corporate social responsibility foreign contribution ... corporate social responsibility is the...

Corporate Social Responsibility

&

Foreign Contribution (Regulation) Act

Background to CSR

Background to FCRA

Practical Analysis of Provisions of CSR & FCRA

Tax treatment of CSR Spend

Recent News on CSR

Recent News on FCRA

Contents

Government has been mulling over CSR and ways and means of making this a

way of corporate life

Globally, there are no legal mandates for CSR spends

India has pioneered this through a provision in Companies Act, 2013 (‘the

Act’)

Background to CSR

What is CSR?

“Corporate Social Responsibility is the continuing commitment by business to

behave ethically and contribute to economic development while improving the

quality of life of the workforce and their families as well as of the local

community and society at large”

However, CSR has not been defined anywhere under the the Act.

Background to CSR (Cont.)

Background to CSR (Cont.)

Applicability of CSR

• Section 135 of the Act deals with CSR

• Applicable to all companies having:

Net worth >= Rs. 500 Crore, or

Turnover >= Rs. 1000 Crore, or

Net Profit >= Rs. 5 Crore

during any of the preceding three financial years

Trade / Business

to control such trading /

business transactions

Regulated by Reserve Bank of

India

Regulation:

Foreign Exchange

Management Act, 1999

(FEMA)

Charity

to regulate such unilateral /

charity transactions

Regulated by Ministry of Home

Affairs, New Delhi

Regulation:

Foreign Contribution (Regulation)

Act , 2010 (FCRA)

Background to FCRA

Regulation of Foreign Exchange in India

FCRA is a national security legislation to consolidate the law to regulate the

acceptance and utilization of Foreign Contribution

Effective from May 1, 2011

Objective :

o Removing the difficulties faced by stakeholders in the repealed FCRA,

1976

o Increasing transparency and accountability of NGOs / NPOs

o Prevention of mis-utilization of foreign currency

Background to FCRA (Cont.)

FCRA, 1976 FCRA, 2010

Sections 32 54

Rules 9 24

Forms 9 10

Applicability:

o Whole of India

o Citizens of India outside India

o Associate branches or subsidiaries outside India of companies or body

corporates, registered or incorporated in India

Not Applicable to:

o Transactions between Government of India and Government of any other

country


ET Bureau Jul 2, 2015, 04.25AM IST


Case Study:

A Limited – Foreign Holding Company

B Limited – Indian Subsidiary of A Limited – Required to spend on CSR i.e.

meeting the specified applicability criteria

XYZ Foundation:

o a registered trust or a registered society or a Section 8 Company having

an established track record of 3 years

o carries out the CSR activities as specified in Schedule VII, as amended, to

the Companies Act, 2013 and

o is in compliance with the requirements of FCRA

Practical Application of Provisions of CSR & FCRA

Practical Application of Provisions of CSR & FCRA (Cont.)

Medium of Spending by B Limited

Self

Through a registered trust or a registered society or a company established

under Section 8 of the Act by the Company, either singly or along with its

Holding or Subsidiary or Associate Company, or along with any other Company

or Holding or Subsidiary or Associate Company of such other Company or

otherwise

Through a registered trust or a registered society or a Section 8 company not

established by the Company, either singly or along with its Holding or

Subsidiary or Associate Company, or along with any other Company or Holding

or Subsidiary or Associate Company of such other Company, provided it shall

have an established track record of 3 years in undertaking similar programs or

activities


Collaboration or pool resources with other companies

Further, as per the clarification issued by Ministry of Company Affairs (MCA),

expenditure incurred by foreign Holding Company for CSR activities in India will

qualify as CSR spend of the Indian Subsidiary if, the CSR expenditure are routed

through Indian Subsidiaries.

Conclusion:

B Limited can spend on CSR through XYZ Foundation by:

i. Contributing directly or

ii. A Limited spending on behalf of B Limited by routing through B Limited


Perspective of XYZ Foundation

XYZ Foundation can approach larger organization having multiple entities who

are required to spend on CSR so as to undertake projects requiring significant

outlay.

The said projects being well above the threshold limits of CSR cannot be

individually taken up by the entities.


Compliances by XYZ Foundation wrt CSR

Modalities of utilization of funds on such projects and programs as specified by

B Limited

Monitoring the projects where the funds are being utilised

Maintaining the requisite details of the project undertaken and utilisation of

funds so as to enable B Limited to comply with the disclosure requirements in

Directors Report and Financial Statements as required under the Act


If XYZ Foundation receives contribution from A Limited, then in such case it ahs

to comply with the provisions of FCRA

Compliances by XYZ Foundation wrt FCRA

Annual reporting requirements

Form FC 6 (Receipt of Foreign Currency)

o Required within 9 months of the end of a given financial year

o Accompanied by income & expenditure statement, receipt / payment

account, balance sheet, and authorized bank account statement for the

designated FCRA account

o Must include receipts and transfers in and out of the designated bank

account

o Must be certified by a Chartered Accountant


Further, if no foreign contribution is received or utilized during the year, ‘Nil

Report’ is required to be filed

Form FC 7 (Receipt of Articles)

o Filed in lieu of FC 6 if contributions were only in the form of articles, not

currency

Form FC 8 (Receipt of Securities)

o Filed in lieu of FC 6 if contributions were in the form of foreign securities

Other reporting requirements

Organizations receiving foreign contributions in excess of Rs. 1 Crore or

equivalent in a financial year must report the same in the public domain i.e.

