Corporate Social Responsibility

Corporate Social Responsibility (CSR) is a self-regulating business model that helps a company be socially accountable to itself, its stakeholders, and the public. It means that companies conduct their operations in ways that positively impact society and the environment, going beyond just making profits. CSR involves efforts in areas such as environmental sustainability, ethical practices, philanthropy, and economic responsibility. Through CSR initiatives, businesses aim to support community development, reduce environmental harm, promote human rights, and foster a strong and ethical corporate image. Ultimately, CSR builds trust, inspires positive action, and contributes to a sustainable future for both society and the business itself.

Governing Laws for CSR in Nepal

The laws governing CSR in Nepal are:

• Industrial Enterprise Act, 2076
• Industrial Enterprise Rule, 2078
• Nepal Rastriya Bank Circular no. 11/073/74
• Security Businessperson (Merchant Banker) Regulation, 2064
• Directive on Institutional Governance of Insurers, 2080

Key Provisions of Corporate Social Responsibility for Industries in Nepal

Section 54 of the Industrial Enterprise Act, 2076, provides the following regarding Corporate Social Responsibility (CSR) compliance for industries in Nepal:

• A medium or large industry, or a cottage or small industry with an annual turnover exceeding NPR 150 million, must set aside at least one percent of its annual net profits each fiscal year specifically for CSR activities.
• The amount set aside must be spent in prescribed areas according to an annual plan and programme prepared by the industry.
• The industry is required to submit details of the CSR programs completed and the amounts spent to the concerned industry registration authority within six months after the end of the fiscal year.
• The CSR expenditure can be deducted as a business expense for the purpose of calculating income tax.
• Additionally, CSR funds are mandated to be utilized in areas including disaster prevention, health, education, environmental conservation, cultural preservation, skill development, and community infrastructure.
• At least half of the CSR funds must benefit the local communities impacted by the industry.
• Non-compliance can attract penalties based on a percentage of the annual net profits as per section 43 of the Industry Enterprises Act, 2076.

Corporate Social Responsibility Requirements for Bank and Financial Institution in Nepal

The fund accumulated in Banks and financial institutions must be arranged to be spent in the next fiscal year as follows:

Areas Where CSR Funds May Be Spent

Expenditure on social projects:

Direct and indirect expenses related to education, health, disaster management, environmental protection, cultural promotion, infrastructure improvement in remote areas, income-generating capacity enhancement for socially disadvantaged groups, financial literacy, and consumer protection programs. When selecting projects, proposals must be solicited through public notices from specialized organizations working in the relevant areas.

Direct grant expenditure:

Direct grants for education and health expenses for extremely poor groups or direct grants for physical infrastructure construction, procurement of resources, and operational expenses of organizations engaged and active in such areas.

Sustainable Development Goals:

Other direct and indirect expenditures aimed at achieving the targets set in the 17 sectors identified by Nepal’s Sustainable Development Goals, 2016–2030.

Other permitted expenses:

• Expenses incurred when banks and financial institutions provide Child Day Care Centre facilities for their employees.

Restrictions and Governance

• Expenses incurred for promoting the institution’s brand shall not be borne from this fund. However, there shall be no objection to mentioning the institution’s name as a courtesy in the expenses made for Corporate Social Responsibility.
• Banks and financial institutions, when spending on Corporate Social Responsibility, must ensure that the expenditure is not limited to a single geographic area or subject (such as education, health, etc.) but is fairly distributed across various geographic areas and subjects within their area of operation.
• Expenditure that benefits the members of the board of directors personally or politically is not permitted.
• The board of directors of licensed banks and financial institutions must formulate and implement a separate procedure that includes the identification of areas for corporate social responsibility, evaluation of proposals, operation and management of the fund, and related matters.
• Banks and financial institutions must disclose information regarding the arrangement of such a fund and expenditures made from it under the accounting remarks section of their annual financial statements.

Corporate Social Responsibility for Merchant Bankers

CSR for Merchant Bankers is guided by Security Businessperson (Merchant Banker) Regulation, 2064, Rule 30(a).

Key Requirements

Establishment of Fund
A merchant banker must establish a Corporate Social Responsibility Fund.

Allocation of Profit
The merchant banker shall allocate at least one percent of their profit to be spent on corporate social responsibility activities from the fund established.

Reporting Requirement
Information regarding the corporate social responsibility activities carried out must be submitted to the securities board within seven days of completing such activities.

Corporate Social Responsibility for Insurance Companies

CSR for Insurance Companies in Nepal is guided by Directive on Institutional Governance of Insurers, 2080.

CSR Fund Allocation

Insurance companies must allocate and set aside one percent of their net profit from each fiscal year into a dedicated Corporate Social Responsibility Fund.

