In significant recommendations, a government-constituted high level panel on Tuesday suggested making expenditure on CSR tax deductible as well as treat non-compliance with CSR requirements a civil offence under the companies law.
Under the Companies Act, 2013, certain classes of profitable entities are required to spend at least two per cent of their three-year annual average net profit towards Corporate Social Responsibility (CSR) in a particular financial year.
The panel, headed by Corporate Affairs Secretary Injeti Srinivas, has stressed that CSR expenditure should not be treated as a means of resource gap funding for government schemes.
Apart from recommending that violation of CSR compliance might be made a civil offence and shifted to the penalty regime, the panel has also pitched for "making CSR expenditure tax deductible", according to an official release.
"All activities listed under Schedule VII to enjoy uniform tax benefit. CSR expenditure to be made deductible from the income earned for the purpose of taxation.
"The mode of implementation to be tax neutral. Implementing agencies be treated as partners and not service providers/ vendors for CSR activities, so as to address the variable incidence of indirect taxes on them," the report said.
Schedule VII of the Companies Act pertains to CSR.
According to the panel, unspent CSR amount for a particular year be transferred to a separate designated account.
Such unspent amount, and the interest earned thereon, be spent within a period of three to five years, failing which the same be transferred to a fund specified by the central government.
"For non-compliance, the panel has also suggested a penalty -- that is two to three times the default amount -- up to Rs 1 crore but "there be no imprisonment," it noted.
In recent weeks, concerns have been raised in certain quarters about penal provisions in the Act for non-compliance with CSR norms.
The scope of CSR applicability be extended to Limited Liability Partnerships (LLPs) and banks, the report said.
Noting that the committee has made far reaching recommendations, the release said the main suggestions include introduction of impact assessment studies for CSR obligation of Rs 5 crore or more, and registration of implementation agencies on the corporate affairs ministry's portal.
Companies having CSR prescribed amount below Rs 50 lakh can be exempted from the need of constituting a CSR committee, as per the report.
"The committee discourages passive contribution of CSR into different funds included in Schedule VII of the Act. It has emphasised on CSR spending as a board driven process to provide innovative technology-based solutions for social problems," it said.
In a significant suggestion, the panel said that CSR could be brought within the purview of statutory financial audit by making details of the spending as part of the financial statement of a company.
Besides, mere disbursal of funds to implementing agencies should not be construed as CSR spending, it added.
"Regulatory oversight be exercised through enhanced and granular reporting wherever CSR funds are used for creation of capital assets.
"Companies be encouraged to forge partnerships when creating assets for public purpose. The ownership shall rest with the public and the company may act as a custodian to operate it and make it self-sustaining," the report said.
A CSR Exchange Portal be developed for creating an interactive platform for all stakeholders, including contributors, and beneficiaries, by leveraging the benefits of technology to maximise the potential and outcomes of CSR, it suggested.
On Tuesday, Srinivas presented the report to Finance and Corporate Affairs Minister Nirmala Sitharaman.
The panel was set up in October 2018 under the chairmanship of Srinivas to review the existing CSR framework and make recommendations on strengthening the CSR ecosystem, including monitoring implementation and evaluation of outcomes.
Tata Sons Chairman N Chandrasekaran, Bain Capital Private Equity MD Amit Chandra, former Additional Solicitor General of India B S Narasimha, Luthra and Luthra Law Office Founder and MD Rajeev Luthra, and Apollo Executive Vice Chairperson Shobana Kamineni were among the panel members.
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