Table of Contents
1. What is meant by Corporate Social Responsibility (CSR)?
- Corporate Social Responsibility (CSR) is a business approach to focus on social matters beyond just profits.
- Its main purpose is to magnify the social standing of a corporation, earn customer loyalty and generate more sales.
- It also benefits society and the environment as businesses work for the collective good.
- In India, all companies to which the CSR provisions apply should mandatorily spend a minimum amount as prescribed for the benefit of the society as a whole.
2. Do the provisions of CSR apply to all companies?
- Yes, the provisions contained in Section 135 of the Companies Act, 2013 relating to CSR shall apply to all companies having a
- Net worth of 500 crores or more (or)
- Turnover of 1000 crores or more (or)
- Net profit of 5 crores or more in the immediately preceding financial year.
- The provisions contained in Companies (Corporate Social Responsibility Policy) Rules, 2014 and Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 shall also apply to the above-mentioned companies.
3. Whether a holding or subsidiary company of a company to which the provisions of section 135(1) apply has to comply with the provisions of section 135?
- No, the compliance with CSR requirements is specific to each company.
- A holding or subsidiary company is not required to comply with the CSR provisions unless the holding or subsidiary itself fulfills the eligibility criteria mentioned under section 135(1) of the Companies Act, 2013 (Refer FAQ no 2 for the eligibility criteria)
4. Whether the provisions of section 135 apply to a section 8 company?
- Section 135(1) commences with the term “Every company..”
- Thus, CSR compliance applies to every company including to a section 8 company provided it satisfies the eligibility criteria given in section 135(1)
5. Whether the applicability of CSR provisions should be checked every year?
- The CSR provisions if applicable, remain effective for a period of 3 financial years.
- Every company which ceases to satisfy the eligibility criteria for three consecutive years shall not be required to,
- Constitute a CSR Committee.
- Comply with the provisions contained in section 135.
6. What are the permissible CSR Activities?
- The permissible CSR activities are given in Schedule VII of the Companies Act, 2013.
- The permissible CSR activities are activities relating to,
- eradicating extreme hunger and poverty
- promotion of education
- promoting gender equality and empowering women
- reducing child mortality and improving maternal health
- combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases
- ensuring environmental sustainability
- employment enhancing vocational skills
- social business projects
- 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 and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women
- such other matters as may be prescribed
7. What are the NON-permissible CSR Activities?
- Activities undertaken in pursuance of the normal course of business of the company.
- Any activity undertaken by the company outside India except for training of Indian sports personnel representing any State or Union territory at national level or India at international level.
- Contribution of any amount directly or indirectly to any political party under section 182 of the Act.
- Activities benefitting employees of the company
- Activities supported by the companies on a sponsorship basis for deriving marketing benefits for its products or services.
- Activities carried out for the fulfillment of any other statutory obligations under any law in force in India.
8. Should all companies for which the provisions of section 135 apply establish a CSR committee?
As per section 135(1) of the Companies Act, 2013 every company to whom the provisions of CSR apply shall constitute a Corporate Social Responsibility Committee of the Board consisting of 3 or more directors, out of which at least one director shall be an independent director.
9. Are there any exceptions to setting up of a CSR committee?
As per Rule 5 of the Companies (Corporate Social Responsibility Policy) Rules, 2014,
| Type of Company | CSR Committee |
|---|---|
| Listed Company | CSR Committee shall consist of 3 or more directors out of which at least one director shall be an independent director |
| Unlisted company or private company that is not required to appoint an independent director as per section 149 of the Companies Act, 2013 | CSR Committee shall consist of 3 or more directors without an independent director. |
| A Private company having only two directors on its Board | CSR Committee shall be constituted with 2 such directors. |
| Foreign company | CSR Committee shall be constituted with 2 persons namely,
|
Note: Where the amount required to be spent by a company on CSR does not exceed fifty lakh rupees, the requirement for the constitution of the CSR Committee is not mandatory and the functions of the CSR Committee, in such cases, shall be discharged by the Board of Directors of the company.
10. How much should the companies spend to comply with the provisions of section 135 of the Companies Act, 2013?
Every company to which the provisions of Section 135 applies shall spend at least 2% of average net profits made during the three immediately preceding financial years.
11. CSR Spending in case of loss suffered by the company
- As per section 135 of the Companies Act, 2013, Every company to which the provisions of Section 135 apply shall spend at least 2% of average net profits made during the three immediately preceding financial years.
- If the company suffers loss in 2 out of 3 preceding years but the average is still positive (i.e. profit), the company has to spend 2% of the average as compliance with the CSR provisions.
- If the company suffers loss in all 3 preceding previous years, the average will be a negative (i.e. loss), and the company is not required to spend any money for complying with the CSR provisions.
12. Whether the CSR provisions apply to a company that has not completed the period of 3 years from the date of its incorporation?
- Yes, if the company has not completed three financial years since its incorporation, but satisfies any of the conditions given in section 135 (1) (Refer to FAQ no 2) the CSR provisions shall apply to such company.
- The CSR spending obligation would be at least 2% of the average net profits of the company during the immediately preceding completed years since inception.
- For Eg. Company A has been incorporated in FY 18-19, and it satisfies the eligibility criteria for FY 20-21. In this case, the spending average will be determined using the profits of FY 19-20 and FY 18-19.
