Indian companies to spend 2% of turnover on corporate social responsibility

01 Apr 2014

A new law mandates that Indian companies comply with a mandatory spend on corporate social responsibility activities, or explain why they’re not. But grey areas persist.

Commentators are calling it the most talked-about provision of the new Indian Companies Act (2013), and experts are cautiously welcoming the initiative of the Ministry for Corporate Affairs. From 1 April, Indian companies over a certain turnover threshold will have to comply with a law requiring that 2% of their average net profits of the last three years be spent on corporate social responsibility activities (CSR).

Though the Act mandates disclosure about CSR, but not a specific CSR spend per se, the ‘comply or explain’ approach means that a spend of 2% will be required, or its absence will be scrutinised. Companies with a turnover in excess of INR 1000 crore, a net worth greater than INR 500 crore or a net profit of more than INR 5 crore in any financial year will be required to form a CSR committee and comply with the 2% figure.

The legislation will outline what constitutes CSR too, with a mind to preventing corruption. Political contributions or funding, and funding aimed to help only the company’s employees or families of employees, will be banned. Nor are companies allowed to choose projects that support their business objective; shared value propositions have been ruled out.

The Act states that CSR includes activities such as protecting national heritage and culture, setting up public libraries, funding training to promote sports, etc. Companies may pool their resources – collaborating with other companies to increase the impact of their CSR spending – but they must still report individually.

According to Harinderjit Singh, a PwC partner in India, there are some grey areas. “The definition of CSR is ambiguous – in one place it seems inclusive, and in another restricted to a set list of permitted activities.” Nor is the tax treatment of CSR spends clear, says Mr Singh: “The draft rules contained guidance on this matter, but the final rules are silent over the tax treatment. It’s still unclear whether the CSR spend will be considered as an allowable business expenditure for tax treatment or not.” The rules cover foreign companies too. Broadly, those above the turnover/worth/profit threshold and with a place of business in India will also be subject to the ‘spend and report’ rules.

Commenting on the initiative of the rules, Mr Singh said “The concept of CSR is recognised the world over. Integrating social, environmental and ethical responsibilities into the governance of businesses ensures their long-term success, competitiveness and sustainability. The Rules reaffirm that businesses are an integral part of society and play a critical role in the sustenance and improvement of healthy ecosystems and the fostering of social inclusiveness and equity.”

*A crore is a unit in the South Asian numbering system equal to ten million