Corporate Social Responsibility (CSR) Advisory

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Corporate Social Responsibility (CSR)Corporate Social Responsibility (CSR)
Compliance & Advisory
Under new Companies Act, 2013
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VisitingCFO.comVisitingCFO.comVisitingCFO.comVisitingCFO.com Corporate Social Responsibility (CSR)Corporate Social Responsibility (CSR)

Executive SummaryExecutive Summary
 India became the first country to mandate spend on CSR activities through a
statutory provision after the President of India gave assent to the Companies Bill,
2013,.
 The Provision of Corporate Social Responsibility (CSR) are effective from financial
year 2014-15.
 As per Section 135 of the Act, every company with a specified net worth or
turnover or net profit are required to mandatorily spend 2 percent of its average
net profit towards specified CSR activities.
 Though many corporate houses in India have been doing CSR activities voluntarily,
the new CSR provisions put formal and greater responsibility on companies to
set out clear framework and process to ensure strict compliance.
 The Board of Directors of the companies are responsible to ensure that the
company spends the mandatory CSR spend on specified CSR activities in
accordance with the CSR policy of the company and disclose the CSR policy and
CSR activities of the company as specified in the provisions.
 Each qualifying company should form a CSR committee which will formulate the
CSR policy of the company and effectively monitor the CSR activities of the
company.
 The Ministry of Corporate Affairs (MCA) has issued draft rules on CSR for public
discussion. The said draft CSR rules lay down the framework and guidance on the
manner in which every eligible company is expected to undertake CSR initiatives.


Mandatory CSR spend under the Companies Act, 2013Mandatory CSR spend under the Companies Act, 2013
CSR rules notified and CSR provisions notified
to become effective from 1 April 2014!
The New Companies
Bill, 2013 (‘the Bill’)
passed by
Lok Sabha
December 2012
The Bill passed by
Rajya Sabha
August 2013
Presidential assent
on the Bill obtained
August 2013

Net profit > INR 5 croresTurnover > INR 1000 croresNet 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 spendCSR spend –– trigger points under the Companies Act, 2013trigger points under the Companies Act, 2013
 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

Applicability ofApplicability of CSRCSR
Net worth = > Rs. 500 Crore; or
Turnover = > Rs. 1000 Crore; or
Net profit = > Rs. 5 Crore
As per Section 135 of the companies Act 2013, any companies during any financial year have:
Mandatorily required to spend at least 2 percent of the average net profit of past three financial
years on specified CSR activities. If any of the above financial strength criteria is met.
 The threshold limit of Net Profit criteria is kept only at Rs. 5 crores to encourage and bring
majority of companies under the CSR spending umbrella.
 For this CSR expense purpose the net profit is defined to mean ‘net profit before tax’ as per
books of accounts and shall not include profits arising from branches outside India.
 While the reporting guidelines for the draft CSR rules under companies act suggest that the
unspent amount of the specified CSR spend to be rolled over to the succeeding financial
years, it does not clarify whether the excess spend of over and above 2 percent mandatory
CSR spend in any particular financial year can be carried forward in succeeding financial
year or not.
 A proper format is provided under the draft CSR rules which specifies the details of all CSR
expenses and initiatives should be reported by all qualifying companies in the Director’s report
and on the company’s website.

 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, Paralympics sports
and Olympic sports
Specified CSR ActivitiesSpecified CSR Activities –– Schedule VII revised (1/2)Schedule VII revised (1/2)

 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 ActivitiesSpecified CSR Activities –– Schedule VII revised (2/2)Schedule VII revised (2/2)
Critical for companies to devise effective CSR policy
to make their CSR spend count

Constitution of CSR Committee of the Board
(3 or more directors, having at least 1 independent
director*)
Formulate and
recommend CSR
policy
(preference to
be given to local
area)
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 BoardCompliances
Board has to Disclose a Director Report,Board has to Disclose a Director Report,
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
* Requirement of independent director relaxed in final CSR rules for unlisted companies and private companies
CSR ImplicationsCSR Implications

Role of Board & CSR CommitteeRole of Board & CSR Committee
Net worth = > Rs. 500 Crore; or
Turnover = > Rs. 1000 Crore; or
Net profit = > Rs. 5 Crore
Role of Board of Directors CSR Committee
Should form a CSR committee
Approve the CSR policy
recommended by the CSR
committee
Ensure implementation of the
activities under CSR
Ensure 2% spend on CSR
Three or more directors with at
least one independent director
Disclose reasons for not spending
the amount (if applicable)
Formulate and recommend a CSR
policy to the board
Recommend activities and the
amount of expenditure to be
incurred on SCR activity
Monitor the CSR policy from time
to time
Disclose CSR policy on website &
CSR activities in Boards Report

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 programmers (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 setup 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
Salient features of CSR rules notified (1/2)Salient features of CSR rules notified (1/2)

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 (up to 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
Salient features of CSR rules notified (2/2)Salient features of CSR rules notified (2/2)
Guiding principle – CSR is not charity or mere donations

Donation to
government
schemes /
independent
NGOs
Govt
Schemes /
Independent
NGOs
Group
Company 1
Group
Company 3
CSR
activities to
be carried
out through
employees
In-house
CSR activity
Alternate 1
Company
Alternate 2
Company
Alternate 3
Group
Company 2
Corporate group forms
separate not-for-profit
arm to carry out CSR
activities
Not-for-profit
arm of the
group
Modalities of carrying out CSR activitiesModalities of carrying out CSR activities

Section 25 Company SocietyTrust
Entity options for separate
not-for-profit arm of the group
Typical entity options available for separate notTypical entity options available for separate not--forfor--profit armprofit arm

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?
Other issues relating CSROther issues relating CSR

 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?
o One view is that tax deduction not available as CSR spend not incurred
for business purpose
o 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.
Tax considerationsTax considerations

ImplementationEvaluationUnderstanding 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
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
• 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
budgetperspective 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
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
Visiting CFO ServiceVisiting CFO Service offeringsofferings –– regulatory and tax servicesregulatory and tax services
Phase - 0 Phase - 1 Phase - 2 Phase - 3

ImplementationEvaluationUnderstanding the facts
• 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
preparation of investment,
scaling up and replication
plans
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
implementing the CSR
policy
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)
Visiting CFO ServiceVisiting CFO Service offeringsofferings –– Business Advisory ServicesBusiness Advisory Services
Phase - 0 Phase - 1 Phase - 2 Phase - 3

Board to constitute
CSR committee
CSR committee to
formulate
CSR policy
CSR committee to develop
internal operating structure
and transparent monitoring
mechanism
1 3 5
1 31 March 2014
CSR Committee to
form Core CSR team
CSR committee to
recommend amount
of CSR spend for
FY 2014-15
Board to approve CSR
Policy, including CSR
spend and monitoring
mechanism) 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
If CSR activities envisaged to be carried out through separate CSR foundation,
foundation set-up to be completed by 31 March 2014
CSR compliances to be completed immediately to ensure any spend
from 1 April 2014 qualifies as eligible CSR spend
2 3 4 5 6
2 4 6
CSR provisions notified to be effective from 1 April 2014CSR provisions notified to be effective from 1 April 2014 ––
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Dr. Dhirendra GautamDr. Dhirendra Gautam
(Ph.D. , CA, CMA, ICWA)
Visiting CFOVisiting CFO –– FounderFounder

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Corporate Social Responsibility (CSR) Advisory

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