Why are contributions to CMRF not treated as CSR expenditure?
Sai Krishna Muthyanolla
April 17, 2020
Both the Central & State governments have appealed to corporates & citizens to donate to the respective funds in order to help the governments combat COVID-19. Contributions are pouring into these funds. However, unlike the contributions to the PM CARES or the PMNRF, contributions made to CMRF at the state level are not treated as CSR expenditure. We look into this issue in detail.
Thegovernment of India has on 28 March 2020, announced the constitution of a new trust fund called  ‘PM CARES’ as part of fight against COVID-19. Therationale of creating a new Trust fund to handle an epidemic, when PMNRF alreadyexists for the same purpose, has been questioned by many. Factly has earlier writtena story on this issue.
The press
release that followed the tweet of the Prime Minister, hadscant details of ‘PM CARES’. Subsequently, clarifications were issued by thegovernment about some of the aspects related to this new Trust fund. One suchis the memorandum issued by Ministry of Corporate Affairs (MCA), regarding the eligibility ofcontributions made towards PM CARES as CSR spending. As per this memorandum,all the contributions that are made to PM CARES shall qualify as CSRexpenditure under the Companies Act 2013.
What
is CSR expenditure?
Section
135 of the Companies Act 2013  mandates qualifying companies to spend astipulated amount under Corporate Social Responsibility (CSR).  As per the existing provisions, every companythat fulfils any of the below criteria (during a financial year) is required toconstitute a CSR Committee.
Thecompany is required to spend every financial year, at least 2% of the averagenet profits made during the three immediately preceding financial years towardstheir CSR activities.
Companies (Corporate Social
Responsibility Policy) Rules, 2014  later notified by the Central Governmentstate that CSR expenditure includes expenditure made towards the CSR activitieswhich are approved by the board and recommended by CSR committee and are inline with the permissible activities listed in Schedule VII of Companies Act 2013.
Contribution
to relief fund set up Central Government is part of the approved list
Inthe clarification issued post the announcement of PM CARES fund by the PrimeMinister, the MCA alluded to item (viii) under Schedule VII of Companies Act 2013to justify the qualification of contribution to PM CARES as permissible CSR expenditure.
SectionVII of Companies act 2013 provides the list
of activities that are eligible to be considered as CSR activitiesand any expenditure incurred towards these activities will be counted as CSRexpenditure.
As per this list, item (viii) refers to the contributions that are made to PMNRF or any other fund which is setup by the Central government for Socio-economic development, relief, welfare of SC, ST, BC, minorities and women.
SincePM CARES fund is established to provide relief for emergency & distresssituations, the contributions made to it are eligible to be treated as CSRexpenditure by companies.
Contributions
to State relief funds not qualified as CSR expenditure
Whilethe purpose of creating a PM CARES despite the existence PMNRF has not clearlyexplained by the government, one of the points being put forward informally is thatit would be a more dedicated fund to be used for the epidemic on hand and anyothers that arise in the future.
Sincethe respective State governments are at the fore-front of tackling the current epidemic, there are suggestions around the need forcontributions to be made to support the state efforts. CM relief funds andother State relief funds are few sources through which the states can raise therequired resources to be utilized for relief activities.
Apartfrom the individual contributions, donations from corporates form a major part ofthe contributions made to such relief funds.
Sincethe contributions to the new fund i.e. PM CARES will be  considered as  permissible CSR expenditure, there werequeries around the eligibility of contributions being made to Chief Minister’sRelief Fund (CMRF) at the state level.
To provide clarity, on 10April 2020,MCA released ‘COVID-19 related Frequently
Asked Questions (FAQs) on Corporate Social Responsibility (CSR)’ .
As per these FAQs:
While the rationale for theinclusion of PM CARES has already been discussed, the eligibility ofcontributions to State Disaster Management Authority is in reference to MCA’s clarification issued on 23 March 2020.
However, the reason for notincluding contributions made to CMRF or other State Relief funds is that theseare not included in Schedule VII of Companies Act 2013, which was the basis forinclusion of PM CARES fund. It has to be noted that currently, the list ofitems in Schedule VII only mentions about the funds set up by Centre and doesnot include any mention of the states.
Companies Act passed by the
Parliament in 2013 included State Funds also
Schedule VII of the Companies Act -2013, passed by the parliamentand notified by August 2013 included the funds set up by State Governments forrelief to be considered as CSR expenditure.
Point IX of Schedule VIImentions thus,
“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 ………….”
However, this has been subsequently amended and the rules relating to CSR  contributions under this law has did notinclude the funds set up by the state governments.
The reasons for removing ‘State’ funds’ fromthe permissible list of activities is not documented in any of availablesources.
Encouraging corporate donations under CSR to
State funds would help states
Donations by corporates are generally higherthan the individual contributions. Including corporate donations to CMRF or anyother state level relief fund in the list of CSR activities would encouragemore corporates to come forward and donate to these funds.
The setup, functioning and rationale of State relief funds and CMRF are similar to that of PM CARES fund i.e. these funds provide for a focussed source of resources in terms of tackling an epidemic or disaster and such relief efforts. In fact, contributions to both these funds are 100% exempt under section 80G of the Income Tax act.
Since the central government has allowed forfunds donated to State Disaster Management Authority to be treated as CSRexpenditure, it would be prudent to extend the same even for CMRF and otherState relief funds, which are more popular with the common public.
Furthermore, there is greater likelihood of corporatescontributing to the relief efforts locally (place of operations) i.e. withinthe state rather than at national level.
States have started looking at overcoming this technical hurdle. In Tamil Nadu, the CM has directed the funds under Chief Minister’s Public Relief Fund (CMPRF) to be diverted to Tamil Nadu State Disaster Management Authority (SDMA) since the contributions made to SDMA qualify as CSR expenditure.
Apart from Tamil Nadu, Telangana has also taken a similar action. As per the G.O issued by the government, all the contributions that are made to CMRF since 24 March 2020 would be allocated to Telangana State Disaster Management Authority. Thereby these contributions would qualify as CSR expenditure.
It is high time that the central government has a relook at its position of not allowing contributions to CMRF and other state relief funds to be part of CSR expenditure, in this critical hour of need.
Featured Image: CSR expenditure