csr in india regulations kpmg

CSR in India - A Changing Landscape

March 2014

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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


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


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


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


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


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


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


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


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


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


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


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


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


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


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

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csr in india regulations kpmg

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