[Nikunj Baheti is a third-year student at Dr. Ram Manohar Lohiya National Law University, Lucknow.]
With the outbreak of COVID-19 and considering lack of substantial funds with the government to deal with the same, there is a need for private individuals and corporate houses to utilize their resources in order to tackle such a situation. In lieu of the same, the government has come up with various incentives related to corporate social responsibility (CSR) so as to allocate the CSR funds towards healthcare and other related facilities required during the crisis. In this article, the author analyses the various aspects of CSR in the light of COVID-19 outbreak which has been declared as a pandemic.
Section 135 of Companies Act 2013
According to Section 135 of the Companies Act 2013 (Act), every company having a net worth of INR 500 crore or more, or turnover of INR 1,000 crore or more or a net profit of INR 5 crore or more during any financial year, is required to spend at least 2% of the average net profits of the company made during the 3 immediately preceding financial years in activities specified under Schedule VII of the Act. Although the companies had to give reasons for non-compliance, there was no sort of penalty being levied upon them. However, after the Companies (Amendment) Act 2019, the above mandate was done away with and a compulsion was imposed upon the companies to fulfil their CSR obligations.
In order to deal with the ongoing situation, the Ministry of Corporate Affairs (MCA) issued a circular dated 23 March 2020 clarifying that “spending of CSR Funds on COVID-19 for promotion of health care, including preventive health care and sanitation and disaster management would be qualified as an eligible CSR activity.” This was required to be clarified since in a circular dated 18 June 2014, MCA had already included the disaster relief activities such as medical aid, food supply and supply of clean water as part of CSR activity.
Incentives regarding use of CSR funds
The Companies (Amendment) Bill 2020 was introduced in the Lok Sabha on 17 March 2020 in order to further amend the Act. The bill had proposed to introduce a set off provision whereby the amount spent beyond the yearly requirement could be set off in the succeeding financial years. Since this bill has not been passed in Parliament, there lies no set off provision till date. However, the Secretary to Ministry of Corporate Affairs, Mr Injeti Srinivas, clearly stated in an online appeal dated 31 March 2020 to company chiefs that companies would be able to offset the CSR obligation in subsequent years. However, the COVID-19 FAQs on CSR (FAQ) released by the MCA on 10 April 2020 clarifies all other aspects relating to CSR activities but finds no mention of the set off provision. Therefore, there exists a confusion which needs to be further clarified by the government.
The MCA has also sought public comments on Draft Companies (CSR Policy) Amendment Rules 2020 which would further amend the Companies (CSR Policy) Rules 2014. The draft provides a negative definition of CSR specifically excluding activities in which 25% or more employees or their families are its beneficiary. Since the rules have not been amended, in the present scenario, all the activities in which the employees or their families are beneficiary have been excluded. The FAQ has also clarified the same stating that “payment of salary/wages to employees or workers even during the lockdown situation is a moral obligation of the employers, as they have no alternative source of employment or livelihood during this period and cannot be counted as a part of CSR activity.”
But, as per the FAQs, even though payment to temporary/ casual workers/ daily wage workers during the lockdown period is a part of moral/ humanitarian/ contractual obligations of the company, any ex-gratia payment made over and above the disbursement of wages specifically for fighting COVID- 19 would be admissible as CSR expenditure as a one-time exception provided the Board makes an explicit declaration duly certified by the statutory auditor. Therefore, companies can even fulfil CSR obligations by helping their own workers who are in dire need of money in this situation.
Contribution to CM Relief Fund
After the release of FAQ, it is now well settled that contribution to CM Relief Fund or State Relief Fund would not be included as a part of CSR activity under Schedule VII. However, it was also specified that any contribution made to State Disaster Management Authority (SDMA) would qualify as CSR expenditure. The contribution would be directed towards the State Disaster Response Fund and the State Disaster Mitigation Fund. Since the pandemic like situation was not covered in the list of disasters as per the circular dated 8 April 2015, the Ministry of Home Affairs came up with a circular dated 14 March 2020 and included COVID-19 as a notified disaster for the purpose of providing assistance under SDRF. The ministry also stated that the items under 3(a) of the 2015 circular relating to relief measures would include homeless people including migrant labourers stranded due to lockdown measures and sheltered in the relief camps and other places for providing them food etc. However, as per the 2015 circular, the states would only be able to utilize 25% of their allotted expenditure for the above mentioned purposes. The companies donating to SDRF would, therefore, defeat the purpose of the CSR policy to benefit the needy if such restrictions exist. Therefore, the government must amend the circular and give liberty to the states in order to use the fund according to the situation and not be bound by such thresholds.
Tax benefit
On 31 March 2020, the government announced that donations to the PM CARES Fund would be eligible for 100% deduction under Section 80G of the Income Tax Act 1961. Further, the limit of deduction of 10% of the gross income would also not be applicable to this donation. This implies that if, for example, a person has an income of INR 29 lakhs and wants to donate INR 5 lakhs to PM CARES Fund, the taxpayer would be eligible to claim a deduction of INR 5 lakhs, and the taxable income would reduce to INR 24 lakhs. Had this provision of 10% on gross income been there, the taxpayer would have got deduction of INR 2.9 lakhs only and had to pay taxes on the remaining INR 26.1 lakhs.
For individual taxpayers, the introduction of a new proposed tax regime in this year’s budget session would have disallowed any tax deductions under Section 80G after 31 March 2020. However, by extending the date to claim such deduction for FY19-20 upto 30 June 2020, the government ensured that the taxpayers avail this opportunity and continue contributing to the fund.
However, a lack of clarity prevails over the last date for companies to donate to PM CARES Fund so as to be eligible for such tax deduction. This becomes important after the announcement of corporate tax cut last year as per which companies would not be able to claim Section 80G deduction if it opts to follow the new structure in the FY 2020-21. In order to deal with the current situation, Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance 2020 was promulgated by the government to extend the limits under taxation laws. The ordinance stated that “any person including corporate paying concessional tax on income of FY 2020-21 under new regime can make donation to PM CARES Fund up to 30 June 2020 and can claim deduction u/s Section 80G against income of FY 2019-20 and shall also not lose his eligibility to pay tax in concessional taxation regime for income of FY 2020-21.” To the contrary, the MCA website states that any contribution made by a company after 31 March 2020 would not be able to claim any deduction if that company has chosen the new tax regime. Therefore, there needs to be clarity with regard to the last date for claiming deductions so that more companies are encouraged to donate in these tough times.
Conclusion
The primary objective of CSR is to encourage companies to bring innovative ideas in order to solve social and environmental concerns in preferably local areas. Even though much of the talk has been regarding the contribution to the fund set up by the government, the author believes that top companies need to collaborate with various NGOs and work at the ground level to utilize their resources for the betterment of the society. While Reliance Industries, Dalmia Bharat Group and many others committed to the use of their private industrial spaces for hospitals, Tata Trusts, Wipro etc. scaled up production of mask and other medical necessities. Also, Standard Chartered is providing financial benefits to those who wish to switch to production of high demand products. Therefore, in order to fulfil the primary objective of CSR there is a need for other companies to not just donate towards the fund but also use their resources in an innovative way in these challenging times.
The author further believes that such unprecedented time calls for exceptional measures which could be noticed by various clarifications issued by the MCA through various circulars. Since the top priority of the government is understandably to overcome this crisis, it should leave no stone unturned and make sure that the policies are laid down without any ambiguity.