www.nareshminocha.com

Font Size

SCREEN

Profile

Menu Style

Cpanel
Submit to FacebookSubmit to Google PlusSubmit to TwitterSubmit to LinkedIn
Image Courtesy: ONGC
 
In its zeal to promote social welfare right from the birth (foetus to be precise) to the death, UPA Government botched up many initiatives including the noble ones like charity and inclusive growth. 
It tied the industry in knots to spend money on corporate social responsibility (CSR) through multiple and at times conflicting and whimsical fiats issued by different ministries.
India is perhaps the only country that explicitly mandates CSR expenditure through a corporate law, as compared to statutory reporting on voluntary CSR practiced in certain countries such as Denmark. India is certainly the only country that has multiple laws/diktats on CSR. 
Modi Government wants to be viewed as better and larger promoter of public welfare than its predecessor. The former has thus tried to rationalize the latter’s mess through a recent clarification issued by the Ministry of Corporate Affairs (MCA). 
In a circular dated 18th June 2014, MCA has clarified that “expenses incurred by companies for the fulfillment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act.”
This implies that companies would have to incur all mandatory social welfare expenditure stipulated under different laws whose aggregate might render certain projects unviable especially the ones that face competition from zero-duty or concessional duty imports under free trade agreements.
The cumulative impact of mandatory CSR on the business appears daunting when one includes expenditure on essential environmental management plan (EMP). As social welfare and environment protection are globally accepted as integral components of larger domain of CSR, the Government should compute the overall impact of these mandatory expenditures as well as several welfare cess.  
The compliance with different statutory guidelines might result in regulatory chaos if the case of Oil and Natural Gas Corporation (ONGC’s) CSR expenditure relating to Mehsana assets in Gujarat is any indication. This case would be discussed later in the column to drive home the need for single and simple statutory regulation on CSR. 
Leave aside for a while the viability of projects, reduced profitability of companies and compliance complications resulting from multiple fiats. Consider the fact that no one in the Government has realized the adverse impact of complex CSR regime on the industry’s income tax-generating potential. Nor has it yet dawned on the Government that CSR would increase the cost of products, services and utilities as the businesses are known for passing the costs to the ultimate consumer.
The governance complexity would accentuate if the Government accepts the industry’s demand for grant of tax concessions for CSR. As it is, the Government grants tax exemptions to donations made in funds such as Prime Minister’s National Relief Fund and specified trusts & institutions.
As the contributions to these funds are exempted from Income Tax under section 80(G),the companies might prefer to make lumpsum donations to such funds to avail tax benefit. This would also defeat the objective of decentralized implementation of CSR schemes. Charity should neither be tax-induced nor mandated through laws in an enlightened, humane society. 
To understand the implications of emerging CSR regime, we need to list and analyze all CSR regulations. MCA has recently substituted its CSR Voluntary Guidelines (CSRVG) issued in December 2009 with CSR rules framed under the Companies Act 2013. 
Under the Companies (Corporate Social Responsibility Policy) Rules that have become effective from 1st April 2014, MCA has specified the governance regime for implementation and enforcement of CSR expenditure. 
The Act stipulates that every company having net worth of Rs. 500 crores or more, or turnover of Rs. 1000 crores or more or net profit of rupees five crores or more during any financial year, would spend at least 2 per cent of its average net profits of the previous three year on CSR activities.
With unveiling of these statutory regulations, the Department of Public Enterprises (DPE) has revised its CSR guidelines for central public sector enterprises (CPSEs). It has thus given up its stance articulated in April 2010 that DPE “guidelines will supersede any other guidelines/circulars/instructions etc. that may have been issued by any Ministry/Department on any prior date.”
In its latest guidelines effective from 1st April 2014, DPE has referred to CSR rules under the Companies Act, 2013 and clarified that its “guidelines do not supersede or override any provision of the Act or the CSR rules.”  It has thus withdrawn its categorization of CPSEs into three groups that specified three different slabs of CSR expenditure linked to three slabs of net profit. 
