Union minister Nirmala Sithraman (PTI)

NEW DELHI: A high-level committee on Corporate Social Responsibility ( CSR ) has suggested doing away with the provision for imprisonment in case of violation of the spending requirement and disclosures, while seeking to allow for tax deduction on the expenditure.

Instead of imprisonment provided under two sections of the Companies Act, the panel headed by corporate affairs secretary Injeti Srinivas has recommended that the penalty be enhanced to two-three times the default amount, with a cap of Rs 1 crore. Companies have protested against the jail provision, prompting FM Nirmala Sitharaman to promise a review. The proposals are not a reaction to the protests as these were drafted weeks ago, although the report was finalised last week, sources told TOI.

Panel suggests third-party assessment on a pilot basis

Sources said there was “selective reading” of the CSR law as the Companies Act provided for up to three-year imprisonment under Section 134(8) for non-disclosure. “Non-disclosure carried stiffer penalty than violation. The committee has suggested that in both cases, imprisonment should be done away with but a stiff penalty should be imposed,” said a source privy to the discussions.

Sources also said despite the provision for jail, the law provides for compounding of the offence, which allows companies to get away by paying a fine. “Imprisonment is a provision that is to be used in the rarest of the rare case and is not triggered every time a company fails to meet the spending requirement. The government has no perverse intent in using it,” said a source, adding that the recent amendments have provided flexibility to companies.

The law mandates that companies with a net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more, have to allocate 2% of their average net profits of three financial years for CSR activities.

The committee under Srinivas has recommended that the scope should be widened to include limited liability partnership firms as well as banks. To ease the burden on small companies, those with CSR amount of under Rs 50 lakh do not need to constitute a committee of the board and also allow for spending of the amount over three to five years after transferring the money into a separate account. A CSR Fund is also planned for companies to transfer unused money.

It has also suggested that the money should be allocated for creating assets for public purpose and the allocation need not necessarily be for activities in the local area. The panel has also recommended enhanced disclosure and third-party assessment on a pilot basis.

