csr in india - changing landscape

8/20/2019 CSR in India - Changing Landscape

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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 InternationalCooperative (“KPMG International”), a Swiss entity. All rights reserved.

Mandatory CSR spend under the Companies Act, 2013

CSR rules notified and CSR provis ions notif ied

to become effective from 1 April 2014!

December 2012 August 2013 August 2013

The New CompaniesBill, 2013 (‘the Bill’)

passed byLok Sabha

The Bill passed byRajya Sabha

Presidential assenton the Bill obtained

Discussion Draft




Net profit > INR 5 croresTurnover > INR 1000 croresNet worth > INR 500 crores

1 2 3

OR OR

If any of the above financial strength cr iteria is met, every company is mandatori ly

required to spend 2% of average net profi ts* of last 3 years on specified CSR activi ties

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




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 cit izens and

measures for reducing inequalities faced by socially and economically backward groups

Ensuring environmental sustainability, ecological balance, protection of f lora 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

histor ical 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 spor ts, nationally recognized sports, paralympic sports and Olympic

sports

Specified CSR Activities – Schedule VII revised (1/2)

Discussion Draft




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, minorit ies 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




CSR Implications

Constitution of CSR Committee of the Board(3 or more directors , having atleast 1 independent di rector*)

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

Responsibil ities of the BoardCompliances

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




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 DenmarkInvestors 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 MalaysiaCompulsory 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




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 thecriteria 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 – nothree 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




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 acompany

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 andcontribution 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 pr inciple – CSR is not charity or mere donations




Modalities of carrying out CSR activities

Company

Govt

Schemes /

Independent

NGOs

Donation to

government

schemes /

independentNGOs

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 throughemployees

Alternate 1 Alternate 2 Alternate 3

Corporate group formsseparate not-for-profit

arm to carry out CSR

activities

Discussion Draft




Typical entity options available for separate not-for-profit arm

Section 25 Company SocietyTrust

Entity options for separate

not-for-profit arm of the group

Discussion Draft




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 intobusiness 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




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 tocompany?

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




ImplementationEvaluation

KPMG service offerings – regulatory and tax services

Understanding the facts

Reviewing the current CSRpolicy (if any), CSRactivities, sustainabilityinitiatives spread acrossdifferent units / groups vis-à-vis the new requirements

Analyzing the financialstatements andidentification of likelyimpact of CSR provisions

Phase - 0

Conceptualization

Assisting the company onthe applicability ofmandatory CSR provisions

Analyzing the allowabilityof CSR expenditure fromtax perspective andevaluating alternativeoptions to maximize the taxbenefit

Providing differentmodalities of carrying outCSR activities andproviding pro and cons ofeach options from tax andregulatory perspective

If CSR envisaged through

a separate not-for-profitarm, providing pros andcons of entity options i.e.trust, society or section 25company

Phase - 1 Phase – 2 Phase – 3

Finalising the modality ofCSR activity, investment,scaling up and replicationplans

Finalizing the appropriateCSR structure which isviable from a commercialas well as tax andregulatory perspective tomeet the current budgetperspective of thecompany

Finalising entity type forsetting up not-for-profitentity (if envisaged)

Assisting the company inpreparation / reviewing thedraft CSR policy preparedby the company from taxand regulatory perspective

Assisting the company insetting up of not-for-profitentity and obtainingnecessary approvals

On-going day-to-day taxand regulatory advisoryand compliance servicesfrom CSR perspective

Discussion Draft




ImplementationDesign

KPMG service offerings – business advisory services

Inception

Reviewing the CSR &sustainability activities ofthe company

Identifying and conductingstakeholder interactions tounderstand theirexpectations

Submission of an InceptionReport (as-is)

Conceptualization

Identify the sectors and theenvisaged focus areas tomake CSR spend count

Assisting the company tostrategize for CSR policy

Assisting the company inpreparation of investment,

scaling up and replicationplans

Assisting the company inanalyzing Social Return onInvestment (SROI) on apilot basis of the CSRactivities

Submission of a ConceptReport (to-be)

Develop a draft CSRPolicy, which has

– Articulated CSR strategy

– Plan for the CSRinterventions (adaptedfrom the LFA) over a 3-5year horizon

Client discussion &feedback

Submission of the CSRStrategy Document

Conduct a detailed S-Ebaseline

Due diligence of partners

Develop effectiveCommunications Plan

Preparing for SustainabilityReporting

Assisting the company inimplementing the CSRpolicy

Assisting the company insetting up internal controls,monitoring and evaluationsystems to implement,assess, document andreport the impact of CSRactivities

Certification for CSR spend(if required)

Discussion Draft

Phase - 0 Phase - 1 Phase – 2 Phase – 3



Thank You

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csr in india - changing landscape

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