- Corporate Social Responsibility (CSR) in India has traditionally been a philanthropic activity before introduction of the same under the Companies Act, 2013 (“Act”). The Act has introduced the idea of CSR to the forefront and through its disclose-or-explain mandate, is promoting greater transparency and disclosure.
- India is the first country in the world to make Corporate Social Responsibility (“CSR”) mandatory, following an amendment to the Companies Act, 2013 in April 2014. Prior to the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, if a company fails to spend the amount of CSR spending, the Board shall, in its report shall specify the reasons for not spending the amount.
- Now, the Companies (CSR Policy) Amendment Rules, 2021 shifted CSR spending mandatory from the voluntary. The new rules in Section 135 of India’s Companies Act make it mandatory for companies of a certain turnover and profitability to spend two percent of their average net profit for the past three years on CSR.
1. What is the applicability of CSR provisions?
- Applicable to every company which fulfils any one of the following criteria during the preceding financial year:
- Net worth of Rs. 500 Crores or more or
- Turnover of Rs. 1,000 Crores or more or
- Net profit before tax of Rs. 5 Crores or more.
2. Is CSR spending mandatory to the Companies?
CSR spending is mandatory to the eligible companies with effect from FY 2020-21. Eligible companies must spend the prescribed CSR expenditure for FY 2020-21 on or before 31st March 2021.
3. Is it mandatory to constitute a CSR Committee?
All eligible companies pursuant to Section 135(1) of the Companies Act, 2013 shall constitute a CSR Committee. However, Section 135(9) of the Companies Act, 2013 has given an exemption to the companies whose prescribed CSR expenditure does not exceed Rs. 50 Lakhs from constitution of a CSR Committee. Under these circumstances the functions of CSR Committee shall be discharged by the Board of Directors.
4. What is the treatment of unspent CSR amount of the previous years before 31st March, 2021?
It is not mandatory for companies to spend the unspent CSR balance of past years i.e., unspent CSR balance before 31st March, 2021.
5. Which activities are considered as eligible CSR Activities?
Activities listed in Schedule VII of the Companies Act, 2013 are included within the scope of CSR. The activities listed in the said Schedule VII must be interpreted liberally and broadly so as to capture the essence of the subjects enumerated in Schedule VII.
6. What is normal course of business?
By way of example, if a company is manufacturing any goods or services and distributes those goods/ services itself free of charge the same may not be eligible to be qualified as CSR expenditure. Therefore, any amount spent by a company can be considered as CSR only if it is outside the company’s normal course of business or not meant for its internal consumption.
7. Which activities are not considered as eligible CSR Activities?
The following activities are not included under CSR and would be disallowed:
- activities undertaken in pursuance of normal course of business of the company except in case of a company engaged in research and development activity of new vaccine, drugs and medical devices in their normal course of business. Such a company may undertake research and development activity of new vaccine, drugs and medical devices related to COVID-19 for financial years 2020-21, 2021-22, 2022-23 subject to fulfilment of following conditions.
- such research and development activities shall be carried out in collaboration with any of the institutes or organisations mentioned in item (ix) of Schedule VII to the Act.
- details of such activity shall be disclosed separately in the Annual report on CSR included in the Board’s Report.
- 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 as defined in clause (k) of section 2 of the Code on Wages, 2019 (29 of 2019).
- activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services.
- activities carried out for fulfilment of any other statutory obligations under any law in force in India.
8. Can a company make one-time charitable donation to discharge its CSR obligation?
Companies must undertake CSR activities in project or program mode instead of making one-time charitable donations. Funding of one-time events such as marathons, awards etc. is not allowed.
9. Which are the implementing agencies through which a company can undertake CSR activities?
- A company can undertake CSR activities through the following implementing agencies:
- 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 (43 of 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.
10. Is it mandatory to file form CSR-1 for implementing agencies?
Filing of form CSR-1 electronically with the Registrar of Companies, Ministry of Corporate Affairs (MCA) is mandatory for implementing agencies w.e.f. 01st April, 2021. After filing Form CSR-1, a Unique CSR Registration Number will be generated and allocated to the implementing agency. Companies must report the CSR Registration Number along with the name and location of implementing agency in its Annual Report on CSR Activities which forms part of the Board’s Report.
11. What is an ongoing project?
Ongoing project means a multi-year project undertaken by a Company in fulfilment of its CSR obligation having timelines exceeding 1 year but not exceeding 3 years excluding the financial year in which it was commenced. It shall also include a project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the Board based on reasonable justification.
12. What is the maximum duration of an ongoing project allowed under CSR?
The maximum duration of an ongoing project allowed under CSR is 3 years excluding the financial year in which the project is commenced.
13. What is the treatment of unspent CSR amount of an ongoing project?
- With effect from FY 2020-21, if a company fails to spend the prescribed CSR amount during any FY and such unspent amount pertains to any ongoing project, the company shall transfer the unspent amount to a special bank account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account within a period of thirty days from the end of the financial year.
