Corporate Social Responsibility

CA Sameer Gogia

2

CSR under the Companies Act 2013

Applicable on? Criteria? How much?

• All companies including a holding or subsidiary company in India

• Branch or project offices of foreign companies

• Net worth of INR 5 billion or more

• Turnover of INR 10 billion or more

• Net profit of INR 50 million or more

• At least 2% of the average net profit of the company in the immediately three preceding financial years

3

Company shall spend, In every FY at least 2% of the average net profit made during the 3

immediately preceding FY

CSR expenditure

• Preference shall be given to local area around it where it operates

• Includes contribution to corpus, or expenditure on projects related to CSR activities approved by BOD

• Does not include any expenditure on an item, not in line with activities covered under Schedule VII

• Companies may build CSR capacities of their own personnel as well as of outside implementing agencies through institutions with track record of three FY, but such expenditure shall not exceed 5% of the total CSR expenditure of the Company in one FY

4

CSR activities

CSR

Promotion of gender equality/empowering women

Promotion of education including employment enhancing vocational skills

Eradicating hunger, poverty and malnutrition

Ensuring environmental sustainability

Training to promote sports

Measures for benefit of armed forces veterans, war widows and dependents

Funds provided to technology incubators with academic institutions

Protecting national heritage, art and culture

Contribution to PM National Relief Fund/ any specified fund

Rural development / slum development projects

Measures for benefit of armed forces veterans, war widows and dependents

Funds provided to technology incubators with academic institutions

Protecting national heritage, art and culture

Contribution to PM National Relief Fund/ any specified fund

Contribution to Swatch Bharat Kosh

Contribution to Clean Ganga Kosh

5

CSR Compliance Responsibilities of Board

CSR Committee Shall

* Requirement of independent director relaxed in final CSR rules for unlisted companies and private companies

Constitution of CSR Committee of the Board (3 or more directors, having atv 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

Board has to disclose in 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

Chronological eventsI

6

Date Reference

10 July 2014 Union Budget 2014.Income tax Act ,1961 amended to include an explanation to section 37 (1)

Explanation to section 37 (1) “for the purposes of sub-section (1) of section 37 any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under said section 37

18 June 2014 CBDT Issues Circular No. 21/2014

Stress for liberal interpretation and Research and Studies in the areas specified in Schedule VII for example research in health care, education, etc. shall qualify as CSR expenditure under Schedule VII of the Companies Ac

24 October 2014

Notification No. [F.NO.1/18/2013-CL-V] issued by Ministry of Corporate Affairs

Central Government notifies Swach Bharat Kosh and Clean Ganga Fund under CSR

7

Chronological events

Date Reference

21 January 2015

Circular No.1/2015 [F.No.142/13/2014-tpl],

Explanation to section 37 (1) “for the purposes of sub-section (1) of section 37 any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under said section 37”. Clarity on : that the CSR expenditure which is of the nature described in section 30 to section 36 of the Income-tax Act shall be allowed as deduction under those sections subject to fulfillment of conditions, if any, specified therein, applicable 1 April 2015.

Union Budget 2015

To be enacted It is proposed to amend the section 135 of the companies Act to include contribution towards swatch Bharat kosh and clean Ganga kosh as allowable CSR activity

8

Clarity on Swatch Bharat and Clean Ganga

8

Section 80G• Donations made to Swachh

Bharat Kosh and Clean Ganga Fund will be eligible for 100% deduction from total income. ‒ Effective from FY 2014-15 ‒ Other than CSR expenditure

Section 10(23C)• Income of Swachh Bharat Kosh

and Clean Ganga Fund will be exempt under section 10(23C)

‒Effective from FY 2014-15

9

Mapping of CSR activities

Schedule VII of Companies ActSection under IT Act

Eradicating hunger, poverty and malnutrition

35AC

Promotion of education including employment enhancing vocational skills

35CCD /35CCC

Promotion of gender equality/empowering women

35AC

Ensuring environmental sustainability 35CCC

Protecting national heritage, art and culture35 AC read with rule 11K [ 80G (2)(b)]

Measures for benefit of armed forces veterans, war widows and dependents

Section 80G(2)(a)(i) and 80G(2)(a)(iii)(h)(c )

*35CCA includes payment of any sum to a notified rural development fund or the National Urban Poverty Eradication fund

10

Mapping of CSR activities

Schedule VII of Companies ActSection under IT Act

Activities concerning Sports- Training to promote rural sports,nationally recognized sports, Paralympics sports and Olympic sports 35AC read with Rule 11K

Contribution to PM National Relief Fund/ any specified fund

80G

Funds provided to technology incubators with academic institutions 35(2AA) and section 80G (2)

Rural development / slum development projects 35CCA* / 35AC/ 35CCC/ 35CCD

11

Income tax benefitsEntity to be registered under section 35(1)(ii)

Corporate taxpayer

Entity registered under section 35(1)(ii)

CSR scheme• Entity engaged, among others, in scientific research activities, is registered under section 80G of the ITA and carrying out specified CSR activities

• Entity to be registered under section 35(1)(ii)

• Quantum of deduction should encourage more contribution by corporates

• Payment by corporate taxpayer to such entity should qualify for activities specified in Schedule VII to Companies Act, 2013 (Refer Annexure 1)

• Deduction of 175% of donation from the taxable income:

Contribution / donation

Particulars Amount Amount

Donation made 100 100.00

Deduction from total income 50 175.00

Tax benefit (~33.99% of 50/175.00 respectively)

16.995 59.482

Additional deduction of 125%

CSR activity as per section

135

As per section 30-36 of the

Act or 80G certificate

Eligible for tax

deduction

CSR Activities as per

companies Act

Activities mentioned

under section 30-36 of the Act

or under 80G

13

Tax issues

14

Tax issues

15

Tax issues

16

Tax issues

17

Tax issues on CSR

• Statutory/ compulsory contribution would not qualify as CSR

• Carryforward of the surplus expenses

• Contributions in kind such as donation of books, land , sports items, computers for education etc. whether monitory value would qualify for the CSR activity

• Applicability of the transfer pricing provisions to CSR activities

CSR Expenditure on the basis of Judicial PrecedentFunds provided for establishing drinking water facilities and providing aid to school meant for residents of the locality in which the taxpayer operated

CIT v. Madras Refinery Ltd. [266 ITR 170](Mad)

Expenditure on community assistance programmes and welfare measures undertaken in the vicinity of taxpayer’s manufacturing unit

CIT v. Madura Coats Ltd. [24 DTR 24](Mad)

Installation of traffic lights in the vicinity of taxpayer’s office to improve traffic situation, serving dual purpose of benefitting the employees as also social commitment 3. Trips to Bhuj and Jamnagar post earthquake for relief work

Infosys Technologies v. JCIT [109 TTJ 631](Bang)

18

CSR Expenditure on the basis of Judicial PrecedentTrips to Bhuj and Jamnagar post earthquake for relief work

Jindal Steel and Power Ltd. [16 SOT 509](Delhi)

Construction of hockey stadium for use of local residents 5.

ITO v. VeluManickam Lodge (123 ITD 25)(Chennai)

Sponsorship of sports tournaments bearing the sponsor’s name on banners and association with the trophy

CIT v. Lake Palace Hotels & Motels (P) Ltd. [293 ITR 281](Raj)

Contributions made by Pharma company to health care society and science foundation allowed as it would bring Goodwill to the assessee

ACIT v. Ranbaxy Labs Ltd. (7 ITR (Trib) 161](Delhi) CSR – Opportunities

19

Thank You