Corporate social responsibility (CSR) is a vital element of business in India. With effect from April 1, 2014, CSR has become an obligatory requirement for certain companies under section 135 of the Companies Act, 2013, compelling them to engage in activities that contribute to the social, economic & environmental development of the country.
In this article, I aim to provide an overview of CSR in India, including its legal framework, and the reporting requirements that these companies need to follow.
Understanding CSR in India
The Companies Act, 2013, made CSR mandatory for companies meeting certain thresholds financially.
CSR requirement applies to companies meeting any of the following criteria in the preceding financial year:
- Net worth: More than INR 500 Crores
- Turnover: More than INR 1,000 Crores.
- Net profit: More than INR 5 Crores.
These companies must spend a minimum of 2 % of their net profit over the last three years on CSR activities. For newly incorporated companies with less than three years of operations, the average net profit of available years should be considered.
The calculation for average net profit for determining CSR expenditure should be as per the provisions of Section 198 of the Companies Act, 2013, excluding the items specified under Rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014. Section 198 outlines specific adjustments to be made when calculating a company’s net profit, excluding elements such as capital payments or receipts, income tax, and the set-off of previous losses. Profit Before Tax (PBT) is used for the computation of net profit under section 135 of the Act.
Excess CSR spending can be set off against the mandated 2 % CSR expenditure for up to the immediately succeeding three financial years, taking into account the conditions outlined in Rule 7(3) of the Companies (CSR Policy) Rules, 2014 are met.
Surplus in CSR activities i.e. income generated from CSR activities, such as revenue received from CSR projects, interest income earned by the implementing agency on CSR funds, proceeds from the disposal or sale of materials used in CSR initiatives, and other similar income sources. Any surplus resulting from CSR activities must be utilized only for CSR purposes.
CSR should primarily be driven by the company’s Board of Directors of the Company, which is responsible for planning, executing and monitoring CSR activities based on recommendations from its CSR Committee. The CSR framework is disclosure-based, requiring CSR-mandated companies to file annual details of their CSR activities in the MCA21 registry. Additionally, companies must include necessary disclosures regarding CSR in their financial statements, including any instances of non-compliance. Existing legal provisions, such as mandatory disclosures, accountability of the CSR Committee and the Board, and audit requirements for the company’s accounts, provide robust mechanisms for effective monitoring.
Permitted CSR activities under Schedule VII
CSR activities are defined in Schedule VII of the Act and can include a wide range of projects such as promoting education, healthcare, environmental sustainability, and rural development.
Companies can include the following activities in their CSR policies, as specified in Schedule VII:
1) Poverty, health, and sanitation:
- Eradication of hunger, poverty and malnutrition;
- Promotion of healthcare including sanitation and preventive healthcare;
- Contributions to the Swachh Bharat Kosh and ensuring access to safe drinking water.
2) Education and employment:
- Improvement of education, special education, and vocational skills for children, women, the elderly, and the differently abled.
- Livelihood enhancement projects.
3) Gender equality and support for vulnerable groups:
- Promoting gender equality and setting up homes and hostels for women and orphans.
- Empowering women and establishing facilities for senior citizens and disadvantaged groups.
4) Environmental sustainability:
- Initiatives for environmental sustainability, ecological balance, and conservation of natural resources.
- Support for projects like river Ganga rejuvenation and agroforestry.
5) National heritage and culture:
- Protection of national heritage, art, and culture, including restoring historical buildings and promoting traditional arts.
6) Support for armed forces and their families:
- Welfare measures for armed forces veterans, war widows, and dependents.
7) Promotion of sports:
- Training and promotion of rural, nationally recognized, Paralympic, and Olympic sports.
8) Contributions to government funds:
- Contributions to funds like the Prime Minister’s National Relief Fund, PM CARES Fund, and others aimed at socioeconomic development.
9) Support for research and development:
- Contributions to R&D projects in science, technology, engineering, and medicine funded by government bodies or public institutions.
10) Support for educational institutions:
- Contributions to public-funded universities, IITs, and national research bodies like DRDO, ICAR, and CSIR.
11) Rural development projects:
- Initiatives focused on the development of rural areas.
12) Slum area development:
- Development of slum areas as declared by the government.
13) Disaster management:
- Activities related to disaster relief, rehabilitation, and reconstruction.
CSR compliance: Forms CSR-1 and CSR-2
Form CSR-1
From April 1, 2021, entities undertaking CSR activities need to file Form CSR-1 with the Ministry of Corporate Affairs (MCA). This form is mandatory for NGOs and other organizations to receive CSR funding from companies. The registration helps in effective monitoring of CSR spending and ensures compliance. Companies must ensure that CSR activities are conducted either directly or through registered entities such as:
- Registered societies, public trusts, or Section 8 companies incorporated by the company;
- Section 8 companies, registered societies, or trusts established by the Central or State Government;
- Entities established under a State Legislature or Act of Parliament;
- Section 8 companies, registered societies, or public trusts registered under Section 12A and 80G of the Income Tax Act with a minimum three-year track record in similar activities.
All these entities, along with companies planning to undertake CSR activities, must register by filing Form CSR-1 electronically. Form CSR-1 needs to be certified by a practicing professional.
Documents required for filing Form CSR-1
Entity documents:
- PAN card.
- Registration certificate.
- 12A and 80G exemption certificate, if applicable.
- NGO Darpan ID, if applicable.
Authorized person documents:
- PAN and DSC of the authorized person signing the form.
Company-specific documents:
- Company CSR policy.
- Company CSR report.
- Details of the subsidiary and other entities involved.
Form CSR-2: Annual CSR reporting
Introduced through the Companies (Accounts) Amendment Rules, 2022, Form CSR-2 is mandatory for companies to report their CSR activities from the financial year 2020-21 onwards. It serves as an addendum to the annual financial statements filed through Form AOC-4 or its variants.
Applicability:
- All companies covered under Section 135 of the Companies Act, 2013, which deals with CSR provisions.
- Companies must file Form CSR-2 as an addendum to their annual financial statement filings.
- From FY 2023-24, Form CSR-2 should be furnished separately on or before December 31, 2024, independent of filing the respective AOC-4 forms.
Key information required in Form CSR-2:
- Net worth, turnover, and net profit of the company.
- Details of the CSR committee, including meetings held and attended by directors.
- Project details, including funds allocated and spent, locations, and modes of implementation.
- Unspent CSR amounts and transfers to specified funds under Schedule VII.
- Reasons for any shortfall in CSR spending and corrective measures taken.
Penalties for non-compliance
Failure to comply with CSR provisions can result in significant penalties. Companies not meeting the required CSR spend or failing to transfer the unspent amount to a specified fund, may be fined up to INR 1 Crore. Officers responsible for the default can also face penalties up to INR 2,00,000.
- Company penalties: Up to INR 1 Crore or twice the unspent CSR amount required to be transferred, whichever is less.
- Officer penalties: Up to INR 2,00,000 or one-tenth of the unspent CSR amount required to be transferred, whichever is less.
GST IMPACT ON EXPENSES INCURRED TOWARDS CSR ACTIVITIES
GST on expenses incurred on goods or/and services to carry out activities relating to CSR as defined in section 135 of the Companies Act, 2013, will not be available as eligible Input Tax Credit to the taxable person incurring such expenses. This has been specifically specified under section 17(5)(fa) of CGST Act 2017, as amended.