- The company would be required to spend that amount within three financial years from the date of such transfer. If a company fails to do so, it shall transfer the final balance of the unspent amount to a Fund specified in Schedule VII of the Companies Act, 2013 within thirty days from the date of completion of the third financial year.
14. What is the treatment of unspent CSR amount other than an ongoing project?
If a company fails to spend the prescribed CSR amount other than on an ongoing project, then the Board shall transfer such unspent amount to a Fund specified in Schedule VII of the Companies Act, 2013 within a period of 6 months of the expiry of the financial year.
15. Which funds are presently included in Schedule VII of the Act?
- The following funds are presently included in Schedule VII of the Act:
- Swach Bharat Kosh
- Clean Ganga Fund
- Prime Minister’s National Relief Fund
- PM CARES Fund
- Any other fund set up by the Central Government for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women.
16. Can a company set-off excess CSR amount spent?
With effect from FY 2020-21, a company would be allowed to set-off the excess CSR amount spent by it during any financial year against the prescribed CSR requirement for such number of succeeding financials years as may be prescribed.
17. What are Administrative Overheads and what are its limits?
- “Administrative Overheads” means 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 the designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project or programme.
- The Board shall ensure that the administrative overheads shall not exceed five percent of total CSR expenditure of the company for the financial year.
18. What is the treatment of surplus, if any, arising out of CSR activities?
- Any surplus arising out of CSR activities shall not form part of the business profit of a company. It shall be ploughed back into the same project or shall be transferred to the Unspent CSR Bank Account and spent in pursuance of CSR policy or shall be transferred to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
19. Can a company spend for creation or acquisition of capital asset as a part of CSR Activity?
Yes, a company is allowed to spend the CSR amount for creation or acquisition of a capital asset provided such capital asset is held by –
- a company established under section 8 of the Act, or a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number or
- beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or
- a public authority.
20. What if a company owns a capital asset before the commencement of CSR Amendment Rules i.e., before 22nd January 2021?
Any capital asset created by a company prior to the commencement of the CSR Amendment Rules i.e., prior to 22nd January, 2021, shall within a period of 180 days from such commencement i.e., before 22nd July, 2021 comply with the new requirement of ownership of capital asset. This period may be extended by a further period of not more than 90 days with the approval of the Board based on reasonable justification.
21. Is it mandatory to attach Annual Report on CSR activities as a part of Board Report?
The Format of Annual Report on CSR activities is mandatory to be attached and forms part of the Board’s Report.
22. Is it mandatory to explain the reasons for not spending the prescribed CSR amount in the Annual Report on CSR Activities?
It is mandatory to provide a reasonable justification for not spending the prescribed CSR amount in the Annual Report on CSR Activities. However, this will no longer give any exemption from payment of penalty.
23. Is Impact Assessment applicable to all companies?
It is applicable only for companies having average CSR obligation of Rs. 10 Crores or more in the three immediately preceding financial years. Such a company shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of Rs. 1 Crore or more, and which have been completed not less than one year before undertaking the impact study.
24. Can a company book the expenditure on Impact Assessment towards CSR?
Yes, a Company undertaking impact assessment may book the expenditure towards CSR for that financial year, which shall not exceed 5 % of the total CSR expenditure for that financial year or Rs. 50 Lakhs, whichever is less. Clarification is awaited from MCA if this 5% is over and above the 5% limit of administrative overheads.
25. Is it mandatory to annex the Impact Assessment Report to the Annual Report on CSR Activities?
Yes, it shall be placed before the Board and shall be annexed to the Annual Report on CSR Activities.
26. Is it mandatory for a company to display CSR Activities and projects on its website?
Yes, it is mandatory for it to disclose the composition of the CSR Committee, CSR Policy and Projects approved by the Board on their website for public access.
27. Is there a penalty for not spending the prescribed CSR amount?
Yes, penalty would be leviable if an eligible company fails to spend the prescribed CSR expenditure during any FY.
28. What is the penalty for not spending the prescribed CSR amount?
- Penalty of twice the amount required to be transferred by the company to the Schedule VII Fund or the Unspent Corporate Social Responsibility Account, as the case may be, or Rs. 1 Crore, whichever is less.
- Every officer in default liable to a penalty of one-tenth of the amount required to be transferred by the company to Schedule VII Fund or the Unspent Corporate Social Responsibility Account, as the case may be, or Rs. 2 Lakhs, whichever is less.
The Companies (CSR Policy) Amendment Rules 2021 have introduced new concepts like impact assessment audit, engagement of International Organisations for CSR Projects and CSR Implementation. The new rules are more detailed and thereby give more clarity. The structured provisions would help companies to effectively spend towards CSR obligations.
Author: Gulshan Goyal and Prajakta Gokhale
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at firstname.lastname@example.org.