Section 135 of the 2013 Act prescribes a mandatory spending of two percent of average net profits of the company on CSR activities made during the three immediately preceding financial years for all companies that meet the specified financial thresholds. The company is required to undertake activities in areas or subjects specified in Schedule VII of the 2013 Act.
The Ministry of Corporate Affairs (MCA) vide Circular No. 10/2020 dated 23.03.2020 (‘the Circular’), clarified on eligibility of spending of funds for COVID-19 for CSR expenditure. Such expenditure is stated to be categorized as follows under Schedule VII of the Companies Act, 2013:
Item No. (i) of the Schedule VII: Promoting health care including preventive health care and sanitation
Item No. (xii) of the Schedule VII: Disaster management, including relief, rehabilitation
The Ministry has quoted that the above items are broad based and may be interpreted liberally for the purpose of CSR funding. This is the right occasion, and unarguably, one of the noblest causes, to use CSR funds in whatever way, one may think of for the welfare of society. Let us try to understand what qualifies as a CSR Activity if it’s spent towards COVID-19.
It should be noted that the item no. (i) as stated above covers both ‘promotion’ and ‘prevention’. Thus, spending on distribution of sanitizers, masks, etc and organising awareness programmes for fighting COVID-19 shall be considered as spending on CSR activity.
This eligible spending shall include contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation.
Pursuant to notification dated 27th May, 2020 issued by MCA, the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARE FUND) is included under item (viii) of Schedule VII of the Companies Act, 2013 that enumerates the list of activities which may be included by companies in their Corporate Social Responsibility Policies.
Now, another question arises as to whether this CSR expenditure will provide any tax relief:
Deduction under Section 80G of the Income Tax Act, 1961
Pursuant to amendment in Section 10 and Section 80G of the Income Tax Act, 1961(‘IT Act’) viz. the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020, contribution to PM CARES Fund shall have same tax treatment as available to Prime Minister National Relief Fund. Therefore, the donation made to the PM CARES Fund shall be eligible for 100% deduction under section 80G of the IT Act.
The maximum limit of admissible deductions @ 10% of gross income of the assessee, shall also not be applicable for donation made to PM CARES Fund.
Furthermore, as the date for claiming deduction u/s 80G of the IT Act has been extended up to 06.2020, the donation made up to 30.06.2020 shall also be eligible for deduction from income of FY 2019-20. Hence, 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 30.06.2020 and can claim deduction u/s 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.
What if your Company has already incurred CSR expenditure for the financial year 19-20?
The contribution to PM CARES Fund forming eligible CSR expenditure which exceeds the minimum prescribed amount of CSR expenditure as per Section 135 of the Companies Act, 2013 shall be eligible for offset in subsequent years.
In the new financial year, a significant portion of the CSR funds can be transferred to the COVID fund without upsetting commitments to ongoing projects.
This lead to various questions in the mind of the stakeholders, to which the MCA clarified by issuing a circular dated 10th April, 2020. The answers clarified are mentioned hereunder:
Q1. Where corporates are being advised to pay salaries and wages during this period of quarantine, will that payment be eligible CSR spending?
It was stated by the MCA that payment of salary/ wages in normal circumstances is a contractual and statutory obligation of the company. Similarly, payment of salary/ wages to employees and workers even during the lockdown period is a moral obligation of the employers, as they have no alternative source of employment or livelihood during this period. Thus, payment of salary/ wages to employees and workers during the lockdown period (including imposition of other social distancing requirements) shall not qualify as admissible CSR expenditure.
However, if any ex-gratia payment is made to temporary / casual workers/ daily wage workers over and above the disbursement of wages, specifically for the purpose of fighting COVID 19, the same shall be admissible towards CSR expenditure as a onetime exception provided there is an explicit declaration to that effect by the Board of the company, which is duly certified by the Statutory Auditor.
Some companies are already being proactive in supporting their most vulnerable employees. When Microsoft asked its Puget Sound employees to work from home, it resulted in a reduced need for on-site staff such as shuttle drivers, café workers, and on-site tech support. Instead of reducing their pay, Microsoft is paying their 4,500 hourly employees and vendors full regular pay during this period of reduced service needs.
Q2. If Companies contributes funds to the COVID dedicated funds setup by respective State Governments, will that qualify as CSR Expenditure?
The MCA clarified with respect to certain funds i.e. ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund. It was asserted that ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’ is not included in Schedule VII of the Companies Act, 2013 and therefore any contribution to such funds shall not qualify as admissible CSR expenditure.
However, if it is a contribution for a specific project and the State govt/implementing agency have declared utilization of the amount contributed as a CSR expenditure, in our view, the same should be treated as eligible expenditure.
Q3. Whether spending of CSR funds for COVID-19 related activities shall qualify as CSR expenditure?
Contribution made to State Disaster Management Authority to combat COVID-19 Management Authority shall qualify as CSR expenditure under item no (xii) of Schedule VII of the 2013.
However, one also needs to gain coherence on the below questions which might attract various school of thinking unless stern guidelines by the Government are issued on the said matters. On the basis of our research on the subject, we have come up with certain questions, answers to which may be debatable.
Does spending on employee benefit for COVID-19 to be considered as spending on CSR activity?
Rule 4(5) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 provides that the CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with Section 135 of the Act.
Whereas, the draft Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 proposes to consider any activity having less than twenty five percent employees as its beneficiary, as CSR activity. Thus, one can find himself/herself at a knotty point where the prevailing provisions of Section 135 disqualify such spending as CSR activity and on the other hand the spirit of law as enumerated in Schedule VII read with draft amendment rules necessitates on liberal interpretation of law.
We understand that if the company spends on COVID-19 preparedness for a wider section of public including its employees or their families, there may not be denial as to eligibility of the same as CSR spending. Whatever be the circumstances, the liberal interpretation should not lead to taking undue advantage of the situation and thereby resulting in exploiting the provision for unjust gain. We think, the broader principles as stated in Rule 4(5) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 should be complied with i.e. if the CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities u/s 135 of the Act.
Will arrangements for Work from Home for employees qualify the said expenditure?
This can be seen as two different sides of coin, where one can consider such spending as only spending for employee benefit (where employees are being provided dongles, network accessibility services, free calling facilities etc.) while the other can hold liberal interpretation in view and consider such ‘Work from Home’ as ancillary for preventing the outbreak of COVID-19.
Contemplating this spending, it could also be seen as moral duty of the employer towards his employees. Further, there can be cases where the employers might be allowing ‘Work from Home’ even in normal course of their workings before the spread of COVID-19. Now, even if such expenditure on arrangements qualifies as eligible CSR spending, which we doubt it would, it shall lead to a tight spot for segregation of arrangements before and during the COVID-19 to report actual and genuine CSR spending.
We must care for each other more, and tax each other less. (Bill Archer)
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