responsibility arising in any way whatsoever, to any person or party in respect of the matters dealt with in this presentation, including any errors or omissions therein, arising through negligence or otherwise, howsoever caused. In connection with the presentation or any part thereof, KPMG does not owe duty of care (whether in contract or in tort or under statute or otherwise) to any person or party to whom the presentation is circulated to and KPMG shall not be liable to any person or party who uses or relies on presentation. KPMG thus disclaims all responsibility or liability for any costs, damages, losses, liabilities, expenses incurred by such person or party arising out of or in connection with the presentation or any part thereof. By reading our presentation the reader of the presentation shall be deemed to have accepted the terms mentioned hereinabove.
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