how to determine net profit for csr applicability

There are 2 places where "Net profit" is mentioned; dont get mixed up

First is the applicability..there are 3 limits...NW, Netprofit and turnover..the netprofit talked about here in applicability is the netprofit as per ur last financial statements...no relation to section 198

Then when u come under CSR bracket; u have to make contribution of 2% of Netprofit (before tax) as per section198

Now there is an article by EY which has a very comprehensive list of things u include and exclude for calculating NP as per 198...search it online or send me ur email

Better to consider PBT for past three years.

NET PROFIT FOR APPLICABILITY OF CSR IS NET PROFIT BEFOR TAX OR AFTER TAX?

To compute net profit under Section 198 of the Companies Act for determining applicability of CSR under Section 135, follow these steps:

1. Calculate the net profit before tax (PBT) for the financial year. 

2. Adjust PBT by adding back: - Income-tax paid/payable - Wealth tax paid/payable (if applicable) - Dividend received from subsidiary companies (if applicable)

 3. Subtract: - Dividend paid/payable - Provision for income tax - Provision for wealth tax (if applicable)

 4. Calculate the average net profit for the preceding three financial years (if applicable).

5. Compare the average net profit with the threshold limit specified under Section 135 (currently ₹5 crores).

 If the average net profit exceeds the threshold limit, the company is required to comply with CSR provisions under Section 135.

Here's a simple example:

PBT = ₹100 crores Add back: Income-tax paid/payable = ₹15 crores Wealth tax paid/payable = ₹0 (not applicable) Dividend received = ₹5 crores Total adjustments = ₹20 crores Adjusted PBT = ₹100 crores + ₹20 crores = ₹120 crores

Subtract: Dividend paid/payable = ₹10 crores Provision for income tax = ₹25 crores Provision for wealth tax = ₹0 (not applicable) Net profit = ₹120 crores - ₹35 crores = ₹85 crores Average net profit (preceding 3 years) = ₹80 crores 

Since the average net profit exceeds the threshold limit (₹5 crores), the company is required to comply with CSR provisions.

To compute net profit under Section 198 of the Companies Act for determining applicability of CSR under Section 135, follow these steps:

1. Calculate the net profit before tax (PBT) for the financial year. 

2. Adjust PBT by adding back: - Income-tax paid/payable - Wealth tax paid/payable (if applicable) - Dividend received from subsidiary companies (if applicable)

 3. Subtract: - Dividend paid/payable - Provision for income tax - Provision for wealth tax (if applicable)

 4. Calculate the average net profit for the preceding three financial years (if applicable).

5. Compare the average net profit with the threshold limit specified under Section 135 (currently ₹5 crores).

 If the average net profit exceeds the threshold limit, the company is required to comply with CSR provisions under Section 135.

Here's a simple example:

PBT = ₹100 crores Add back: Income-tax paid/payable = ₹15 crores Wealth tax paid/payable = ₹0 (not applicable) Dividend received = ₹5 crores Total adjustments = ₹20 crores Adjusted PBT = ₹100 crores + ₹20 crores = ₹120 crores

Subtract: Dividend paid/payable = ₹10 crores Provision for income tax = ₹25 crores Provision for wealth tax = ₹0 (not applicable) Net profit = ₹120 crores - ₹35 crores = ₹85 crores Average net profit (preceding 3 years) = ₹80 crores 

Since the average net profit exceeds the threshold limit (₹5 crores), the company is required to comply with CSR provisions.