13. How is the net profit computed for the purpose of determining the amount of CSR spending?
| Particulars | Amount | |
|---|---|---|
| Net profit after tax (Refer Note) | ||
| Credit shall be given for the following as per Section 198(2) | ||
| 1 | Bounties and subsidies received from any government or any public authority constituted or authorized by the Central government. | |
| Credit shall not be given for the following as per Section 198(3) | ||
| 1 | Profits, by way of premiums on shares or debentures of the company, issued or sold. | |
| 2 | Profit on sale of forfeited shares | |
| 3 | Profits of capital nature | |
| 4 | Profits from the sale of any immovable property or fixed assets or capital nature, unless the business of the company consists of buying or selling of any property or assets. | |
| 5 | Any change in the carrying amount of an asset or of a liability recognized in equity reserves. | |
| LESS | The following shall be deducted as per Section 198 (4) | |
| 1 | All the usual working charges | |
| 2 | Directors remuneration | |
| 3 | Bonus or commission paid or payable to any member of the company’s staff | |
| 4 | Tax on excess or abnormal profits | |
| 5 | Tax on business profits imposed for special reasons or in special circumstances by the Central government | |
| 6 | Interest on debentures issued by the company | |
| 7 | Interest on mortgages, loans and advances secured by a charge on its fixed or floating assets. | |
| 8 | Interest on unsecured loans and advances | |
| 9 | Repairs and Maintenance expenses, provided the repairs are not of a capital nature. | |
| 10 | Outgoings inclusive of contributions made under section 181 | |
| 11 | Depreciation to the extent specified in section 123 | |
| 12 | Excess of expenditure over income, on account of computing net profits as per this section in previous years which had not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained. | |
| 13 | Compensation or damages paid on account of any legal liability including breach of contract. | |
| 14 | Insurance expense against the risk of meeting any liability referred to in “point 13” above. | |
| 15 | Bad Debts written off | |
| ADD | The following shall not be deducted as per Section 198 (5) | |
| 1 | Income tax payable as per the Income Tax Act | |
| 2 | Compensation or damages paid for any reason other than referred to in “Point no 13” above. | |
| 3 | Loss of capital nature | |
| 4 | Any change in the carrying amount of an asset or of a liability recognized in equity reserves | |
Note:
The Net profit shall not include the following,
- any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise.
- any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act
14. Can an entity acquire capital assets as a part of its CSR Spending?
- The CSR amount can be spent by a company for the creation or acquisition of a capital asset, which shall be held by
- a company established under section 8 of the Act, or a Registered Public Trust or Registered Society, having charitable objects and a valid CSR Registration Number. (or)
- beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities. (or)
- a public authority
- Any entity which had capital assets created/acquired before the commencement of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 shall within 180 days of commencement comply with the above-mentioned rules of possession.
15. What do you mean by administrative overheads?
- Administrative overheads mean the expenses incurred by the company for “general management and administration” of Corporate Social Responsibility functions in the company
- but shall not include the expenses directly incurred for designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project or program.
- As per Rule 7 of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, the administrative overheads shall not exceed 5% of the total CSR expenditure of the company for the financial year.
16. Can the company set off excess CSR spending in the subsequent years?
- Where a company spends an amount in excess of the actual requirement (i.e. in excess of 2% of average net profits of 3 immediately preceding financial year).
- Such excess may be set off against the spending requirement of up to immediately 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.
- The Board of the company shall pass a resolution to that effect.
17. Should the CSR activities be undertaken by the company on its own?
- The CSR activities should be undertaken by the company itself or through,
- a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80 G of the Income Tax Act, 1961 established by the company, either singly or along with any other company. (or)
- a company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government (or)
- any entity established under an Act of Parliament or a State legislature (or)
- a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities.
18. Is registration compulsory for undertaking CSR Activities?
- Every entity who intends to undertake any CSR activity, shall register itself with the Central Government by filing the form CSR-1 electronically with the Registrar, w.e.f. 01st day of April 2021.
- Form CSR-1 shall be signed and submitted electronically by the entity and shall be verified digitally by a Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice.
- On submission, a unique CSR registration number shall be generated automatically.
19. What is the status of CSR projects commenced by entities before the introduction of Form CSR 1?
As per Rule 4 of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, the CSR projects or programs approved prior to 01/04/2021 shall remain unaffected by the above provisions.
20. What are the CSR Reporting requirements?
Annual report on CSR + Impact assessment
| Foreign Company | The Balance sheet shall contain an annual report on CSR. |
| Other Companies | The Boards report of the company shall include an annual report on CSR |
| Every company having an average CSR obligation of 10 crores in the three immediately preceding financial years | Such companies should undertake an impact assessment through an independent agency of all their CSR projects having outlays of 1 crore or more and which have been completed not less than 1 year before undertaking the impact study. |
Note: The annual report on CSR shall be in the format given in the Annexure to Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.
- Form CSR 2
- Every company for which CSR provision applies, is required to file Form CSR 2 (Report on Corporate Social Responsibility) as an addendum (attachment) to Form AOC-4. (The due date of AOC-4 applies to Form CSR 2 since it is an addendum).
- The composition of the CSR committee, CSR policy and projects should be displayed on the website of the company for public access.
Sangeeth R
Research Associate at Pioneer One Consulting