The concept of corporate social responsibility (CSR) has always been an integral part of the Indian business environment. Even before it was enacted as a legal obligation in 2014, businesses in the country undertook philanthropic activities, albeit voluntarily, to contribute toward various social causes. Back in 2014, when India became the first country to mandate CSR contributions, the move was hailed as a crucial step toward involving companies in nation-building.
At the same time, the enactment of CSR obligations under the Companies Act, 2013 (“Act”) and the Companies (CSR Policy) Rules, 2014 (“Rules”) has given rise to a host of compliances. Hence, it has become imperative, now more than ever, for businesses to stay on top of all applicable CSR norms. This article takes a look at the 7 things that all employers must know about CSR in India.
1) CSR obligations do not apply to all companies
As per Section 135 of the Act, only those companies that have a minimum net worth of Rs. 500 crore, a turnover of Rs. 1,000 crore, or a net profit of Rs. 5 crore are mandated to undertake CSR activities. Moreover, CSR spending for a particular financial year is compulsory only to the extent of 2% of average net profits in the previous 3 financial years. However, if a company has not completed 3 financial years since its incorporation, the CSR spending requirement is calculated based on the preceding financial years since incorporation.
2) CSR spending cannot be done on any ‘social’ activity
Schedule VII of the Act lays down an exhaustive list of permissible CSR activities. The categories of activities include socio-economic development, environment conservation, promotion of culture, heritage and sports, welfare of armed forces veterans, contribution to government-funded R&D projects and universities, funding for rural and slum area development projects and disaster management relief and contributions towards funds set up by the Union Government.
Rule 2(1)(d) of the Rules also explicitly excludes the following from the scope of CSR:
- Activities undertaken in pursuance of the normal course of business of the company. However, exemption is provided till FY 2022-23 for companies engaged in R&D activities for new vaccines, drugs, and medical devices related to COVID-19
- Activities undertaken outside India, except for training of Indian sports personnel at the national or international level;
- Contribution to any political party;
- Activities benefiting employees;
- Sponsorship activities for deriving marketing benefits;
- Activities for fulfilling statutory obligations.
3) It is not mandatory to carry out CSR activities in local areas
Although Section 135(5) of the Act stipulates that companies should give preference to local areas in undertaking CSR activities, it is merely discretionary and not mandatory. Accordingly, companies may contribute to any permissible activity under Schedule VII, without any strict geographical considerations.
4) The scope of administrative overheads for CSR is restricted
All administrative overheads (i.e. expenses incurred for general management and administration of CSR functions) are included in the total CSR spending but they must not exceed 5% of this spending. However, the expenses which are directly incurred for designing, implementation, monitoring, and evaluation of CSR projects are not included in administrative overheads.
5) CSR spending exceeding the mandatory limit can be set off
Excess CSR spending can be set off against the required 2% expenditure for up to 3 succeeding financial years. This applies from January 22, 2021, with prospective effect. However, CSR spending cannot be claimed as business expenditure under Section 37(1) of the Income Tax Act, 1961. Hence, no tax exemptions are available for CSR.
6) CSR activities need not be implemented by the company itself
There are 3 modes available to a company for implementation of CSR activities:
- implementation by the company;
- implementation through eligible implementing agencies under Rule 4(1); and
- implementation in collaboration with one or more companies as per Rule 4(4).
7) A company can avoid penalties for unspent CSR amount
If a company spends less than the mandatory CSR amount, the Board must specify the reasons for the same in its report. If the unspent amount pertains to an ongoing project, it can be transferred to a separate bank account called ‘Unspent CSR Account’ within 30 days from the end of financial year. Otherwise, the unspent amount can be transferred to any fund under Schedule VII within 6 months from the end of the financial year.
However, failure to transfer unspent CSR funds within the prescribed time limit is a civil wrong and attracts the following penalties:
- For company: Twice the unspent amount or Rs. 1 crore (whichever is less) to be transferred to any fund under Schedule VII or Unspent CSR Account, as the case may be.
- For officers in default: 1/10th of unspent amount or Rs. 2 lakh (whichever is less) to be transferred to any fund under Schedule VII or Unspent CSR Account
The benefits of CSR in furthering social prosperity are evident. This has prompted the government to place a greater policy thrust on CSR. Resultantly, there is higher regulatory scrutiny on businesses to meet their CSR obligations and heftier penalties for instances of non-compliance. Hence, companies must make active efforts to prioritise their statutory CSR responsibilities. To this end, detailed checklists, periodic monitoring and review, and employee training, among other things, should be included in the compliance agenda. As the government pushes for greater CSR enforcement, the time has come for corporate India to play its part in the developmental progress of the country.
Source: TL Regtech
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