Amendments in CSR provisions of Companies Act, 2013 and CSR Rules, 2014
The CSR universe in India is orchestrated by the Schedule VII of the Company’s Act, and unsurprisingly, any changes to the same attracts interest. Items listed in the Schedule VII of the Act have been fairly broad-based, for liberal interpretation by companies so as to capture the essence of the enumerated subjects. However, considering COVID and its implications, there has been a general expectation of an amendment in the Schedule in the CSR ecosystem, to facilitate additional funds towards the pandemic control. Corporate India, from its trade and industry bodies, have been in talks with the Ministry to aid them by their fight against COVID, through relaxation in the CSR laws.
Subsequently, the Government came up with a set of amendments on August 24, 2020, based on the special recommendations made by pharmaceutical and medical device manufacturers and government departments such as the department of pharmaceuticals and health ministry.
Briefly, the approved amendments are:
- Item (ix) of schedule VII shall include contributions to: a. Contribution to incubators or research and development projects in the field of science, technology, engineering, and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government; and
- Contributions to public funded Universities; Indian Institute of Technology (IITs); National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE); Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Défense Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR); Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR), engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).
What do these changes mean for the corporates?
- The amendments are beneficial, as they look to remove the provision of erstwhile excluded “activities undertaken in pursuance of its (the company’s) normal course of business” from being considered as CSR activities, albeit temporarily. This especially helps pharmaceutical, medical device manufacturers or any firm engaged in “research and development activity of new vaccine, drugs and medical devices in their normal course of business”. They will now be eligible to avail CSR benefits for their R&D work related to such activities for Covid-19 products, provided the work is “in collaboration with” any of the institutes or organisations under item (ix) of Schedule VII.
- However, it is to be reiterated that the allowances under CSR are only limited to “R&D” and not the actual distribution of drugs/medicines/equipment on ground, and other such activities. CSR funds could be utilized for Covid-19 R&D activities (as mentioned in rule 2 under sub-rule (1), in clause (e)) conducted as a normal course of business. Any activities apart from these would still need to be beyond the normal course of business to qualify as CSR under Schedule VII.
- These CSR funds can be diverted towards R&D for Covid-19 only for three years i.e, from the FY21 to FY23.
- Companies that have already spent the funds on Covid-19 R&D will not be burdened with the task of finding alternate opportunities for spending towards CSR.
- The details of such activity must be disclosed under a separate head in the annual report on CSR included in the Board’s report, as per the stipulated format.
- The Board of Directors of companies undertaking such research need not ensure that these activities be mentioned under the CSR Policy and that the expenditure is mandatorily made within the purview of Schedule VII.
- The R&D must be conducted in collaboration with one of the agencies prescribed under item (ix) of the schedule VII.
- Item (ix) of Schedule VII has been amended to include incubators or research and development projects in the field of science, technology, engineering, and medicine and National Laboratories.
- The big change is the inclusion of autonomous bodies established under the Department of Pharmaceuticals and Ministry of AYUSH to widen the ambit of partner agencies for the companies to undertake R&D activities. This move was anticipated by many, given the Government push for AYUSH, through substantial investments, and through promotion of entrepreneurial pursuits in this field.
- As CSR funds do not qualify as business expenditure, the 2% funds diverted towards the R&D expenditure will not be eligible for tax deductions
In conclusion, the amended CSR rules intend to support and encourage development of Covid-19 vaccine, drugs, and medical devices by expanding the boundaries of the CSR law. This move may be seen as a roundabout way of encouraging India based R&D of companies, especially amongst pharma giants, as well as ideating CSR to move beyond philanthropy, towards building societal goods within the ecosystem of a corporate. It is one-step towards the direction of seeing “development” as a business case of the company, and not just as a positive externality. The philosophy of CSR of giving back to the society, not just in the traditional sense of giving, especially during the tough hour of a pandemic or disaster has been emphasized through this amendment.