FAQs on Corporate Social Responsibility (CSR)
December 1, 2020 by Srajan Garg
Our perception of values is dramatically subjective. Few years ago, a couple of Harvard Business School professors published an article titled Creating Shared Value (CSV). It was about maximising revenues, whilst also offering benefits that add to the local community. All profits are not equal, the profits which additionally does social good is better. There is an award winning economics documentary on YouTube about how social entrepreneurs are using business to create value beyond profit. Real Value documentary
The emerging market businesses are embracing Shared Value as a smart, sustainable and profitable business model. There is a subtle difference between CSV and CSR. CSR is about responsibility; CSV is about creating value.
CSRreflects the relationship between a company and the society within which it operates. CSR in essence is a corporate’s responsibility towards the society where it contributes towards the betterment of society i.e. actions that appear to further some social good.
CSR was initially introduced on April 1, 2014. India became the first country to legally mandate corporate social responsibility. Section 135 of The Companies Act, 2013 requires companies of a certain net worth / turnover / profitability to spend 2 % of their average net profit for the past three years on CSR.
We have summarised some FAQ’s covering the concept, compliances, obligations and liabilities under CSR by addressing some popular queries here.
Further, for your easy reference the FAQ’s are being arranged in following heads/categories:
- CSR Committee
- CSR Expenditure/Spending
- Taxation Aspects
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FAQ’s on CSR
Ques-1 Which all companies are required to comply with CSR norms?
Section 135 (1) of the Companies Act, 2013 (“the Act”) provides the threshold to constitute the CSR Committee. The companies, in order to be covered by the provisions under the aforesaid section are required to satisfy any of the following criteria during the immediately preceding financial year –
- Net worth of Rs 500 crores or more; or
- Turnover of Rs. 1000 crores or more; or
- Net Profit of Rs. 5 crores or more
Ques-2 Is it mandatory for a company to undertake CSR activities by itself?
The Company can undertake CSR activities either on its own or with any other company or through any registered trust/non-profit organisation/society.
Ques-3 Whether applicability of CSR provisions are to be considered every year?
Rule 3(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 states that:
Every company which ceases to be a company covered under subsection (1) of section 135 of the Act for three consecutive financial years shall not be required to –
(a) Constitute a CSR Committee; and
(b) comply with the provisions contained in sub-section (2) to (5) of the said section, till such time it meets the criteria specified in sub-section (1) of section 135.”
Accordingly, the applicability of CSR is not required to be checked every year except where the company ceases to be covered under section 135(1) for 3 consecutive financial years.
In other words, once CSR provisions are applicable in any financial year, then it remains applicable for three financial years.
Ques-4 What would be the course of action if CSR provisions ceases to apply for three consecutive financial years?
The Company can dissolve the CSR Committee by passing a Board Resolution.
Note that the amount already earmarked as “CSR Expenditure” would still be required to be spent as per the provisions of Section 135 and all the provisions relating to disclosures and reporting would be complied with. Further, the expenditure and project activities shall be monitored by the Board itself.
Ques-5 Which year’s profits, turnover and net worth will be reckoned for understanding the applicability of CSR?
Immediately preceding financial year profit, turnover and net worth shall be taken into consideration.
Ques-6 What would be the composition of CSR Committee?
Where a company is required to have appointed Independent Directors, the composition shall be minimum three or more Directors and out of which minimum one Director shall be an Independent Director.
Where there is no requirement of appointment of Independent Director, the composition shall be minimum two or more Directors.
Ques-7 When should the CSR Committee hold its first meeting, its quorum and frequency of meetings?
Since the first task of the CSR Committee is to frame the policy, the Committee should hold its meeting soon after it is constituted. While nothing specifically is mentioned in the Act, the quorum shall be as that of Board Meetings i.e. minimum 2 or one third of total members; whichever is higher. There is no minimum number of meetings specified, although, to consider Annual CSR Expenditure Budget and monitoring the activities, it’s advisable to have appropriate number of meetings of this Committee.
Ques-8 What are the contents of CSR policy and its approval?
According to our understanding following should be the part of CSR policy among others:
- A list of CSR projects or programs that the company plans to undertake falling within the purview of Schedule VII of the Act, specifying the process of execution of such project or project and the implementation schedule of the same.
- Process of monitoring the projects or programs listed down.
- That the surplus arising out of the CSR projects or programs shall not form part of the business profit.
The CSR policy shall be approved by the Board.