Areas of Expenditure

The accumulated CSR fund shall be spent annually based on an approved plan and program in the following areas:

• Social projects such as education, health, disaster management, capacity building for socially marginalized groups, insurance literacy, consumer protection, and insurance programs for marginalized communities.
• Direct grants for insurance-related expenses in education and health for extremely poor and marginalized groups.
• Poverty reduction programs including insurance coverage against natural disasters for the extremely poor, as per the government’s poverty reduction strategy.
• Expenses related to establishing child care centers for children of employees within the company.

Restrictions on Expenditure

• Expenses for promoting the insurance company’s brand cannot be charged to the CSR fund. However, the company’s name may be mentioned as a courtesy in CSR activities without restriction.
• CSR spending must be fairly distributed across various geographic regions and thematic areas, not concentrated in a single location or subject.
• CSR funds must not be used for the personal or political benefit of board members.

Management, Disclosure, and Reporting

• The board of directors must establish and implement a separate procedure detailing the identification of CSR expenditure areas, evaluation of proposals, and the management and operation of the CSR fund.
• Details of the CSR fund and related expenditures must be disclosed under the notes to the financial statements.
• Insurance companies must submit a report to the regulatory authority within six months after the end of each fiscal year, detailing the CSR programs conducted and the expenses incurred.

Summary of Requirements

Aspect
Requirement

Fund Allocation
1% of net profit allocated to CSR fund

Spending Areas
Social projects, grants, poverty reduction, child care

Branding
Prohibited; name mention allowed

Distribution
Fair geographic and thematic distribution

Restrictions
No personal/political benefits

Governance
Board manages fund and proposals

Disclosure & Reporting
Financial statements & report within 6 months after FY end

TAX Deduction of CSR Expenditure

In Nepal, corporate social responsibility (CSR) expenditures are generally tax-deductible, subject to specific conditions and caps under the Income Tax Act and related regulations.

The key points are:

• Section 13 of the Income Tax Act, 2058 allows deduction of business expenses, but CSR expenses must meet conditions related to being incurred in the course of earning income or fall under specific CSR-related provisions to be deductible.
• The Industrial Enterprise Act (IEA) provides recognition for CSR expenses as deductible for tax purposes, especially under Section 54(4) of the IEA.
• Section 24 of the Income Tax Act, 2058 allows expenses to be accounted in accrual basis.
• In Para 8.4. of the Income Tax Directives, it is stated that provisions are not allowed for deduction while computation of Taxable Income.

Verdicts from the Court

Despite legal provisions under the Income Tax Act and the Industrial Enterprise Act allowing tax deductions for Corporate Social Responsibility (CSR) expenditures, the tax authorities in Nepal denied Mainawati Steel Industries the tax deduction for their CSR expenses.

The industry subsequently filed an appeal with the Revenue Tribunal (Mainawati Steel Industries v. Large Tax Payers Office et. al, case no: 080-RB-0072), asserting that CSR expenditures should be deductible for tax purposes in accordance with the relevant laws.

The Revenue Tribunal ruled in favor of Mainawati Steel Industries, stating that CSR expenditures must indeed be deducted for tax purposes. However, the Large Tax Payers Office has filed an appeal against this decision in the Supreme Court of Nepal, and the case remains pending.

In the case of Sangrila Development Bank Ltd. vs. Large Taxpayer Office Lalitpur, case no. 077-RB-0052, the Revenue Tribunal ruled that:

“The prevailing law appears to have also encouraged industries, banks, financial institutions, and companies to allocate and spend a certain percentage of their annual net profit for social responsibility and welfare. Such expenditure enhances the social reputation of the concerned institution, builds public trust, and ultimately leads to the growth of the taxpayer’s business and higher income generation. Therefore, the decision of LTPO to deny expenditure incurred under corporate social responsibility on the ground that it is not related to the taxpayer’s business income cannot be considered a just decision”.

Final verdict from the Supreme Court is awaited.

Whether Charging to Profit or Appropriation from Reserve?

There are two practices found on treatment of CSR expenses. In one situation, the CSR expenses is charged as expense in Profit and Loss while in another situation, CSR is appropriated from profits after taxes (reserve).

Whether the Amount to Be Calculated Is Cum-CSR or Ex-CSR?

The Act or the legal authority is not clear whether the CSR fund to be allocated or appropriated is cum-CSR or ex-CSR.

If the CSR is to be calculated on cum-CSR basis then the formula to be used would be:

CSR = Net profit * 1 / (100 + 1)

If it is to be calculated on ex-CSR basis then the formula to be used would be:

CSR = Net profit * 1%