Corporate Social Responsibility (CSR) was declared mandatory by the Government of India on 1st April, 2014. As per the Companies Act of 2013, Section 135, companies that meet certain turnover and profitability requirements, will have to spend at least 2% of their average net profit of the previous three years on CSR activities.

However, a lot of confusion and queries about CSR find their way online as companies need clarification about the same before implementation. For example, whether contribution to any political party can be considered as CSR, whether a company qualifies or not for CSR under the Companies Act, 2013, can tax benefits can be availed under CSR, how to calculate average net profit calculated for the purpose of section 135 of the Act, do activities undertaken outside India qualify as CSR are some of the frequently asked questions.

The Ministry of Corporate Affairs (MCA) in its website has tried to address some of the above. Following are some of the Frequently Asked Questions (FAQ) about CSR.

Can a company’s contribution to any political party be considered as CSR activity?

As per the Ministry of Corporate Affairs (MCA), Contribution of any amount directly or indirectly to any political party under section 182 of the Act, shall not be considered as CSR activity.

Can a company’s CSR expenditure be claimed as business expenditure?

As per MCA, the amount spent by a company towards CSR cannot be claimed as business expenditure. The Finance Act, 2014 says that any expenditure incurred by an assessee on the activities relating to Corporate Social Responsibility referred to in section 135 of the Companies Act, 2013 shall not be considered to be an expenditure incurred for the purposes of the business or profession.

Which companies qualify for CSR under the Companies Act, 2013?

A company satisfying any of the following criteria during the immediately preceding financial year is required to comply with CSR provisions specified under section 135(1) of the Companies Act, 2013

-Net worth of rupees five hundred crore or more

-Turnover of rupees one thousand crore or more

-Net profit of rupees five crore or more.

Do CSR provisions apply to a company that has not completed the period of three financial years since its incorporation?

Yes. If the company has not completed three financial years since its incorporation, but it satisfies any of the criteria mentioned in section 135(1), the CSR provisions including spending of at least two per cent of the average net profits made during immediately preceding financial year(s) are applicable. For example, Company A is incorporated during FY 2018-19, and as per eligibility criteria the company is covered under section 135(1) for FY 2020-21. The CSR spending obligation under section 135(5) for Company A would be at least two per cent of the average net profits of the company made during FY 2018-19 and FY 2019-20.

Which social welfare activities of a company do not qualify as CSR?

CSR projects/programmes or activities that benefit only the employees of the company and their families, shall not be considered as CSR activities in accordance with section 135 of the Act.

One-off events such as marathons/ awards/ charitable contribution/ advertisement/sponsorships of TV programmes etc. do not qualify as part of CSR expenditure.

Expenses incurred by companies for the fulfilment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act.

Contribution of any amount directly or indirectly to any political party shall not be considered as a CSR activity.
Activities undertaken by the company in pursuance of its normal course of business do not qualify as CSR.
Here is the full list of activities that do not qualify as CSR in India.

Do CSR projects or programmes for employees of the Company and their family form part of CSR activity?

The Ministry of Corporate Affairs clearly states that CSR projects or programs or activities that benefit only the employees of the company and their Families shall not be considered as CSR activities in accordance with section 135 of the Act’.

Can the expenditure incurred towards personnel exclusively appointed by the companies for implementing the CSR activities of the company, be included in the expenditure earmarked for CSR activities?

Salary paid by the companies to regular CSR staff as well as employees, who render their services for CSR will be part of Administrative overheads and should not exceed 5% of the total CSR expenditure as per rule 4(6) of CSR Policy, Rules 2014.

How is average net profit calculated for the purpose of section 135 of the Act?

According to Section 135 of the Companies Act, 2013, the average net profit for calculating Corporate Social Responsibility (CSR) expenditure is calculated by taking the “net profit before tax” from the preceding three financial years, as defined in Section 198 of the Act, and dividing it by 3; essentially, it is the sum of the net profit before tax for the three previous years divided by 3.

