We, humans, are an inseparable part of society and the corporates founded by humans impact people with their operations. Therefore, it is of utmost importance to understand the needs of society as a moral obligation. Any action that a company takes to give back to society can fall under the Corporate Social Responsibility (CSR) umbrella.
CSR brings positive change to society and also builds customers’ trust as consumers feel that they are using the product or service of a socially responsible company and they feel attached and become supportive. In India, CSR spending constitutes up to 28% of philanthropic giving which is invested in education, livelihoods support, health sectors, etc.
Though CSR is a moral responsibility that every entity should take toward society, still, it is better to make it mandatory so that no entity can miss it. On the same lines, the Companies Act, of 2013 made it mandatory for specified companies to incur a specified % of net profits on CSR Activities. This write-up discusses various facets of CSR viz. mandatory requirements, activities for CSR, modes of conducting CSR, taxation allowance and CSR, treatment of unspent or excess CSR amount, impact assessment, and disclosures relating to CSR and CSR in COVID times.
1. CSR Committee: Company covered for CSR Provisions
- As per Section 135(1) of the Companies Act, 2013, companies falling under any of the following categories during the preceding immediate financial year are required to form a CSR Committee:
- Company having a net worth of INR 500 Crores or more; or
- Company having turnover of INR 1,000 Crores or more; or
- Company having a net profit of INR 5 Crores or more
- CSR Committee shall consist of 3 or more directors out of which one should be an independent director. However, where a company is not required to appoint an independent director under section 149(4) then the CSR Committee shall consist of 2 or more directors.
- The company is required to disclose the composition of the CSR Committee in the Director’s Report.
- Provided that Where the amount to be spent by a company on CSR Activities does not exceed INR 50,00,000 then the Company shall not be required to form a CSR Committee and all the functions of the CSR Committee shall be discharged by the Board of Directors of such company.
2. Expenditure to be incurred on CSR Activities
- Every company, required to form a CSR Committee, shall incur in every financial year at least 2% of the average net profit of the three immediately preceding Financial Years on CSR Activities.
- Where a company has not completed a period of 3 years since incorporation, the average shall be computed of profit of all financial years from incorporation.
3. Computation of Net profit for CSR Activities
- Covered Companies are required to incur 2% of their average Net profit on CSR Activities.
- For this purpose, Net Profit shall be computed as per Section 198 of the Companies Act, 2013.
- Deductions Allowed:
In computing Net Profits, the following sum shall be deducted:
- all the usual working charges;
- Directors’ remuneration;
- bonus or commission paid or payable to any member of the company’s staff or to a person engaged by the company
- Taxes on excess or abnormal profits;
- Tax on business profits imposed for special reasons or in special circumstances
- interest on debentures issued by the company;
- interest on mortgages executed by the company and on loans and advances secured by a charge on its fixed or floating assets;
- interest on unsecured loans and advances;
- expenses on repairs, whether to immovable or to movable property, provided the repairs are not of a capital nature;
- outgoings inclusive of contributions made under section 181;
- depreciation to the extent specified in section 123;
- The setting of losses incurred in any year. Provided that such excess has not been deducted from any profits of the subsequent year preceding the year in respect of which the net profits have to be ascertained;
- any compensation or damages to be paid in virtue of any legal liability including a liability arising from a breach of contract;
- any sum paid by way of insurance against the risk of meeting any liability such as is referred to in clause (m);
- debts considered bad and written off or adjusted during the year of account.
- Incomes not to be credited:
While computing net profits, credit shall not be given for the following sums::
- profits, by way of premium on shares or debentures issued or sold by the company except in the case of the investment company;
- profits on sales of forfeited shares;
- profits of a capital nature including profits from the sale of the undertaking or any part thereof;
- profits on the sale of immovable property or fixed assets of a capital nature except when the business of the company consists, whether wholly or partly, of buying and selling any such property or assets:
However, when the sale value of the fixed asset exceeds the written-down value, credit shall be given for so much of the excess as is not higher than the difference between the original cost of that fixed asset and its written-down value;
- Profit/loss on revaluation of asset or liability recognized in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.
- any amount representing unrealized gains, notional gains, or revaluation of assets
4. Roles of CSR Committee
The Corporate Social Responsibility Committee shall:
- formulate and recommend to the Board, a Corporate Social Responsibility Policy indicating activities to be undertaken by the company.
- recommend the amount of expenditure to be incurred on the activities
- monitor the Corporate Social Responsibility Policy of the company from time to time.
5. Roles of Board of Directors with respect to CSR Activities
The Board of every company shall,—
- Considering recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company.
- Disclose the contents of CSR Policy in its report and also place it on the company’s website; and
- ensure that the activities as are included in the Corporate Social Responsibility Policy of the company are undertaken by the company.
6. Activities covered under CSR Activities
Schedule VII of the Companies Act, 2013, provides a wide range of CSR activities that may be undertaken by corporates in India. The activities to achieve its CSR obligations include:
- Eradicating hunger, poverty, and malnutrition, promoting health care including preventive health care and sanitation including contributing to the Swach Bharat Kosh set up by the Central Government for the promotion of sanitation and making available safe drinking water.
- Promoting education, including special education and employment enhancing vocational skills, especially among children, women, the elderly, and the differently abled, and livelihood enhancement projects.
- Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, daycare centers, and such other facilities for senior citizens, and measures for reducing inequalities faced by socially and economically backward groups.
- Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources, and maintaining the quality of soil, air, and water including contribution to the Clean Ganga Fund set up by the Central Government for rejuvenation of river Ganga.
- Protection of national heritage, art, and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional art and handicrafts.
- Measures for the benefit of armed forces veterans, war widows and their dependents, Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows.
- Training to promote rural sports, nationally recognized sports, paralympic sports, and Olympic sports.
- Contribution to the prime minister’s national relief fund or Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)] or any other fund set up by the central govt. for socio-economic development and relief and welfare of the scheduled caste, tribes, other backward classes, minorities, and women.
- 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 Defence 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).
- Rural development projects.
- Slum area development.
- Disaster management, including relief, rehabilitation, and reconstruction activities.
Further, as per General Circular No. 21/2014 dated 18th June 2014, activities mentioned above should be interpreted liberally so as to capture the essence. The items listed above are broad-based and are intended to cover a wide range of activities as illustratively mentioned in the Annexure.
Further, as per Section 135(5) of the Companies Act, shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.
7. Activities not covered under CSR activities
As per General Circular No. 21/2014 dated 18th June 2022, the following activities cannot be included as part of a company’s eligible CSR spend:
- Projects or programs or activities that benefit only the employees of the company and their families
- One-off events such as marathons/ awards/ charitable contributions/ advertisements/ sponsorships of TV programs etc.
- Expenses incurred for the fulfillment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act, etc.)
- Contribution of any amount directly or indirectly to any political party shall not be considered as a CSR activity.
- Activities incurred in pursuance of its normal course of business.
However, Salaries paid by the companies to regular CSR staff as well as to volunteers of the companies can be factored into CSR project cost as part of the CSR expenditure.
8. Treatment of excess or unspent amount on CSR Activities
8.1 Excess amount spent on CSR Activities during the year
Where a company spends an amount in excess of the required 2% of net profits, such excess amount may be set off against the same requirement to spend up to the immediate succeeding 3 financial years subject to the following conditions:
- the excess amount available for set-off shall not include the surplus arising out of the CSR activities if any and
- the Board of directors shall pass a resolution to that effect.
8.2 Unspent amount for ongoing projects
In case, a company fails to spend the entire amount towards CSR activity for an ongoing project, then, any unspent amount from such an ongoing project should be transferred within 30 days of the end of the financial year, to the specifically designated ‘Unspent Corporate Social Responsibility Account’ Bank Account to be opened by the company.
Further, The amount transferred in such a dedicated account must be used within the next three financial years as per CSR policy.
However, if, somehow, these amounts remain unspent even after the three-year period, then they should be transferred, within 30 days of the end of the third financial year, to any fund specified in Schedule VII of the Companies Act, 2013 viz. PM CARES Fund, etc.
8.3 Unspent amount for other projects
In case, the company is unable to utilize the entire amount of CSR and the same remains unallocated to any CSR project, then such unspent amount shall be transferred, to any fund specified in Schedule VII of the Companies Act, 2013 within six months of the end of the financial year.
Further, the company shall specify in the board report the reasons for not spending CSR Amount.
9. Consequences of Non-Compliance
As per Section 135(7) of the Companies Act, If a company defaults in complying with the provisions of CSR, the company shall be liable to a penalty of the lower following amount:
- Twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or
- INR 1 Crores
Further, every officer of the company who is in default shall be liable to a penalty of lower following amounts:
- of 1/10th of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be,
- or two lakh rupees, whichever is less.]
10. Frequently Asked Questions
Whether expenditures incurred on CSR Activities are eligible for deduction under Income Tax
As per Explanation 2 to Section 37(1), CSR expenditure in business is not deemed to be an expenditure incurred for business. Therefore, it is not deductible in income tax. However, CSR expenditures which is of other nature described in sections 30 to 36 or 80G like repairs, depreciation, or contribution to specific funds will be eligible for deductions under those respective sections.
What is Impact assessment for specified companies?
The Government has mandated to have an impact assessment for specified companies so that companies can understand and evaluate the impact of their social investments in programs and projects on society. Currently, impact assessment is mandatory for companies with a CSR spend of INR 10 crore or more in three immediately preceding years of all projects with outlays of INR 1 crore or more.
An impact assessment must be undertaken by an independent agency and the report of impact assessment shall be placed before the Board and annexed to the annual report on CSR. The cost of impact assessment can be booked towards CSR but the same should not exceed 5% of total CSR for that financial year or INR 50 lakh whichever is less.
CSR activities in COVID times
MCA has clarified wide Circular No. 09/2021 dated 05 May 2022 that CSR funds incurred on COVID-19-related activities will qualify as CSR expenditure. Spending for creating health infrastructure for COVID care, the establishment of medical oxygen generation and storage plants, manufacturing and supply of oxygen concentrators, ventilators, cylinders, and other medical equipment for countering COVID-19 or similar such activities were made eligible CSR activities.
Further, companies engaged in R&D activities for new vaccines, drugs, and medical devices in their normal course of business can undertake R&D activity of vaccines, drugs, and medical devices related to COVID-19 as CSR activity. This will qualify only for financial years starting from April 2020 and running till March 2023. But these companies engaged in R&D concerning COVID-19 should do so in collaboration with the institutions mentioned in Schedule VII.
Dedicated CSR funds of corporates could be spent for various activities related to COVID-19 under Schedule VII to the Companies Act, 2013.