Corporate Social Responsibility (CSR) Policy

The Ministry of Corporate Affairs, Government of India has notified the Section 135 of the Companies Act, 2013 along with Companies (CSR Policy) Rules, 2014 and other notifications related thereto which makes it mandatory (with effect from 1st April, 2014) for certain companies who fulfill the criteria as mentioned under Sub Section 1 of Section 135 to comply with the provisions relevant to CSR.
Corporate social responsibility may be referred to as “corporate citizenship” and can involve incurring short-term costs that do not provide an immediate financial benefit to the company, but instead promote positive social and environmental change.
The companies on whom the provisions of the CSR shall be applicable are contained in Sub Section 1 of Section 135 of the Companies Act, 2013. According to the section, the companies having Net worth of INR 500 crore or more; or Turnover of INR 1000 crore or more; or Net Profit of INR 5 crore or more during the immediately preceding financial year shall be required to constitute a Corporate Social Responsibility Committee of the Board having three or more directors, out of whom at least one director shall be an independent director.
Provided that where a company is not required to appoint an independent director, it shall have in its CSR Committee two or more directors (Inserted by the Companies (Amendment) Act, 2017, with effect from 19-9-2018). The companies under this section will be performing following activities:
• The companies shall be required to Constitute CSR Committee of the Board. The CSR Committee shall be comprised of 3 or more directors, out of which at least one director shall be an independent director. Provided that where a company is not required to appoint an independent director, it shall have in its Corporate Social Responsibility Committee two or more directors.
• The Board’s report shall disclose the compositions of the CSR Committee.
• All companies in every financial year shall spend at least two percent of their average net profits made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years in pursuance of its Corporate Social Responsibility Policy. It has been clarified that the average net profits shall be calculated with the provisions of Section 198 of the Companies Act, 2013. Also, proviso to the Rule provide 3(1) of the CSR Rules that the net worth profit of a foreign company of the Act shall be computed in accordance with balance sheet and profit and loss account of such company prepared in accordance with the provisions of clause (a) of sub-section (1) of section 381 and section 198 of the Companies Act, 2013.
• Company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities
The companies shall be required to incorporate an annual report on CSR containing a brief outline of company’s CSR Policy, Composition of CSR committee, company’s net profit for last three immediately preceding financial years, prescribed CSR Expenditure, details of CSR spent during the financial year and need to mention the reason in case the company has failed to spend prescribed CSR Expenditure.
Any amount remaining unspent, pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII (contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women), within a period of thirty days from the date of completion of the third financial year.
If the company fails to spend such amount, the Board shall, in its report specify the reasons for not spending the amount and unless the unspent amount relates to any ongoing project referred above, transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
Any contravention of this provision, the company shall be punishable with fine of fifty thousand rupees but it may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall be fifty thousand rupees but which may extend to five lakh rupees, or with both.
The CSR committee shall be required to formulate and recommend to the board a CSR policy which shall monitor the company’s activities, recommend the expenditure to be incurred on activities and timely monitor the company’s CSR policy. The CSR Committee will consist of three Directors, who shall meet at least twice in a year to discuss and review the CSR activities and policy.
The Policy recognizes that CSR is not just compliance; it is to support initiatives that improve the lives of underprivileged by eradicating basic problems like hunger, poverty etc.; promoting education, promoting gender equality, increasing provisions of hospitals, implementing rural development projects, protection of national heritage and above all, ensuring environmental sustainability etc.
Scope of CSR policy is to provide education and required training to all; ensuring proper drinking water supply through hand pumps, tube wells and taking proper steps for its maintenance; organizing health care camps to educate people about chronic diseases, managing and maintaining environment and pros and cons of addiction etc.; prominent steps to save environment; provide electricity and latest technologies in rural areas and proper training to farmers; and several more essential steps for the growth and development of the country.
The investment in CSR should be project based which are to be implemented by specialized agencies comprising of NGOs, elected local bodies like panchayats, academic organizations, trusts, missions, Government, Semi Government and autonomous Organizations, Mondals and Samitis etc.
The Board of Directors on its own and/or on the recommendation of CSR committee can amend its policy as and when required deemed fit. Any or all provisions of CSR Policy would be subjected to revision/amendment in accordance with the regulations on the subject as may be issued from relevant statutory authorities, from time to time.

CAPITAL GAINS NOT CHARGEABLE TO INCOME TAX ON INVESTMENT IN CERTAIN BONDS [SECTION 54EC]

CAPITAL GAINS NOT CHARGEABLE TO INCOME TAX ON INVESTMENT IN CERTAIN BONDS [SECTION 54EC]
Introduction:
 
The gain that arises on the sale of a Long Term Capital Asset is known as Long Term Capital Gain and Capital Gain Tax is levied on such gain. Many investors, who sell properties, end up paying huge tax because they have not invested the proceeds from sale on time. Tax saving on long-term capital gain is possible by investing the capital gain amount in long term specified bonds, also called as Capital Gains Bonds specified under Section 54EC.

