High-level panel suggests uniform tax treatment for CSR activities

The panel has also said the government should have no role in monitoring of CSR expenditure by corporates and this should be the job of their respective boards

A government-appointed high-level panel has recommended uniform tax treatment for all corporate social responsibility (CSR) activities carried out under the new Companies Act and has also suggested leniency towards non-compliant firms in the first 2-3 years of this law. The panel has also said the government should have no role in monitoring of CSR expenditure by corporates and this should be the job of their respective boards.

Under the new companies law, certain class of profitable entities are required to shell out at least 2% of their three-year annual average net profit towards CSR activities. The first year of implementation was last financial year (April 2014-March 2015) and compliance reports would be available by the end of this year. According to the committee, differential tax treatment for expenditure on various CSR activities may create unforeseen distortion in allocation of funds across development sectors.

“The (company) board’s decision could be guided more by tax savings implications rather than compelling community social needs. The committee therefore feels that there should be uniformity in tax treatment for CSR expenditure across all eligible activities,” the report said.

At present, certain activities such as contribution to the Prime Minister’s National Relief Fund qualify for tax exemption. The panel, chaired by former home secretary Anil Baijal, was set up by the corporate affairs ministry to suggest steps for improved monitoring of CSR spending. According to the panel, leniency may be shown to non-compliant entities in “initial two/three years to enable them to graduate to a culture of compliance” since these years would be a period of learning for all the stakeholders. This liberal view can be taken at least for smaller companies, it added. “The government should have no role to play in engaging external experts for monitoring the quality and efficacy of CSR expenditure of companies,” the panel said in its report submitted to the ministry. The boards/CSR committees and the management are sufficiently empowered to engage any external firm, if they so require, it added. As per the report, the boards and the CSR committees should be monitoring their companies’ social welfare spending. “The existing legal provisions like mandatory disclosures, accountability of the CSR committee and the board, provisions for audit of the accounts of the company etc, provide sufficient safeguards in this regard,” it added.

The panel said that keeping in view the intent of the of the law, the main thrust and spirit of the law is not to monitor but to generate conducive environment for enabling corporates to conduct themselves in a socially responsible manner. “The rationale behind CSR legislation is not to generate financial resources for social and human development since the resource gap, if any, for such development or social infrastructure, could as well have been met by levying additional taxes/cess on these corporates,” the report noted.

CSR norms came into effect from 1 April 2014. Entities having at least Rs.5 crore net profit or Rs.1,000 crore turnover or Rs.500 crore net worth would come under its ambit. Further, the committee has suggested allowing private companies to carry forward their unspent CSR funds provided there is a sunset clause of five years for spending the money. “The ceiling on administrative overhead costs should be increased from the present 5% to not more than 10% of the CSR expenditure of the company,” the panel said while adding that department of public enterprises is of the view that existing limit is sufficient. Administrative overhead expenditure of the company on CSR should not include expenses incurred on capacity building of the implementing agencies, the report said. The panel has decided against recommending monetisation of the services of corporate employees to be made part of CSR expenditure as that would “create rather than solve problems”.

According to the panel, government cannot and should not maintain a data bank of CSR implementing agencies and that responsibility should be left to the concerned company’s board or CSR committee. Another suggestion is that CSR norms should not be applicable to not-for-profit (Section 8) companies apart from the need for having more clarity on the applicability of these norms on foreign entities. In addition, the panel has said there has to be clarity on the definition of “net profit” with respect to CSR spending. Noting that existing provisions based on the general principles of “comply or explain” are sufficient for the time being, the committee said there should be two models of implementation strategies based on CSR expenditure threshold of Rs.5 crore.

Observing that Schedule VII of the Companies Act has been amended thrice since its notification in February 2014, the panel has suggested “inclusion of an omnibus clause simply because certain development concerns, needs and priorities cannot be anticipated”. Schedule VII pertains to eligible CSR activities. The panel has pitched for a level-playing field for all companies, including central public sector entities, on CSR norms. There is no need for additional mechanism to monitor their CSR implementation, it added.

-live Mint