Whether the ‘average net profit’ criteria for section 135(5) is Net profit before tax or Net profit after tax?

The average net profit criteria for section 135(5) of the Companies Act, 2013 is net profit before tax (PBT). The net profit is calculated as per section 198 of the Act, which makes certain adjustments to the profit, such as excluding capital payments and receipts, income tax, and set-off of past losses.

Can the CSR expenditure be spent on the activities beyond Schedule VII?

According to the Companies Act, 2013, CSR expenditure cannot be made on activities beyond Schedule VII; meaning that all CSR activities undertaken by a company must align with the areas specified in Schedule VII of the Act, which outlines eligible CSR activities like health, education, environment, and rural development.

What tax benefits can be availed under CSR?

According to the MCA, no specific tax exemptions have been extended to CSR expenditure per se. The Finance Act, 2014 clarifies that expenditure on CSR does not form part of business expenditure. While no specific tax exemption has been extended to expenditure incurred on CSR, spending on several activities like contributions to Prime Minister’s Relief Fund, scientific research, rural development projects, skill development projects, agricultural extension projects, etc., which find place in Schedule VII, already enjoy exemptions under different sections of the Income Tax Act, 1961.

What is meaning of ‘any financial year’ mentioned in Section 135 (1) of the Companies Act, 2013?

The phrase “any financial year” in Section 135(1) of the Companies Act, 2013 refers to any of the three preceding financial years

Is CSR applicable for Section 8 Company?

Section 8 companies are subject to the Corporate Social Responsibility (CSR) provisions of the Companies Act, 2013 if they meet the criteria of Section 135(1).
Section 135(1) states that every company with a specified net worth, turnover, or net profit must establish a CSR committee and comply with CSR provisions

Will being a holding or subsidiary company of a company which fulfils the criteria under section 135(1) make the company liable to comply with section 135, even if the company itself fulfils the criteria?

Being a holding or subsidiary company of a company which fulfils the criteria under section 135(1) doesn’t make the company liable to comply with section 135, unless the company itself fulfils the criteria. For example Company A is covered under the criteria mentioned in section 135(1). Company B is holding company of company A. If Company B by itself does not satisfy any of the criteria mentioned in section 135(1), Company B is not required to comply with the provisions of section 135.

Can donation of money to a trust by a company be treated as CSR expenditure of the company?

The MCA states that Contribution to Corpus of a Trust/ Society/ Section 8 companies etc. will qualify as CSR expenditure as long as:

(a) The Trust/ Society/ Section 8 company is created exclusively for undertaking CSR activities

(b) Where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the Act

Do CSR projects/programmes undertaken outside India qualify as CSR?

Activities undertaken outside India, except for training of Indian sports personnel representing any state/Union Territory at the national level or India at the international level are not CSR.

Does any contribution made in ‘kind’ qualify as CSR?

The Indian law does not consider any contribution made in kind as CSR as the law categorically mentions ‘spending’ wherein it states that ‘the Board of every company referred to in sub-section [1], shall ensure that the company ‘spends’, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.’

What are the functions of the CSR Committee?

The Corporate Social Responsibility Committee shall —

(i) Formulate and recommend the CSR policy to the Board;

(ii) Recommend the amount of expenditure to be incurred on CSR activities;

(iii) Monitor the CSR policy of the company from time to time;

(iv) Formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy, which shall include the items as mentioned in rule 5(2) of the Companies (CSR Policy) Rules, 2014.

For companies covered under Section 135(9) of the Act and not required to have CSR Committee, these functions shall be carried out by the Board itself.

What is the role of the Government in the approval and implementation of the CSR programmes/projects of a company?

The Government has no direct role in the approval and implementation of the CSR programmes /projects of a company. The Board of the company is empowered to plan, approve, execute, and monitor the CSR activities of the company based on the recommendation of its CSR Committee.

