Expense on R&D for Covid-19 drugs, vax, devices will count as CSR

Research and development of new vaccines, drugs and medical devices related to Covid-19 by companies in the normal course of business will be regarded as corporate social responsibility (CSR) for three financial years, till FY22-23, the ministry of corporate affairs (MCA) said through a document.

While activities in the normal course of business do not qualify as CSR, the exception regarding R&D for Covid drugs and vaccines is only for companies that collaborate with organisations mentioned in the item (ix) of Schedule VII in the Companies Act.

These organisations include the Indian Institute of Technology, National Laboratories and auto­nomous bodies established under the Department of Atomic Energy, Indian Council of Medical Research and Council of Scientific and Industrial Research, among others.

“The FAQs on CSR issued by MCA provide important clarifications related to various implementation questions for corporate India. This is a welcome step and will provide impetus to corporate India’s fight against the pandemic,” said Anand Subramanian, partner, Deloitte India.

MCA has also clarified that preference to local areas under CSR is only directory and not mandatory in nature. The government has said that some activities in Schedule VII such as welfare activities for war widows, art and culture, and other similar activities, transcend geographical boundaries and are applicable across the country. 

“The spirit of the Act is to ensure that CSR initiatives are aligned with the national priorities and enhance engagement of the corporate sector towards achieving Sustainable Development Goals,” MCA said.

“The government understands that with new-age businesses, geographical boundaries are dissolving and has acknowledged corporate entities as partners in the social development process,” said Suraj Nangia, partner-Nangia Andersen.

“The explanations offered will help comprehend the CSR law properly, thereby facilitating effective execution.” The government notified the new rules in January 2021 underlining the big theme that CSR is mandatory and a statutory obligation, making India the first country to do so.

Thereafter several new aspects were added such as impact assessment of CSR contribution, involvement of international organisations for the purposes of CSR projects, drafting of a CSR policy, meaning of CSR, its implementation and limiting the discretion with the companies.

“These new aspects created several confusion and needed clarity. Though the FAQs provide clarity, the provision of 5 per cent limit on administrative overheads might be difficult for the companies to follow,” said Neeraj Dubey, partner, Singh & Associates.

The CSR FAQs provide details of what would qualify as administrative overheads. These include expenses incurred in the management and administration of CSR functions in the company. Expenses incurred by implementing agencies on the management of CSR activities shall not amount to administrative overheads and cannot be claimed by the company. 

For instance, salary and training of employees working in the CSR division of a company, stationery cost and travel expenses may be categorised as administrative overheads. However, the salary of school teachers or other staff for education-related CSR projects will be covered under education project cost. 

The CSR rules state that if a company spends more than the required amount on CSR, the excess amount can be set off against the mandatory CSR expenditure in the succeeding three years with effect from January 2021. However, no carry forward will be allowed for excess amount spent prior to FY20-21. “The freedom to carry forward for three years will give the corporations the freedom to spend liberally on social development activities,” Nangia said.

Globally, most countries have taken a voluntary approach to CSR spending. Countries such as Norway and Sweden, which have voluntary CSR, had started with a mandatory provision. Some experts believe that India needs to go through a compulsory CSR regime to become more accustomed to the idea before the rules are eased.