DPE says that its latest guidelines are “in the nature of extra initiative or endeavour which the key stakeholders expect of CPSEs in the discharge of their corporate social responsibility.” 
These guidelines are applicable even to profit-earning CPSEs that are not covered under the eligibility criteria based on the threshold limits of net worth, turnover or net profit as specified by Section 135(1) of the Act.  Even these CPSEs would have to spend at least 2% of the profit earned in previous year on CSR.  
Although the Act and CSR rules are silent on carry-forward of unspent CSR fund in a particular year to the next year’s CSR budget, DPE guidelines provide for this arrangement to ensure that unspent funds don’t lapse and are utilized in subsequent years. 
DPE guidelines are thus a mix of its adminstrative order and statutory norms as mentioned in the Companies Act. As these guidelines are applicable to all profit-earning CPSEs, they put larger responsibility of central public sector as whole as compared to the burden to be borne by private sector under the Companies Act. 
A fundamental limitation of DPE guidelines is that these are silent on the applicability of CSR expenditure stipulated by Ministry of Environment and Forests (MOEF) in the environmental approval letters issued to companies for their new or expansion projects. 
Notwithstanding this, ONGC has sworn by DPE guidelines while refusing to comply with MOEF’s CSR diktat in a letter dated 16th July 2014 addressed to a MOEF committee, which asked the company to disclose the status of compliance with the conditions stipulated in the environmental clearance given in April 2009 for drilling of 157 development wells in Mehsana asset. 
MOEF’s Expert Appraisal Committee (EAC) for industrial projects had sought the compliance report in June this year while deferring a decision on ONGC’s application seeking permission to drill 350 additional development wells in Mehsana block.
EAC had asked ONGC to disclose its action plan to implement the former’s norm for spending 5% of the project cost on CSR dubbed specifically as “Enterprises Social Commitment”.  ONGC replied that 5% of the project cost of Rs 1167.7 crore for 157 wells amounted to Rs 83.385 crore to be budgeted as Rs 16.677 crore as annual component of CSR for five years. 
Taking the norms of 2% of net profit as mandatory outlay for CSR as applicable to ONGC under DPE guidelines (which the same as envisaged under the Companies Act), ONGC computed its required CSR expenditure as Rs 418.541crore from net profit of Rs 20925.7 crore in 2012-13. From this, ONGC computed the Mehsana asset’s CSR budget for 2013-14 at Rs 7.46 crore. 
This is not even half of the ESC expenditure computed for the same project under MOEF fiat. 
After making these calculations and recalling DPE’s CSR guidelines, the company stated: “ONGC being a CPSE is bound to comply with DPE guidelines issued for CSR and Sustainability for CPSE and shall always comply in future also as per the DPE guidelines issued/amended.” 
It thus requested EAC to review the condition of expenditure on “Enterprises Social Commitment” (ESC) that mandates allocation of 5% of the project cost on CSR over five years and align this requirement with DPE guidelines. 
Ironically, the 5% norm is not stipulated in the environmental clearance (EC) for 157 wells dated 1 April 2009. It is thus yet another case of retrospective governance. ONGC has not mentioned this fact in its letter to MOEF perhaps because it has miserably failed to comply with several other conditions mentioned in EC.
A glance through documents of EAC for industrial projects over the years shows that it first mentioned and applied the stipulation for earmarking 5% of the project cost on ESC on certain projects in its meeting held in February 2010. 
At its meeting held in February 2014, it has articulated in the generic terms of reference (TOR) for all industrial projects. It reads as: “At least 5 % of the total cost of the project shall be earmarked for the initial 5 years towards the Enterprise Social Commitment and 2% of retain profit thereafter for life of the project towards CSR based on public hearing issues and item-wise details along with time bound action plan shall be included. Socio-economic development activities need to be elaborated upon.”
This expenditure is different from cost of EMP that varies from project to project, technology to technology and location to location.  Apart from pollution control initiatives, EMP includes expenditure on development of green belt in the project area, rain water harvesting, etc. 
The 5% capital and 2% recurring CSR norm has, however, not been adopted by six other EAC companies such as the ones for coal mining and thermal power projects. They have their own CSR norms. EAC for thermal power plants, for instance, stipulates budgetary provisions for capital CSR cost @ 0.4% of project cost during the construction phase and thereafter annual recurring CSR cost @ 0.08% of the project cost.