What is the role of the Government in monitoring compliance of CSR provisions by companies?

The Government monitors the compliance of CSR provisions through the disclosures made by the companies in the MCA 21 portal. For any violation of CSR provisions, action can be initiated by the Government against such non-compliant companies as per provisions of the Companies Act, 2013 after due examination of records, and following due process of law. Noncompliance of CSR provisions has been notified as a civil wrong W.E.F. 22nd January, 2021.

What is the meaning of the term ‘administrative overheads?

Administrative overheads are the expenses incurred by the company for ‘general management and administration’ of CSR functions. However, the expenses which are directly incurred for the designing, implementation, monitoring, and evaluation of a particular CSR project or programme, shall not be included in the administrative overheads. Administrative overheads generally comprise of items such as employee costs, utilities, office supplies, legal expenses, etc. However, expenses which are attributed to the project implementation shall be included in project cost only.

For example, Salary and training for the employees working in the CSR division of a company, stationery cost, travelling expenses, etc. may be categorised as administrative overheads. However, salary of school teachers or other staff, etc. for education-related CSR projects shall be covered under education project cost. The maximum permissible limit for administrative overheads is five per cent of the total CSR expenditure of the company for the financial year

What is the meaning of surplus arising from CSR activities? How can this surplus be utilised?

Surplus refers to income generated from the spend on CSR activities, e.g., interest income earned by the implementing agency on funds provided under CSR, revenue received from the CSR projects, disposal/sale of materials used in CSR projects, and other similar income sources. The surplus arising out of CSR activities shall be utilised only for CSR purposes.

Do expenses related to transfer of capital asset as provided under rule 7(4) of Companies (CSR Policy) Rules, 2014, qualify as admissible CSR expenditure?

Yes, the expenses relating to transfer of capital asset such as stamp duty and registration fees, will qualify as admissible CSR expenditure in the year of such transfer.

If a company spends more than the requirement provided under section 135, can that excess amount be set off against the mandatory 2% CSR expenditure in succeeding financial years?

Yes, the excess amount can be set off against the required 2% CSR expenditure up to the immediately succeeding three financial years subject to compliance with the conditions stipulated under rule 7(3) of the Companies (CSR Policy) Rules, 2014. This position is applicable from 22nd January, 2021 and has a prospective effect. Thus, no carry forward shall be allowed for the excess amount spent, if any, in financial years prior to FY 2020-21.

If a company cannot take the benefit of set off of excess amount spent in the previous financial year because of non applicability of CSR provisions, will the excess amount lapse?

Yes, the Indian law states that the excess CSR amount spent can be carried forward up to immediately succeeding three financial years. Therefore, in case any excess amount is left for set off, it will lapse at the end of the said period. For example, in FY 2020-21 a company had spent Rs. 2 crores in excess.

In FY 2021-22, it sets-off Rs. 50 lakh from such excess. However, from FY 2022-23, the company is no longer subject to CSR provisions under section 135(1). In such case, the company may continue to retain the remaining excess CSR of Rs. 1.50 crore up to FY 2023-24, and subsequently the same shall lapse.

Is it mandatory for companies to carry out CSR in their local areas?

The first provison to section 135(5) of the Act provides that the company shall give preference to local areas and the areas around where it operates. Some activities in Schedule VII such as welfare activities for war widows, art and culture, and other similar activities, transcend geographical boundaries and are applicable across the country.

With the advent of Information & Communication Technology (ICT) and emergence of new age businesses like e-commerce companies, process-outsourcing companies, and aggregator companies, it is becoming increasingly difficult to determine the local area of various activities.

The spirit of the Act is to ensure that CSR initiatives are aligned with the national priorities and enhance engagement of the corporate sector towards achieving Sustainable Development Goals (SDGs). Thus, the preference to local area in the Act is only directory and not mandatory in nature and companies need to balance local area preference with national priorities.

Source: Ministry of Corporate Affairs, Government of India