Section 54EC of Income-tax Act, 1961, provides that capital gain arising from the transfer of a Land and/or Building (Whether residential or commercial ) which was held for more than 24 months shall not be charged to tax, if such capital gains are invested in long term specified bonds within a period of six months from the date of such transfer.  If the Land/Building that has been sold was held for less than 24 months, it would be classified as Short Term Capital Asset and tax would be levied on such sale as per applicable Income Tax slab Rates. From FY 2018-19, the benefit of this deduction has been restricted to Long Term Capital Gains (LTCG) arising from the transfer of land and/or building only.

 

Capital Gain Bonds
These Capital Gain Bonds redeemable after 5 years, which help in saving tax can only be issued on or after 01.04.2018 by the

·        National Highway Authority of India (NHAI)

·         Rural Electrification Corporation of India (REC)

·        Power Finance Corporation Limited. (PFC)

·        Indian Railway Finance Corporation Limited (IRFC).

 

Capital gain shall be exempt to the extent of amount of investment in such specified bonds upto a maximum of Rs.50 Lakhs.

 

The Interest Rate on the Capital Gains Bonds is 5.75% for all bonds purchased after 01st April 2018. The Interest @ 5.75% is payable annually. Before 1st April 2018 – the Interest Rate was 5.25%.

 

It is important to note that the interest is not exempt from income tax. Interest would be liable to be taxed as per the income tax slabs of the taxpayer. Only the amount invested is exempted from Capital Gain Tax.

 

The face value of the Bonds issued by NHAI, REC, PFC and IRFC is Rs. 10,000. Hence the maximum no. of Bonds that can be purchased by an investor is 500 since the maximum investment allowed in these bonds in a year is limited to 500 x 10,000 i.e. Rs. 50 Lakhs.

Benefit of Investing in Capital Gain Bonds
The interest on these Capital Gain Bonds of 5.75% is lower as compared to the Interest paid on a Fixed Deposit which is around 7% . However, the benefit of investing in capital gain bonds is the income tax on long term capital gain which is being saved.

For better understanding of the benefit of investing in Capital Gain Bonds, an analysis of the benefit which would arise to the taxpayer if he invests in Capital Gain Bonds is produced here below:-

 

Option 1: Investment in Capital Gain Bonds

 

Particulars  
Capital Gains 50,00,000
Less : Investment in Bonds 50,00,000
LTCG Tax NIL
Post Tax Amount 50,00,000
Investment Tenure (years) 5
Rate of Interest (Per Annum) 5.75%
Benefits  
Tax saved on above investment (incl cess)   – (A) 10,40,000
Interest earned for 5 years @5.75% per annum in Rs

(Rs.2,87,500*5 years)                               – (B)

14,37,500
Total Benefit (A+B)                                    – (C) 24,77,500
Total Benefit in Percentage (2477500/5000000) 49.55%
Annualised Return (49.55/ years) 9.91%

 

Option 2: Invest in any other option after paying tax

Particulars  
Capital Gains 50,00,000
LTCG Tax @20.8% 10,40,000
Post Tax Amount 39,60,000
Investment Tenure (years) 5
Total Benefit Required to match (C) above 24,77,500
Total Benefit in Percentage (2477500/3960000) 62.56%
Annualised Return (62.56/5 years) 12.51%

 

If the rate of return is higher than 12.51% in the other option, then investing in them makes sense. If the return is lower, then 54EC bonds may be more suitable.

 

*Effective LTCG Tax for the FY 2018-19 is 20% + Education Cess @4% = 20.8%.

 

Other Key Features of Capital Gain Bonds

 

1. The Capital Gain Bonds are AAA rated, non-transferable, non-negotiable and cannot be offered as a security for any advance or loan.

2. The Bonds are issued for a period of 5 years. One cannot transfer or convert or avail loan or advance on the security of such bonds for a period of 5 years from the date of acquisition of such bond. In case where the Capital Gain Bonds are transferred or converted into money (otherwise than by transfer) within a period of five years from the date of their acquisition, the amount of Capital Gain exempt earlier under section 54EC shall be deemed to be long-term capital gain of the previous year in which such bonds are transferred or converted into money. (Prior to FY 2018-19, the lock in period was 3 years)

3. Bonds are not listed on any stock exchange.

 

4. Documents needed at the time of purchase of bond:

·        self-attested copy of the PAN Card

·        self-certified copy of Address Proof

·        One Cancelled Cheque.

5. Available in Physical as well as Demat form.

6. There is no online mechanism of purchasing these bonds and a person would be required to fill in the physical form.

7. Bonds will be automatically redeemed, without the surrender of Bond Certificate(s) and the proceeds would be paid by cheque or NECS/ECS.

 

Compiled by Dhanush D Bolar,

Associate Nitin J Shetty & Co