This implies two different CSR norms for coal-based captive thermal plant set up as part of an integrated industrial project such as steel project and for stand-alone coal-based plants. 
EAC for Coal Mining projects stipulates recurring CSR expenditure at rate of Rs 5/tonne of coal and project-specific capital CSR outlay, whereas EAC for non-coal mining projects has adopted flexible CSR approach. This is evident from JSW Steel Limited’s iron ore mining project in West Singhbhum district of Jharkhand where EAC asked for allocation of at least 2-3% of the project cost towards CSR activities. 
Ironically, none of the mandatory CSR pushed for by EACs has been notified either as policy statement or as amendment rules relating to EC issued under Environment (Protection) Act. 
A project developer has to incur separate expenditure if the project requires forest land. In such case, a company has to pay for compensatory afforestation, additional compensatory afforestation, Net Present Value (NPV) to State Compensatory Afforestation Management and Planning Authority (State CAMPA) under the Forest (Conservation) Act.
While there are clear-cut guidelines for expenditure towards compensatory afforestation and NPV, there is no such transparency in the case of expenditure to be borne by a company if the project affects wildlife area.
This expenditure for wildlife care/management is decided arbitrarily as can be discovered by going through the documents of Standing Committee of National Board on Wildlife (NBW-SC).  The expenditure on this count is also deemed mandatory as wildlife clearances are issued under the Wild Life (Protection) Act.
Yet another component of UPA’s CSR regime is separate guidelines for CSR expenditure to be borne by major ports that were issued in December 2011. 
UPA Government’s CSR labyrinth would have become more complex had it worked for passage of the Minerals (Development and Regulation) Bill (MMDR Bill), 2011 after receipt of the Parliamentary Standing Committee’s report on the Bill in May 2013. 
The Bill has envisaged mineral-specific CSR outlay that has to be deposited with District Mineral Foundations (DMFs), which would be created to promote socio-economic development of persons in the mining areas.
The Bill, which would have to be introduced afresh in the Lok Sabha by the new Government sooner or later, requires a mining company to pay to DMF an amount equal to royalty on minerals paid by them to State Governments. This can be a maximum of 10% ad valorem on minerals.
Similarly, the prospective coal mining firms would have to deposit with DMF 26% of its net profit for previous year resulting from the related mining lease. 
These expenses would be in addition to the unspecified CSR expenditure to be incurred by the company as envisaged under the Bill. It also provides for setting up of mining regulator, appellate authority and competitive bidding for mining leases.  
Even before legal CSR frenzy gripped UPA, the Statute Book has had several laws that generate CSR revenue by levying specific cess on a product or service for welfare of specified category of workers.
One such law is The Building and Other Construction Workers’Welfare Cess Act, 1996 that provides for levy of cess at the rate of 1% of the total cost of construction
incurred by the employer .
The other laws include The Mica Mines Labour Welfare Fund Act, 1946; The Limestone and Dolomite Mines Labour Welfare Fund Act, 1972; The Iron Ore Mines, Manganese Ore Mines and Chrome Ore Mines Labour Welfare Fund Act, 1976; The Beedi Workers Welfare Fund Act, 1976; and The Cine Workers Welfare Fund Act,1981.
In addition to this, there are certain social-welfare imposts that are either borne only by the industry or by all consumers. These include National Calamity Contingent Duty which levied on specified imports including mobile phones, Education Cess and secondary and Higher Education Cess, both of which are levied as certain percentage of different indirect and direct taxes. 
There are many more cess, some of which would certainly qualify for inclusion the larger CSR domain.
The obvious conclusion one can draw from this analysis is that the Central and State Governments, that collect both tax and non-tax revenue, have failed to fulfill their Constitutional responsibility to meet the basic needs of the population and are menacingly targeting businesses as conduits for societal welfare. 
The complicated CSR regime should be replaced with a simple, single, statutory and universal regulation. This is needed to nip in bid regulatory arbitrage, litigation, corruption and to improve the ease of doing business in India.
 
Published by taxindiaonline.com on 2nd August 2014.
You are here: Home Corporate Governance Clear CSR legal jungle; don’t treat industry as the Kam Dehnu for social welfare