It seems that people have answered the question posed by poet Mary Oliver: ‘Tell me, what is it you plan to do with your one wild and precious life? People want to live life while sustaining the businesses they own. Ever since the lockdown was announced in India, various ministries announced numerous plans and protective measures to preserve the life of people and their businesses from the deadly pandemic. At the same time, the Ministry of Corporate Affairs (“MCA”) introduced notifications to address the concerns by various sectors and measures to reduce the impact of the ongoing pandemic on the companies.
This piece aims to look into the Corporate Social Responsibility (“CSR”) in the present COVID pandemic era along with discussing the scantiness in the clarificatory circular by MCA on the spending of CSR funds for ‘creating health infrastructure for COVID Care’, ‘establishment of medical oxygen generation and storage plants’, etc.
Corporate Social Responsibility
CSR, a term that was coined five decades before the enforcement of the Companies Act, 2013 (“CA, 2013”), has become a term of art for the businesses that exist in India. Schedule VII of CA, 2013 also lists what would be considered under CSR. Section 135 of CA, 2013 read with The Companies (Corporate Social Responsibility Policy) Rules, 2014 prescribes mandatory CSR provisions that are to be fulfilled by the company. In pursuance of this section, all companies possessing a net worth of a minimum or more than INR 500 crore, an annual turnover exceeding INR 1000 crore, or with net profits of more than INR 5 crore are obligated to disburse at least 2 percent of their annual profits. The provision has been ascribed under Section 134 (5) of the CA, 2013. It is also called the “2 Percent Law” in India.
The Section 134 (5), CA, 2013 further mandates companies to establish a CSR committee to sow seeds annually for CSR Policy, and thereby recommend it to the Board of Directors, who in turn owns the responsibility to approve such a policy and publish it in their annual report and website. In the event the Board fails to publish the same, it would have to state the reasons for neglecting the social responsibility. The legislation passed over the years has proved to be a tributary measure to governmental endeavour to surge the process of growth in the country. Additionally, the provision creates an air of social responsiveness and in turn makes the company accountable to the public. It subtly makes the consumers, stakeholders and, the public, the judges of social obligations.
However, MCA by Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 released the Amendment to Section 135 of CA, 2013 that introduced fundamental rules to CSR Rules, 2014. This amendment has shifted the CSR Scenario from the “Obey or Justify” approach, (wherein the companies were expected to obey the Corporate Social Responsibility as prescribed by Section 135, CA, 2013 and if the Company failed to abide by the law, the Board was expected to justify the reason in the Companies report) to now Section 137(7), CA, 2013 that levies punitive monetary penalties in case of non-adherence to the CSR mandate.
Moreover, in wake of the ongoing COVID- 19 pandemic outbreak, MCA on 23 March 2020 issued a circulation with respect to utilizing the CSR funds. Following this circular, the MCA vide its General Circular No. 09/2021 dated 5May 2021, clarified that the funds deployed for creating Health Infrastructure for COVID care or used for the establishment of medical equipment for countering COVID-19 or similar activities that are eligible to be considered under CSR, Item Nos. (i) and (xii) Schedule VII of the CA, 2013.
Commitments to specified research and development projects, as well as contributions to publicly funded universities and certain organisations engaged in research in science, technology, medicine, etc., are all eligible CSR activities, according to Item No. (ix) of Schedule VII of the CA, 2013. The circular further reinforced that Government Companies may choose to undertake actions independently or in collaboration with other Companies.
Shortcomings in the new Circular
This notification reaffirms the cushion which was set out to ease the CSR norms. Nonetheless, it fell short of addressing the issues upon which the sectors were seeking answers. With regard to present times, the General circular was ineffective in establishing the connection as to whether the Companies engagement under scientific research expenditure on COVID-19 treatment, care, and vaccination under their CSR would be subject to availing of income tax benefits on the same. Though, as per Circular no. 01/2015, the Central Board of Direct Taxes (“CBTD”) clarified that as CSR Expenditure “is not incurred wholly or partially for the purposes of carrying on business”, such expenditure is not eligible for deduction. However, the CBTD Circular also mentioned that if the CSR funding falls within the gambit of expenditure covered under Section 30-36 of the Income Tax Act, it is qualified for deduction. This can result in disproportionate money being spent on those CSR programs that serve tax incentives.
Moreover, as per previous year’s government rules, the drug makers were allowed to categorize R&D expenditure on therapies for COVID-19 as CSR expenditure but corporations are to date not entitled to claim tax benefits on such CSR expenditure. Irrespective of the fact that Section 35 of the Income Tax Act, 1961 permits the companies to deduct all expenditure sustained on scientific research in a year from their taxable profits.
The Circular has also overlooked whether vaccination drives, conducted by corporates such as OYO, Reliance Industries, HDFC Bank, to name a few, for the employees/contractual laborers and their families, will amount to CSR activities under items of Schedule VII of CA, 2013. Such projects are indeed facilitating in aiding the health care system of the country and especially the workers belonging to the unorganized sector of society. The Companies are awaiting further expansion in the scope of the definition under mandatory CSR expenditure. As per many reports though, a Senior Government Official has in his statement mentioned that if the vaccination program includes the general public in addition to the employees, then it counts as CSR, if it is only the employees then it doesn’t but this is subjects to amendments in future. This step can prove to not only accelerate the vaccination program but also build larger community faith in vaccination and thereby bust the myths associated with it.
Such a program can be highly beneficial in bringing health security for workers belonging to Micro, Small and Medium Enterprise (“MSME”) sectors. Undoubtedly, due to overwhelming numbers, it is difficult for the Government to get hold of people for vaccination. Lakhs of population that belongs to the MSME sector are facing everyday life crisis as they report to the workplaces unarmed with vaccination. Recently, MSMEs have urged the government to offer facilities for vaccinating employees and other stakeholders in the industry in order to preserve their livelihoods and maintain the overall operation of industrial units in the broader interest of the nation. It goes without saying that in every country MSME’s are the backbone of the economy. Accordingly, if a secure plan for the workers is established where the Large Conglomerates are willing to volunteer and help the MSME Sector receive the vaccination as part of their vaccination drives, the necessitous will be vaccinated without any hurdle at a quicker pace and safer place.
Firstly, a mandate stating whether or not Companies are in legal capacity to claim deduction on CSR funds undertakings towards scientific research should be clarified by governmental authorities.
Secondly, workers vaccination at an immediate glance might seem to be a choice on the Companies and could be covered under employee benefit expenses yet it will benefit not just companies but the community at large and ultimately the country. Further, in these unprecedented times, wherein Companies want to initiate vaccination drives for family members of the employees an exception to allow such measures under CSR after due consideration will promote Community-oriented efforts while expediting the daunting task of vaccination in the country. After all the main intent behind CSR is to chase “collective value” to create “economic value”.
These economic downturns in current times are pressing us to abandon our aversion to change. It is time to innovate and redefine the CSR scope to cope with extraordinary ways to reach CSR Goals. The COVID-19 age has taught everyone the hard way, how to tailor the impacting circumstances to meet the demands of the present day and CSR is no exception to it.
This article has been written by Yashika Bharadwaj, student at Amity Law School, Noida.