By Anita Whitehead, Managing Director, KPMG LLP
The India Companies Act 2013 requires companies to spend 2 percent of profits stemming from their Indian businesses on corporate social responsibility (CSR) activities in India. It also requires companies to establish a board-approved CSR policy and a board-level CSR committee. However, a number of questions remain about the fine details of these provisions.
Earlier this year, KPMG LLP convened a remote meeting of several corporate funders to discuss these questions. The Q&A below details some of the understanding emerging from that meeting.
Q: Does philanthropic funding from a foreign foundation/foreign parent company to an Indian affiliate company qualify as CSR in India?
Every company is required to spend 2 percent of profits on specific CSR activities in India. Actual expenditure by the foreign holding company will qualify as CSR provided that the expenditure on CSR is reflected in the accounting records of the Indian company.
Philanthropic funding from a foreign source would be governed by the Foreign Contribution (Regulation) Act 2010 (FCRA) in India and would require specific approval/permission from the Ministry of Home Affairs. The funding for such CSR activities may be received by the company from foreign sources subject to receipt of approval under the FCRA from the Ministry of Home Affairs for receipts from a foreign foundation.
Q: Does philanthropic funding by global foundations (of multinational organizations established and operating in India) count toward the requirements under the act?
No. Strictly speaking, contributions towards CSR activities conducted directly by global foundations (of multinational companies established and operating in India), may not be counted towards spending of the Indian company. However, it may serve as a reason) as to why the entity established in India has not met the 2 percent requirement in a particular year (e.g., prior global commitments, global CSR strategy, etc.) The organization should establish a clear, well-defined CSR strategy and think through implementation structures that demonstrate how the Indian company will spend going forward.
Q: Is shared value defined under the act??
No. The final rules do not mention shared value. The act defines CSR activities in Schedule VII, and spending must include projects or programs relating to such activities or the activities undertaken by the board in pursuance of Schedule VII. Under the act’s definition, CSR specifically excludes activities undertaken in the normal course of business.
Q: Do the CSR provisions apply to companies incorporated outside India?
Yes. The finalized CSR rules clarify that CSR provisions apply to companies incorporated outside India or to foreign companies having a branch office of project office in India. In the case of foreign companies, the calculation of net worth, net profit, and turnover would relate to Indian operations only.
Also, in respect to a foreign company, the CSR committee must consist of at least two people, one of whom must be an Indian representative. The other can be nominated by the company.
Q: Does the CSR spending have to be solely determined by the board of directors of the company based on the permissible CSR activities?
Yes. The board of directors of every eligible company should approve the CSR policy formulated by the CSR committee. This helps ensure the activities meet CSR’s definition under Schedule VII of the act.
Recommendations for compliance
To comply with the requirements of the act, companies should:
- Formulate a CSR policy which identifies sectors and areas of sustainability, as well as scalability of CSR operations
- Conduct CSR activities within the company and through its own local foundation not through external NGOs/foundations
- Establish effective monitoring, evaluate clear, measurable outcomes and set up an effective reporting process
- Establish adequate systems to measure CSR spending (e.g., quantification of employee volunteering initiatives).
 Foreign company means any company or body corporate incorporated outside India which (1) has a place of business in India whether by itself or through an agent, physically or through electronic mode, or (2) conducts any business activity in India in any other manner.
About the author:
Anita Whitehead is a Managing Director with KPMG’s Development and Exempt Organizations practice. Based in Washington, DC, she assists global commercial organizations strategize their philanthropic vision and manage the legacy they wish to leave behind. KPMG’s DEO professionals are uniquely familiar with the trends affecting corporate responsibility, corporate philanthropy and charitable activities – including tax compliance services related to giving within the commercial environment.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.