Guest Article by Shivkant Vaish, Chartered Accountant and Expert in Companies Law and Tax Laws, in Governance Democracy & Politics Magazine, Special Issue on CSR “Responsible Institutions of India 2016″, (Views expressed are personal)
As provisions under Company Act 2013 regarding mandatory CSR expenditure by the companies came into force three years back, like all other new laws, various confusion prevail for this provision as well. Though Ministry of Corporate Affairs, various ROCs, institute like ICSI, ICAI, other body corporates are doing their bit to sensitize India Inc. regarding the provisions of mandatory CSR, still there are various issues that arouse doubts in successfully implementing mandatory CSR. May be than can be one of the reasons, why various prominent companies failed in its first year in successfully implementing the provisions regarding CSR expenditure.
Under CSR Provision “Net Profit” Means PBT
On of the biggest confusion, or we can say error of judgment, among companies remained to be the calculation of “Net Profit” as put forward by the Company Act 2013 for the matter of calculating prescribed quantum of CSR spending. Though there shouldn’t be any confusion as act is quite clear regarding that. Act clearly says that in pursuance of its Corporate Social Responsibility (CSR) Policy, “The Board of every company covered under section 135, shall ensure that the company spends, in every financial year, at least two per cent (2%) of the average “Net Profits” of the company made during the three immediately preceding financial years.
Interestingly act used the term “Net Profits” in the provision that may give a perception that it is PAT or Profit After Tax that may be used for calculating CSR amount, but it is other way round and PBT will have to be taken for calculation of CSR amount. Act clearly explains that the “average net profit” shall be calculated in accordance with the provisions of section 198. When we see Sec 198 then as per section 198 (5) (a) income-tax and super-tax payable by the company under the Income-tax Act, 1961, “shall not” be deducted while arriving at net profit under the section. Thus Net Profit is Profit Before Tax (PBT) of the company. Considering this it is of prime importance for finance department of any company to consider PBT for calculating the prescribe amount of mandatory CSR expenditure for the company.
Act Is Silent About Penalty
Another dilemma among companies exists in relation to the penalty to be imposed on the organization, which fails to spend mandatory CSR amount. If we see the provision of the act then it is quite silent about the penalty in case of default. Section 135 (5) clearly provides that “if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.” Further “No penalty or action has been prescribed under section 135 of the Companies Act 2013 against Board, which fails to spend its CSR amount.” Interestingly only reporting requirement of unspent amount in Board report has been provided in the section covering CSR. Considering that there is no provision of penalty or punishment against the company, which don’t comply with the provision of mandatory CSR spending and ROCs will only issue show cause notice to company to give reasons for not spending.
Actually we have to understand here that government wants company themselves to be more responsible and if they don’t comply with CSR spending provision, then they have to report it in the Board Report and as a responsible institution it itself bring bad name to the company, which surely work as a deterrent for the company.
This article is part of Special Issue of GDP Magazine on CSR. Governance Democracy& Politics (GDP) Magazine’s Special Issue on #CSR Takes A Deep Dive on the state of CSR Spending. It has a regressive database of 5000+ companies on CSR Spending.
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