With the passage of companies’ act 2013 a mandatory responsibility under section 135 was cast on companies to spend 2% of the net profit as calculated under section 198 of the companies act on the activities listed therein and being social in nature.
Initially the expenditure was thought to be treated as business expenditure by the revenue department but later on it was clarified that this expenditure has to be made out of net profit of a company after paying or providing for taxes. At the time of compliance i.e. when spending the money actually started the situation became difficult as concerns were raised on the following matters.
1. How to use the funds under CSR activities?
2. Can a company spend the available funds directly or not?
3. Relevance of FCRA?
4. Relevance of service tax?
5. Any other matter to be examined.
1. How to use the money under CSR activities: Companies having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
The Corporate Social Responsibility Committee shall:—
(a) Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;
(b) Recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
(c) Monitor the Corporate Social Responsibility Policy of the company from time to time.
The Board's report under sub-section (3) of section 134 shall disclose the Composition of the Corporate Social Responsibility Committee.
2. A company can spend the available funds under CSR in the undermentioned manner:
a. Directly on its own, say by making a division called CSR division.
b. Through its own not for profit foundation set- up so as to facilitate this initiative.
c. Through independently registered not for profit organisations that have a record of at least three years in similar such related activities.
d. Collaborating or pooling their resources with other companies.
3. Relevance of FCRA Act 2010?
In the cases where the funds are transferred by an Indian company as defined under the companies act 2013 under CSR as grant to its foundation or to an independent registered not for profit organisation or collaborating or pooling their resources with other companies (as explained under point number 2 above) the same can be done through normal banking channels.
But funds in the shape of grants etc. transferred by companies considered as foreign companies as per the companies’ act 2013 the funds have to be transferred to a bank account earmarked under Foreign Contribution and Regulation Act 2010 for receipt of grants from oversea bodies.
4. Relevance of service tax?
Companies spending funds directly through any organization eligible under law but in the capacity of organizer, aggregator, and contractor or with any other terminology used therein will attract the provisions of service tax. Service tax being relatively new law with less clarity becomes a big issue after a certain period and once there is noncompliance of the act the liabilities become huge due to heavy interest and penalties. Thus in cases where the CSR funds are spent through organizer, aggregator, and contractor or in any other terminology used therein will be treated as service thus liability to pay service tax will arise. However funds transferred as grant with limited review rights will not attract service tax provisions. Now a days even in the case of grants the funding companies want their logos displayed this amounts to advertisements thus qualifies as service resulting in applicability of service tax provisions. In short all the agreements or MOUs need to be carefully drafted and reviewed before concluding weather service tax applies or not.
5. Any other matter to be examined:
Due to constant changes in laws, as a result of ongoing reforms, it is advised to refrain from applying one’s own logic but to keep updated on the changes in law either due to passing of new legislations or due to the cases been decided by the judiciary. A check list need to be made and followed religiously to avoid any difficulty at a later stage. A sample of such check list can be:
a. Applicability of the companies’ act 2013 with respect to CSR spending.
b. Funds available for CSR activities.
c. Identify problems of the local area where the company operates.
d. Identify and match the problem with the list of areas to develop as provided in the schedule VII of the companies’ act 2013.
e. Set up a CSR committee as per the provisions of companies’ act 2013.
f. Decide the manner in which funds will be spent.
g. Draft an MOU or agreement.
h. Review for the application of provisions of Income Tax, Service tax and other taxes including local taxes if any.
i. Report the process and procedure being followed by the company in Director’s report with the annual accounts.
j. No doubt India has taken a great initiative for social cause but the activities need to be in conformity to the provisions provided in the companies’ act 2010 and not in violation with other laws of the land.
DILIP K RAINA
Chartered Accountant:
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