CSR - An Overview

SCHEDULE VII / SEC 135

CORPORATE SOCIAL RESPONSIBILITY

1. APPLICABILITY:

Companies (Either private or public) having,

1. Net worth of Rs. 500 crores or,
2. Turnover of Rs. 1000 crores or,
3. Net profits of Rs. 5 crores,

Have to spend at least 2% of its average net profits for the immediately preceding three financial years on CSR activities.

Every company including its holding or subsidiary, and a foreign company having its office in India which fulfills the above criteria, shall comply with the CSR rules.

2. COMPUTATION:

- For the above purpose, the Net worth, Turnover and Net profits are to be computed in accordance with the provisions of the Companies Act, 1956.

- Any profits from overseas branch operations would be ignored in the computation of Net profits of the company.

- Any dividends received from any other Indian company, which need to comply with the CSR regulations, are to be excluded.

3. NON-APPLICABILITY:

Every company which ceases to be a company covered under the above section for previous 3 consecutive financial years shall not be required to comply with the CSR regulations in the current year. A company which is covered under the said section in the previous year, but does not satisfy any of the specified criteria in current financial year would still need to undertake CSR activities.

4. CSR ACTIVITIES:

The activities that can be undertaken by a company to fulfill its CSR obligations include:

1. Eradicating hunger, poverty and malnutrition
2. Promoting preventive healthcare
3. Promoting education
4. Promoting gender equality, setting up homes for women, orphans and the senior citizens
5. Measures for reducing inequalities faced by socially and economically backward groups
6. Ensuring environmental sustainability and ecological balance
7. Animal welfare
8. Protection of national heritage and art and culture
9. Measures for the benefit of armed forces veterans, war widows and their dependents
10. Training to promote rural, nationally recognized, Paralympics or Olympic sports
11. Contribution to the prime minister's national relief fund or any other fund set up by the Central Government  for socio economic development and relief
12. Welfare of SC, ST, OBCs, minorities and women, contributions or funds provided to technology incubators located within academic institutions approved by the Central Government and rural development projects. 

5. CSR COMMITTEE:

To formulate and monitor the CSR policy of a company, a CSR Committee of the Board needs to be constituted. The committee shall constitute 3 directors of which, one should be an independent director to the board. For unlisted public and private companies, they are not required to have an independent director in the CSR committee. For any foreign company covered under these rules, the committee should comprise of at least 2 members of which 1 must be an authorized resident Indian as per Sec 380(1)(d) and one nominee appointed by the foreign company.

The committee shall institute a transparent monitoring mechanism for implementation of CSR projects. The CSR activities shall be undertaken by the company, as per its CSR policy, on projects/ programs/ activities excluding the activities undertaken in pursuance of normal course of its business.

6. CSR POLICY:

• Includes a list of CSR projects or programs which a company plans to undertake falling within the scope of the Schedule VII of the Act, specifying modalities of execution of such project or programs and implementation schedules for the same &
• Monitoring process of such projects or programs.
• Does not include the activities undertaken in pursuance of normal course of business of a 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.
• CSR Policy shall specify that the CSR Corpus would include the following: a) 2% of the average net profits, b) any income arising there from c) surplus arising out of CSR activities.

7. OUTSOURCING:

The board may approve to undertake CSR activities through a registered trust, society or company, established by the company or its holding/ subsidiary/ associate company, provided that-

• If such undertaken entity is not established by the company or its holding/ subsidiary/ associate, it shall have an established track record of three years in undertaking similar programs or projects.
• The company has specified the projects or programs to be undertaken through these entities and the utilization of funds.

Companies can also collaborate with each other for jointly undertaking CSR activities provided that each of the companies is able to individually report on such projects.

A company can build CSR capabilities of its personnel or implementation agencies through Institutions with established track records of at least three years, provided that the expenditure for such activities does not exceed 5% of the total CSR expenditure of the company in a single financial year.

8. CSR EXPENDITURE:

CSR expenditure shall include all expenditure including contribution to corpus, to projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee, but do not include any expenditure on an item not in conformity or not in line with activities which fall within the purview of Schedule VII of the Act.

9. DISALLOWANCES:

- Any CSR project/ program/ activity that benefit only the employees of the company and their families shall not be considered as CSR activities.

- Contribution of any amount directly or indirectly to a political party shall not be considered as CSR activity.

10. CSR REPORTING/ DISCLOSURE:

The report of the Board of Directors attached to the financial statements of the Company would also need to include an annual report on the CSR activities of the company in the format prescribed in the CSR Rules setting out the following:

1. A brief outline of company’s CSR policies, including overview of projects or programs proposed to be undertaken and a reference to the web-link to the CSR project/ program.
2. The composition of the CSR committee.
3. Average Net Profit of the company for the past 3 financial years.
4. Prescribed CSR expenditure (2% on Average NP above)
5. Details of CSR spent during the financial year-

1. Total amount to be spent
2. Manner in which amount was spent during the FY
3. Amount unspent, if any (With reasons for not doing so).

11. KEY CONCERNS:

PENAL PROVISIONS:

The Act does not prescribe any penal actions towards unspent amount on CSR activities. Hence, it is enough, if the reasons for not spending on CSR activities are specified in board’s report.

PROVISION FOR CSR EXPENDITURE:

It is not absolutely clear whether a company should create provision for unspent amount of prescribed CSR expenditure. Hence, a company can get away by providing proper explanatory statement in board’s report for unspent CSR expenditure. However, if the company expects to incur any legal expenses for the same, provision may be created for such amount as per AS29.

TAX IMPLICATIONS:

a. As per the Finance Bill 2014, any voluntary CSR expenditure incurred by the company will be deemed to be non-business expenditure and will be disallowed for taxation purpose. However, in some cases, courts have allowed voluntary CSR expenditure for tax deduction in following cases:

1. Drinking water facilities – CIT v/s Madras refinery ltd
2. Community assistance programs – CIT v/s Madura coats ltd
3. Installation of traffic lights – Infosys technologies v/s JCIT
4. Earthquake relief work – Jindal steel v/s Power ltd
5. Construction of Hockey stadium – ITO v/s Velumanickam lodge
6. Sponsorship of sports tournaments – CIT v/s Lake palace hotels & motels
7. Contribution to Health care society - ACIT v/s Ranbaxy labs ltd.

Donations offered as part of CSR expenditure can be taken for 80G deduction as below:

1. Donations allowed subject to a maximum of 10% of Adjusted Gross Total Income

• Donations to government for promoting family planning – 100% deduction.
• Donations to government for other charitable purpose – 50% deduction.
• Donations for housing accommodations/ improvement of cities, towns or villages – 50% deduction.

1. Donations allowed for 100% deduction without maximum limit:

• Donation to PM’s National relief fund.
• Donation to State government Fund for Medical relief for the poor.
• National illness assistance fund.
• Chief Minister’s relief fund.
• Approved university or educational institution of national eminence.

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