As was expected, the notification bringing in force Section 135 of the new Companies Act, 2013 (‘New Act’) dealing with arguably the most important provision of the New Act of the corporate social responsibility (CSR) has been released on Thursday, ahead of other sections of the New Act. This showed government’s eagerness to bring this provision into force. The provisions will come into force from April 1, 2014.
Schedule VII has been significantly amended pursuant to government’s power under Section 467 of the New Act which gives it the power to amend the schedules. The effect of this amendment is that some activities as were provided in the current Schedule VII have been completely deleted; for instance, social business projects do not find any mention in the amended schedule. Some new activities have been added; for instance, protection of national heritage, art and culture, including restoration of buildings and sites for historical importance and works of art. Further, measures for the benefit of armed forces veterans, war widows and their dependents have been added. The scope of some of the existing activities has been expanded; for instance, the scope of promoting education has been expanded to include special education especially among children, women, elderly and the differently abled. Interestingly, a clause in the earlier Schedule VII, which gave power to the government to prescribe other matters, has now been deleted. In effect, it will mean that if there is a need to add further activities, Schedule VII will again require amendment pursuant to Section 467.
In the Companies (CSR Policy) Rules, 2014 which were also notified on Thursday, the definition of CSR is an ‘inclusive’ one, while the main body of the Rules very clearly provides at many places that the CSR activities have to be one of those as specified in the amended Schedule VII. So, this will create some ambiguities since the inclusive nature of the definition of CSR gives an impression that activities other than those permitted in Schedule VII can also be undertaken but the Rules elsewhere do not support this. Since the main body of the Rules at many places restricts activities to the ones in Schedule VII, it will be difficult to take a view that activities other than those can be undertaken. This will restrict a company from implementing CSR projects of its choice and many existing CSR schemes and programmes of companies will need to be relooked and aligned with the activities of Schedule VII. There were hopes that the government will permit companies to design their own CSR activities but unfortunately that hasn’t happened.
One important amendment exempts private companies to have an independent director on the CSR committee. This is a welcome change because private companies are otherwise not required to have independent director as per Section 149. So to expect them to have an independent director only for a CSR committee was too much. Further, since a private company needs a minimum of two directors, while the minimum to constitute a CSR committee is three directors, private companies have been permitted to constitute the CSR committee with only two directors. While this is a relief to private companies, the legal question is that since this was a requirement under Section 135 of the New Act which also applied to a private company, could the relaxation be given to private companies through government’s rules making power under Section 469. Legally, the Ministry of Corporate Affairs should have invoked its power under Section 462 which allows central government to exempt companies from compliance of certain provisions of the New Act. But, whatever may be the mode, the intention of the government to exempt private companies is clear in the Rules.
Not only the Indian companies but even foreign companies having a branch office or project office in India will need to comply with the CSR requirements if they fall within any of the criteria under Section 135.
While calculating the profit for the purposes of CSR contribution, neither the profits earned from overseas branch of an Indian company nor the dividend received from other Indian companies be included provided those Indian companies are covered and comply with Section 135.
Complete clarity has been provided that political contribution shall not be considered as CSR activity. All questions on this issue have been laid to rest. Further, the expectation of the industry to permit the time-value of the contribution of company’s personnel towards CSR has not been permitted; so it means it will have to be actual spending by the company and the value of employees’ services will not be considered as a CSR activity. Having said this, there is a provision in the Rules which says that companies may build CSR capacities of their own personnel but such expenditure shall not exceed 5% of the total CSR expenditure of the company in a financial year. The provisions are not amply clear to conclusively say that the time-value of the personnel for CSR activities is permissible.
The draft Rules earlier provided that the tax treatment will be as per the CBDT’s norms in this regard but these final Rules do not provide anything in this regard. So the tax treatment of CSR contribution is not clear as nothing has been clearly provided in this respect; so whether or not CSR contribution be deducted as business expenditure still remains an unresolved question.
(Lalit Kumar is a partner with J. Sagar Associates. Views are personal.)
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