Ques-9 What are the circumstances under which a company is not required to form a CSR Committee?
In view of the amendments notified by the Companies Amendment Act, 2020 where the CSR expenditure required to be spend is less than INR 50 Lakhs, the Company is not required to constitute a CSR Committee, and the duties and functions of CSR committee shall be discharged by the Board of the Company.
Ques-10 What is the amount of CSR expenditure that a company is required to make every year?
At least 2% of the Average Net Profits of the Company made during the three immediately preceding financial years from the year in which the provisions of CSR became applicable to the Company.
Ques-11 How would the average net profit be calculated?
The average net profit for the purpose of determining the spending on CSR activities is to be computed in accordance with the provisions of Section 198 and will also be exclusive of the items given under Rule 2(f) of the CSR Rules.
In nutshell, Section 198 of the Companies Act, 2013 specifies certain additions/deletions (adjustments) to be made while calculating the net profit of a company (mainly it excludes capital payments/receipts, income tax, set-off of past losses). Additionally, the computation of net profit for CSR expenditure, would be based on profit before tax (PBT) rather profit after tax (PAT).
Ques-12 What if in any of the three immediately preceding financial years under consideration, the company has loss or negative profit?
Companies are expected to spend 2 % of the average net profit of the last three financial years. Hence, even for two consecutive years if the company has been in loss, but on an average, the company has been in profit over the last three years, then the company would be required to spend 2 % of the average net profit on CSR.
However, if the average net profit of three years is negative, then there would be no requirement to spend on CSR.
Ques-13 What if the Company doesn’t/ could not spend the 2% of the Average Net Profit in any financial year?
There is no penalty or fine notified to be levied on failure to spend the amount earmarked for a relevant financial year towards CSR expenditure.
However, there is one obligation on the company that the Board has to disclose in its Board Report the amount not spent along with appropriate reasons of not spending.
Please also read Ques-15 below.
Ques-14 What happens if the Company fails to disclose the amount and reasons of not spending CSR amount?
Where the Company fails to spend 2% of the Average Net profit and also fails to disclose in the Board Report then following penal provision shall apply u/s 134(8) of the Companies Act 2013, the prescribed penalties are as follows;
On the Company;
Penalty of three lakh rupees.
On Every officer in default;
Penalty of fifty thousand rupees
Ques-15 What happens to the unspent CSR amount and what are the implications of amendments* introduced by Companies Amendment Act, 2020?
Sub-section 5 and sub-section 6 of section 135 (hereinafter called as “Transfer Provisions”) provides for transfer of unspent amount to specified bank account elaborated in the subsequent paras. Consequences for not complying with transfer provisions are specified in sub-section 7. The perplexing thing is that though sub section 7 (hereinafter called as “Penal Provisions”) has been notified but transfer provisions are yet to be notified.
Where the unspent CSR amount is pursuant to an ongoing project: The company has unspent CSR amount and the same shall be transferred to a special bank account, opened by Company on this behalf for a relevant financial year, to be called as Unspent CSR Account, opened with any scheduled bank within 30 days from the end of financial year, This amount shall be spent according to the provisions of the CSR and project undertaken by the company within three financial years from the date of transfer and if not spent, the same shall be transferred to a specified fund in Schedule VII of the Companies Act, 2013, within a period of 30 days from the completion of third financial year.
Where the unspent amount doesn’t belong to an ongoing project: The same shall be transferred to a specified fund in Schedule VII of the Companies Act, 2013, within six months of the end of the financial year.
Pursuant to penal provisions specified in sub-section 7 (which has been notified through Amendment Act 2020), where a company neither spent 2% of the Average Net Profit, nor transfer unspent CSR amount to special Unspent CSR Account/ Fund under Schedule VII, as the case may be, then following penalty shall apply;
- On the Company;
Twice the amount required to be transferred to CSR unspent account or Fund specified in Schedule VII of the Companies Act, 2013, as the case may be, or one crore, whichever is less;
- On Every officer in default;
One tenth of the amount required to be transferred to CSR unspent account or Fund specified in Schedule VII of the Companies Act, 2013, as the case may be or two lakh, whichever is less.
In the light of amendments brought in by the Companies Amendment Act, 2020, we fail to understand the basic implication of the amendments since the penal provisions are of no significance unless the transfer provisions are applicable.
Ques-16 Can a company set-off the excess CSR amount spent i.e. in excess of 2% of the Average Net Profit?
