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High Level Committee recommends CSR expenditure to be made tax deductible, non-compliance to be made civil offence with no imprisonment

The committee has recommended that passive CSR activities allowed under the law, such as contribution towards PM’s national relief fund, should be discontinued

After facing lots of criticism over strict punishment for non-compliance with CSR norms, there is some good news for the corporate sector, as a high-level committee has recommended that CSR expenditure should be made tax-deductible, and suggested that the non-compliance of CSR should be a civil offence attracting only penalty, not imprisonment.

The Report of the High-Level Committee on CSR was presented to the Finance and Corporate Affairs minister Nirmala Sitharaman by Injeti Srinivas, Secretary, Corporate Affairs. The committee has made several important recommendations in regard to the mandatory Corporate Social Responsibility.

The report recommends that CSR expenditure should be made tax-deductible from the income, and the mode of CSR implementation should be tax neutral. It suggests that implementing agencies should be treated as partners and not service providers, so that the issue of indirect tax applicable to them can be addressed.

The committee has also recommended that unspent balance on CSR should be allowed to carry forward for a period of 3 to 5 years. The report says that the unspent CSR amount should be transferred to a separate account designated for this purpose. The amount in this amount will have to be spent within three to five years, else it will be transferred to a fund specified by the central government.

In a very important recommendation, the committee has suggested that violation of CSR compliance should be made a civil offence and it should be shifted to a penalty regime. If accepted, it would remove the provision of jail sentencing for CSR compliance violation, which will only impose a financial penalty for the same. The committee recommends a penalty of 2-3 times of the default amount, adding that there should not be any imprisonment for defaulting on CSR compliance.

It has also recommended aligning schedule 7 of companies act, which deals with CSR activities, with Sustainable Development Goals (SDG) by adopting an SDG plus framework.

The scope of CSR activities has been suggested to expand with the inclusion of sports promotion, senior citizens’ welfare, welfare of differently-abled persons, disaster management and heritage protection. The committee has suggested balancing local area preferences with national priorities, the introduction of impact assessment studies for CSR obligation of ₹5 crore or more, and registration of implementation agencies on MCA portal.

The committee has recommended that the government should not treat CSR as a means to resource gap funding for government schemes. The committee also wants to emphasize on active CSR work by the corporate sector, and has recommended that passive CSR activities allowed under the law, such as contribution towards PM’s national relief fund or any such fund of central of state governments, should be discontinued. However, it suggests creating a specific fund to transfer unspent fund allocated by companies for CSR.

The report recommends that companies with CSR amount below ₹50 lakh should be exempted from forming a CSR committee. It has also recommended that the reporting on CSR should be strengthened, and it should be brought under the purview of statutory financial audit.

The High-Level Committee on CSR was constituted in October 2018 under the Chairmanship of Secretary (Corporate Affairs) to review the existing CSR framework and make recommendations on strengthening the CSR ecosystem, including monitoring implementation and evaluation of outcomes.

As per the Companies Act, companies having a minimum net worth of ₹500 Crore, or minimum turnover of ₹1000 crore, or minimum net profit of ₹5 crore have to spend 2% of average net profit made in the last three years in CSR activities. The recently amended Companies Act has added the provision of jail term upto three years for non-compliance of CSR. This had attracted a huge uproar, and last week Finance Minister Nirmala Sitharaman had assured that the penal provisions like jail term will not be implemented.

The full report of the committee can be accessed here [PDF].

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