online, by listing records of the receipt and utilization of the funds. These

would also be listed by the Ministry of Home Affairs on its website


Conditions on Acceptance of FC

FC received should be deposited only in the designated FC bank account

Association should keep record of all FC clearly indicating the names of the

donors, their locations and the purpose

Utilization of FC

FC should be utilized for the purpose it has been received

Not more than 50% of FC received should be utilized for administrative

expenses without the prior approval of the Central Govt. (However, as per

the CSR provisions, expenditure on administrative overheads shall not exceed

5% of total CSR expenditure)

Every assets purchased / acquired should be in the name of XYZ Foundation

Interest earned on FC should be utilized towards its activities / projects of

XYZ Foundation


Restriction on transfer of FC

FC can be transferred to only those associations who have been granted

registration / Prior Permission

FC, less than 10% of the total FC received in a financial year, may be

transferred to an association not granted registration / Prior Permission only

after obtaining the permission of the Central Govt. by filling Form FC 10

However, approval not required if such FC is transferred to Self Help Groups

(SHGs) / individuals beneficiaries for the end utilization of FC received or the

FC received is for definite programme for providing some direct financial

assistance as charity

In case of extending loans to SHGs / Community Based Organization (CBO),

approval of the Government is required


Maintenance of Accounts

There should be a separate FC designated account in the bank. FC cannot be

deposited or utilized from the bank account used for local / domestic funds

XYZ Foundation is required to maintain a separate set of account or records

exclusively for the FC received and utilized

Any standard or acceptable method of accounting can be used for maintaining

books of account for FCRA purposes

Local / domestic contribution should never be mixed up with FC

All accounting statements, annual return and copy of statement of account

from the bank regarding the exclusive FC account accompanying the annual

returns should be preserved at least for a period of six years


XYZ Foundation should maintain separate register of investments and every

register of investment must be submitted for audit

All funds like General Fund, created from FC are to be reflected in the FC

books of account

Any asset created / purchased out of FC is FC asset and should be recorded in

the FC books of account


Compliances by B Limited wrt CSR

Role of BOD:

Constitute CSR Committee of the Board

Approval of CSR Policy

Disclosure in Board Report

Ensure that CSR activities are undertaken by the Company

Role of CSR Committee:

Formulate and recommended a CSR Policy to the Board

Recommended the amount of expenditure to be incurred on the CSR

activities

Monitoring CSR Policy of the Company from time to time


Constitution of CSR Committee

CSR Committee shall consist of:

in case of listed public company at least 3 directors, out of which at least 1

director should be independent director

in case of an unlisted public company which is not required to appoint an

independent director, at least 3 directors

in case of a private company having only two directors, such directors

in case of foreign company, at least 2 persons of which 1 person shall be as

specified under Section 380 (1)(d) of the Act and another person shall be

nominated by the foreign company


Contents of CSR Policy

CSR Policy should include :

At least one of the activities as specified in Schedule VII to the Act, as

amended

CSR projects or programs which the Company plans to undertake

Modalities of execution of such project or programs

Implementation schedule of such project or programs

Monitoring process of such projects or programs


Amount & Mode of Spending

Amount of spending

The Company shall spend, in every financial year, at least 2% of the average

net profits made during the immediately preceding three financial years

Mode of Spending

List of programs and activities specified in Schedule VII of the Act, as

amended

Preference to the local area where it operates

Programs and activities should be undertaken in India only

Programs and activities should not be exclusively for employees & their

families


Disclosure

The Board's Report shall disclose:

Composition of the CSR Committee

Contents of CSR policy

Reason for not spending the specified amount on CSR activities

Further, the Board shall also disclose the CSR Policy and its contents on the

Company's website, if any.


Steps to be followed by A Limited

A Limited should instruct XYZ Foundation that the amount of contribution

given is on behalf of B Limited’s compliance with CSR provisions

A Limited to instruct XYZ Foundation to give necessary details / information

to B Limited to comply with the disclosure requirements in Directors Report

and Financial Statements as required under the Act

Documentary and secretarial compliances should be ensured by A Limited

and B Limited

Tax Treatment of CSR Spend

Finance (No. 2) Bill, 2014 has clarified that for the purposes of Section 37(1) of

Income Tax Act, 1961, any expenditure incurred by an assessee on the activities

relating to CSR referred to in Section 135 of the Act shall not be deemed to have

been incurred for the purpose of business and hence, shall not be allowed as

deduction under Section 37.

However, the CSR expenditure which is of the nature described in Section 30 to

Section 36 of the Income Tax Act, 1961 shall be allowed deduction under those

sections subject to fulfilment of conditions, if any, specified therein.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply

in relation to the Assessment Year 2015-16 and subsequent years.

Recent News on CSR

Actual CSR spending in FY 2014-15

Corporate shirking responsibility? Only 14 Nifty cos spent 2% of net gain on CSR in

FY15

ET Bureau | 30 Sep, 2015, 04.11AM IST

Greenpeace India’s registration cancelled

By PTI | 6 Nov, 2015, 05.03PM IST

Ford Foundation funding to non-FCRA NGOs, Teesta Setalvad's Sabrang Trust

PTI May 5, 2015, 04.24PM IST

Govt cancels registration of 4,470 NGOs in fresh crackdown

Source: Zee News Tuesday, June 9, 2015 21.40 IST

Recent News on FCRA

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