Earlier there was no such provision w.r.t. to set off of the excess amount spent. However, after Companies (Amendment) Act, 2020 dated 28th September, 2020, provisions of Section 135(5) of the Companies Act, 2013, has been amended and a company can now take the benefit of excess amount spent against the required CSR amount to be spent in succeeding financial years.
Ques-17 What if the Company has negative profit or loss in all/any of the three immediately preceding financial year(s)?
As we have already mentioned in question 12 above, no amount is required to be spend if the Company has incurred losses or has negative profit due to which the company has negative Average Net Profit of three immediately preceding financial years.
Ques-18 What does not constitutes CSR Expenditure?
Following shall not be considered as CSR activities:
- Activities undertaken in pursuance of its normal course of business.
- Project, Programmes or activities undertaken outside India.
- Contribution to any political party.
- Activities or programmes that benefits exclusively to the employees or their families of the Company.
- Expenses incurred for the fulfilment of any other Act/statute.
Ques-19 A company incurred some expenditure such as salary of the employees, utility bill payments etc for its CSR. Does these expenditures be covered as CSR expenditure?
Rule 4(6) of CSR rules specifies that a company can build CSR capacities of their own personal i.e. the expenditure on training the CSR staff regarding the CSR project. However, such expenditure is not to exceed 5% of the total CSR expenditure of the Company in one financial year.
Ques-20 What disclosures are required under Companies Act, 2013 and Listing Regulations?
A company which is a listed entity, the provisions of SEBI (Listing Obligations & Disclosure Requirements), 2015 are also applicable. Following disclosures are required:
|Companies Act, 2013
|| SEBI (LODR)
|Disclosure in Board’s Report of the composition and CSR Policy
||Disclosure in the Corporate Governance Report in Annual Report
|Disclosure on website of the Company
||Any recommendation of the CSR committee which the Board has not accepted
Ques-21 Is there any CSR reporting framework?
Yes, the reporting framework along with format of annual report on CSR is provided in CSR rules. The Ministry has laid down the format vide the CSR Rules, in which the company is required to report the CSR expenditure.
Ques-22 What is the treatment of profits/surplus arising out of CSR activities?
Rule 6(2) of the Companies (CSR Policy) Rules, 2014 provides that the CSR policy of the Company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company. Ideally, the surplus should be rolled over to CSR Corpus.
Ques-23 Will CSR amount spent be an appropriation or a charge on P&L?
According to ICAI FAQs on CSR, CSR expenditure shall be treated as appropriation of profit and loss account and not allowed to be as deductible expenditure from profit & loss account. Thus, CSR Expenditure cannot be made part of business expenditure.
Ques-24 What would be the tax treatment or tax implications of the CSR expenditure? Whether CSR expenditure be allowed as deductible expenditure from profit & loss account?
There are two major things to consider.
- Section 80G of Income Tax Act, 1961 (IT Act) & Section 135 of Companies Act, 2013-
MCA General Circular dated 12th January, 2016 does not provide any specific tax exemption. However, the language of the law seems to suggest that PM’s National Relief Fund, Rural Development Projects will qualify for deduction. In furtherance to this, section 80G of IT Act allows deductions to various funds which includes:
|Prime Minister’s Armenia Earthquake Relief Fund
||National Children’s Fund
|Prime Minister’s National Relief Fund
||Rajiv Gandhi Foundation
|National Defence Fund
||National Blood Transfusion Council
|Jawaharlal Nehru Memorial Fund
||Army Central Welfare Fund
|Prime Minister’s Drought Relief Fund
||National Illness Assistance Fund
|Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)
As per the aforesaid table, Section 80G of the IT Act enlist funds where deduction from income tax shall be available. In case an activity is not covered u/s 80G, then if such an activity has capital expenditure which is deductible u/s 35 etc. then it is deductible expenditure otherwise no deduction or exemption for such capital expenditure will be available.
- Section 30 to 36 of Income Tax Act, 1961 & Section 135 of Companies Act, 2013-
The Central Government has inserted an Explanation 2 in Section 37(1) of the Income Tax Act, 1961 as follows;
“Explanation 2- it is declared that for the purpose of subsection (1) any expenditure incurred by an assesse on the activities relating to corporate social responsibility referred to section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assesse for the purpose of business or profession.”
In other words, the expenditure on CSR activities is non-deductible for tax purposes unless falling within provisions of Sections 30 to 36 of the Income Tax Act, 1961.
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