CSR in India - A Changing Landscape. March 2014

Transcription

1 CSR in India - A Changing Landscape March 2014

2 Mandatory CSR spend under the Companies Act, 2013 The New Companies Bill, 2013 ( the Bill ) passed by Lok Sabha The Bill passed by Rajya Sabha Presidential assent on the Bill obtained December 2012 August 2013 August 2013 CSR rules notified and CSR provisions notified to become effective from 1 April 2014! 2

3 CSR spend trigger points under the Companies Act, 2013 Every company of certain financial strength Financial strength criteria Net worth > INR 500 crores OR Turnover > INR 1000 crores OR Net profit > INR 5 crores 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 * 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.. 3

4 Specified CSR Activities Schedule VII revised (1/2) 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 4

5 Specified CSR Activities Schedule VII revised (2/2) 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 Critical for companies to devise effective CSR policy to make their CSR spend count 5

6 CSR Implications Compliances Responsibilities of the Board Constitution of CSR Committee of the Board (3 or more directors, having atleast 1 independent director*) Disclose composition of CSR Committee CSR Committee shall: 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 Approve CSR policy and report Ensure CSR activities are undertaken by company Ensure spending on CSR activities and reporting of non-compliance Penal consequence: Failure Board to spend has to on disclose CSR activities in Director and Report. failure to report would attract Failure to report penalty would on attract the company penalty on of the maximum company INR of 25 maximum lakhs and INR probable 25 lakh and probable imprisonment imprisonment of officer officer which which may extend may extend to 3 years to 3 years * Requirement of independent director relaxed in final CSR rules for unlisted companies and private companies 6

7 Global scenario CSR requirements in few countries 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 India would become the first country to mandate CSR through a statutory provision - Corporate Affairs Minister, Mr. Sachin Pilot 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 5 Malaysia Natural Resource based companies must allocate budgets for CSR programs and the programs must be run according to government regulations Compulsory for companies listed on Bursa Malaysia to disclose their CSR activities or practices Disclaimer - The above data is collated from public domain 7

8 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 8

9 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 Guiding principle CSR is not charity or mere donations 9

10 Modalities of carrying out CSR activities Alternate 1 Alternate 2 Alternate 3 Company Company Group Company 1 Group Company 2 Group Company 3 CSR activities to be carried out through employees In-house CSR activity Govt Schemes / Independent NGOs Donation to government schemes / independent NGOs Not-for-profit arm of the group Corporate group forms separate not-for-profit arm to carry out CSR activities 10

11 Typical entity options available for separate not-for-profit arm Entity options for separate not-for-profit arm of the group Section 25 Company Trust Society 11

12 Other aspects / issues What constitutes CSR activities 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? CSR spending Calculation and continuity 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? 12

13 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. 13

14 KPMG service offerings regulatory and tax services Phase - 0 Phase - 1 Phase 2 Phase 3 Understanding the facts Conceptualization Evaluation Implementation Reviewing the current CSR policy (if any), CSR activities, sustainability initiatives spread across different units / groups visà-vis the new requirements Analyzing the financial statements and identification of likely impact of CSR provisions 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 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 14

15 KPMG service offerings business advisory services Phase - 0 Phase - 1 Phase 2 Phase 3 Inception Conceptualization Design Implementation Reviewing the CSR & sustainability activities of the company Identifying and conducting stakeholder interactions to understand their expectations Submission of an Inception Report (as-is) 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) 15

16 CSR provisions notified to be effective from 1 April 2014 Need of the hour! 1 Board to constitute CSR committee 3 CSR committee to formulate CSR policy 5 CSR committee to develop internal operating structure and transparent monitoring mechanism CSR committee to consist atleast 3 directors, out of which at least 1 to be independent director CSR committee to formulate CSR policy along with internal CSR team CSR committee to develop operating system and monitoring mechanism along with internal CSR team March CSR Committee to form Core CSR team CSR team to be delegated with powers to do necessary compliances under the CSR provisions including formulations of CSR policy 4 CSR committee to recommend amount of CSR spend for FY CSR committee to compute CSR spend 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 6 Board to approve CSR Policy, including CSR spend and monitoring mechanism) by 31 March 2014 Board approval by circular resolution possible (if no physical meeting possible), which can be reconfirmed in board meeting post 1 April

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