CSR Defaulters likely to be Penalised under New Clause

September 18, 2014
The Narendra Modi-led government will not let companies get away easily if they do not spend the mandated 2% of their profits on Corporate Social Responsibility (CSR) activities as specified by law.
The government is planning to add more teeth to the Companies Act 2013 by introducing the penalty clause for companies that miss this target spending repeatedly. At present, non-compliance of CSR rule isn’t penalized by the Companies Law, and those unable to spend the stipulated amount can get away with some justification.
“Under the current law, there’s no mandatory obligation on the company, but a responsibility is cast upon the board members. In case companies repeatedly fail to do so for two or more years, they should be penalized. We can’t leave any grey areas in law,” a senior government official told ET. Under the Companies Act 2013, a company must spend 2% of its average net profit in the preceding three years on CSR if it has a turnover of Rs. 1,000 crore or more, or net worth of Rs. 500 crore or more, or net profit of Rs. 5 crore or more.
The new law, which came into effect on April 1, 2014, says if a company isn’t able to give a satisfactory explanation about not spending on CSR activities, the corporate affairs ministry, at most, can question the roles and responsibility of its directors, but can’t act beyond that. “The quantum of penalty in case of non-compliance hasn’t been worked out,“ the official added.
However, the industry and corporate lawyers are critical of the government’s proposal of penalising in case of repeated non-compliance. “A better proposition would be to provide tax incentives to corporates, effectively complying with the CSR obligations,“ a senior executive of a multinational told ET.
Around 14,000 companies are expected to spend about Rs 15,000 crore on various social projects under the mandatory CSR spending.
The government has provided a list of activities that qualify as CSR, which include measures to eradicate hunger, promote education and rural sports, protection of heritage, and environmental sustainability.
The companies which fail to spend the entire 2% on CSR activities can also transfer the remaining amount to the Prime Minister’s relief fund.
“The government expects companies to abide by the spirit of the legislation, which is currently enacted on the principle of ‘comply or explain’, and does not have any penal provisions.
If the compliance levels are seen to be low, the corporate affairs ministry would consider introduction of penalties,” said Sai Venkateshwaran, Partner and Head Accounting Advisory Services, KPMG in India. – http://www.economictimes.indiatimes.com

Source : http://www.taxmann.com/topstories/222330000000003792/csr-defaulters-likely-to-be-penalised-under-new-clause.aspx

 

CSR rules should be interpreted liberally, says government

New Delhi: In its latest clarification on the new companies law, the corporate affairs ministry said on Thursday that rules regarding corporate social responsibility should be “interpreted liberally so as to capture the essence of the subjects enumerated” in the norms.
The ministry has further clarified that one-off events such as marathons, awards, charitable contribution, advertisement, sponsorships of TV programmes, etc., will not qualify as part of CSR expenditure.
The expenses incurred to fulfil any regulation will also not be counted as CSR expenditure, nor would the salaries paid by the companies to regular CSR staff as well as to volunteers, the ministry said.
“The expenditure incurred by foreign holding company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is required to do so as per section 135 of the Act,” the ministry said in the order posted on its website.
The ministry has said that contribution to a corpus of a trust or society would qualify as CSR expenditure as long as such an entity is “created exclusively for undertaking CSR activities”, or “where the corpus is created exclusively for a purpose directly relatable” to the subjects covered within Schedule VII of the companies law, which deals with corporate social responsibility.
A registered trust, in this case, says the ministry, “would include trusts registered under the Income Tax Act 1956, for those states where registration of trust is not mandatory.”
Amarjit Chopra, a former president of Institute of Chartered Accountants of India (ICAI), said that the government has sought to liberalize the activities that companies can undertake to fulfil their CSR obligations.
“Put simply, they have told the companies that they can take some liberties and go outside the scope of the activities prescribed under the Act,” he said.
Pavan Kumar Vijay, managing director at New Delhi-based financial and legal consultancy, Corporate Professionals India Pvt. Ltd, while agreeing with Chopra’s view, said one major change brought about by the order is the inclusion of the so-called “consumer-protection services” under the ambit of corporate social responsibility.
“Representations were made by several sections of the industry on this, and the government has accepted this view,” he said.
The various “consumer-protection services” include provision of an effective consumer grievance redressal mechanism, protection of the consumer’s health and safety, sustainable consumption, consumer service, support and complaint resolution.
The new companies law mandates companies with a net worth of more than Rs.500 crore or a revenue of more than Rs.1,000 crore or a net profit of more than Rs.5 crore to spend 2% of their average net profit over the three preceding years on CSR activities.
While non-compliance will not be penalized, companies will be required to disclose the reasons for this, effectively making such spending mandatory.
The clause relating to CSR was a key provision in the long-pending legislation to overhaul the outdated companies law of 1956.