The concept of corporate social responsibility (CSR) was first inserted into the statute books by the Companies Act, 2013, in which Section 135 mandated a certain class of companies meeting a specified threshold to spend two per cent of their average net profit on social causes. A wide range of activities were covered in the seventh schedule of the Act for this purpose, which were suggestive of the direction a company may undertake to meet its legal obligation casted by the newly enacted statute.
In 2014, India became the first country which legally mandated CSR and this issue was highly debated. There were arguments that a company already pays taxes on its taxable income and, therefore, these provisions are in the nature of additional levy. It was also argued that corporates are already engaged in social activity by way of creating jobs and assisting in economic progress; therefore, social welfare being the government’s job should not be shouldered by them. However, there is another view that since businesses take resources from society and they have to deal with society for exchanging their goods/services, they must participate in social upliftment. Anyway, the dust has settled on this issue and the CSR provisions are there in the statute.
The government notified new CSR rules on January 22, 2021, and these will have far-reaching implications. Initially, CSR laws were somewhere optional in nature: in case a company failed to spend money on CSR activities, it was only required to disclose the fact in its annual report. However, things are going to change now and corporates will be required to deposit the unspent amount in the fund specified by the government.
Apart from this, CSR activities can now be undertaken only through entities that are registered under the Income Tax Act and such entities are also required to register themselves with the ministry of corporate affairs. This change will also bring programme-implementing agencies under scrutiny.
There is another significant change, which is effective now, and it will have far-reaching implications. As per Rule 8(3), certain companies will have to submit an impact-assessment report of their CSR projects. This step is expected to bring transparency into the process because several instances have been reported in the past where executing agencies were used as a tool to either channelise the funds for illegal activities or money was routed through the banking channel only to meet the regulatory requirements of CSR but no activities were carried out on the ground. Even though there is no hard law in the Western world which enforces mandatory CSR spending, corporations are already invested in a big way in this area because society there is more mature and their customers are conscious about the public image of an entity.
A closer look at the recent changes reveals that legal scrutiny is being heightened not only on the corporate bodies but equal stress is given on the implementation partners also. An implementation partner, which is usually an NGO, is registered as a charitable organisation and it receives donations from outside India also. The government has started tightening the noose on NGOs since 2010 when the Foreign Contribution Regulation Act, 2010 (FCRA) replaced the erstwhile Foreign Contribution Regulation Act, 1976, and subsequent amendments were made by the Narendra Modi government.
In the past few years, the home ministry has cancelled the FCRA licences of various NGOs which were non-compliant with the laws related to foreign donations and, in some cases, though the licences were not cancelled outright, their ability to receive funds was curbed severely. The CSR route was allegedly used by various NGOs to carry out their operations which are not in compliance with the law.
For instance, the Central Bureau of Investigation filed a charge sheet against a non-governmental organisation, Caruna Bal Vikas (CBV), which was a pivotal donor for more than 300 NGOs working in India (FIR No. RC2202020E0003, dated February 20, 2020). As per the charge sheet filed by the CBI, only ten per cent of the donations were used for the purpose they were meant for, while the remaining amount was diverted to other NGOs. The stated objective of the pivot NGO was “converting poor children into fulfilled Christian adults”, and such religious objectives don’t go hand in hand with so-called charitable objectives.
The money used by NGOs to lure the poor for religious conversion was held illegal by the Supreme Court in the matter of “Stanislaus vs State of Madhya Pradesh (1977)” in which the court made a clear distinction between the right to propagate one's religion or faith and the right to convert. It is worthwhile to mention that Section 13(1)(b) of the Income Tax Act, 1961, prescribes that if any income of a religious/charitable institution is applied for the benefit of any particular religious community or caste, then tax exemption of the institution shall stand withdrawn. The new rules require that a CSR implementation partner must be registered under the Income Tax Act.
We have also seen instances where economic activities were halted by anti-India elements by making NGOs the face of agitations manufactured to derail growth. The role of organisations like Greenpeace India in agitations was highlighted by the Intelligence Bureau.
NGOs must adhere to the laws of the land and changes made in CSR rules are a welcome step. Government officials should go beyond merely making amendments and verify that CSR schemes are yielding results in line with the legislative intent. We should expect that the practice of taking the CSR route to carry out nefarious activities will now come to an end.
(The author is a chartered accountant and public policy analyst. Views expressed are personal.)