In order to facilitate effective implementation of Corporate Social Responsibility (CSR), the Ministry of Corporate Affairs (MCA) has released a Circular on ‘Frequently Asked Questions’ (FAQs) with regard to CSR under Section 135 of the Companies Act 2013. The Circular follows closely on the heels of the release of a report by the High Level Committee set up by the MCA to suggest measures for improved monitoring of the implementation of CSR policies in October 2015, and provides clarity on some of the topics covered in the report. The key highlights of the Circular are:
Applicability of CSR
Section 135 of the Companies Act, 2013 is applicable to every company registered under the Act, and any other previous Companies Law, with a net worth of Rs 500 crore or more, or a turnover of over Rs 1,000 crore or a net profit exceeding Rs 5 crore in any financial year. The circular further explains that ‘any financial year’ implies any of the three preceding financial years.
No role for government in CSR monitoring
The Circular emphasizes that the government has no role in monitoring CSR activities; it lays the onus on the board of the company to ensure the quality and efficacy of a CSR project.
The circular states that the government has no role in appointing an appropriate authority for approving and implementing CSR programmes of a company or in engaging external experts in monitoring the efficacy of CSR expenditure of companies such as for impact assessments.
Companies’ boards will decide all aspects of CSR
The board of the company takes a call on the CSR expenditure and qualifying activities as CSR.
CSR projects (and any changes thereof) and their monitoring are subject to the approval of the company’s board on recommendations of its CSR committee.
Boards or committees are fully competent to engage third parties to have an impact assessment of CSR programmes to validate compliance of the CSR provisions of the law.
Current tax exemptions valid for CSR spend
No specific tax exemptions are extended to CSR expenditure. However, certain activities such as contribution to Prime Minister’s National Relief Fund (Section 80G), scientific research (Sections 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(2AA)), rural development projects (Section 35AC), skill development projects (Section 35CCD), agricultural extension projects (Section 35CCC), etc. aligned to Schedule VII already enjoy exemptions under different sections as indicated under the Income Tax Act, 1961. Further, the Finance Act 2014 clarifies that the CSR expenditure does not form part of business expenditure.
No carry forward for CSR spend
The Circular provides clarification that in case of CSR spend greater than the prescribed CSR spend (2% of average net profit of three preceding financial years), then the excess cannot be carried forward to the subsequent years against that year’s prescribed CSR spend.
For any unspent amount of the prescribed CSR spend, the board can chose to carry forward to the subsequent years, provided it is over and above that year’s prescribed CSR spend.
CSR policy and reporting must for all qualifying companies
The Circular confirms that the contents of the board-approved CSR Policy must be disclosed in the board of directors’ report and on the company’s website.
All qualifying companies must report in the format provided by the Companies (CSR Policy) Rules, 2014 on the annual report on CSR.
Further, a foreign company unless otherwise exempted by the central government, should attach a report on its CSR activity as an annexure to the balance sheet document that it submits to the Registrar of Companies every calendar year.
Investing in government schemes as CSR
The Circular states that the objective of the CSR Law is to promote innovative ideas and corporate’s enhanced management skills in discharging social responsibility that results in greater efficiency and better outcomes. Therefore, CSR should not be interpreted as a source of financing the resource gaps in government schemes.
The board may decide to supplement government schemes should it be deemed to qualify under the CSR provisions of the law.
Employee volunteering and in-kind donations
The Circular states that while companies should be encouraged to involve employees in their CSR activities, monetisation of the pro-bono services provided by employees will not be counted towards CSR expenditure.
Contribution in kind cannot be monetised to be shown as CSR expenditure unless the company spends the amount as per Section 135 of the Companies Act 2013.
The Circular reiterates that those activities that benefit only the employees or their families, one-off events, expenses towards fulfilment of regulatory statutes, contribution to political parties, activities as part of normal course of business or those undertaken outside of India do not qualify as CSR expenses. It also reiterates that the contribution to corpus of a trust/ society/ Section 8 companies etc. will qualify as CSR expenditure as long as the entity is created exclusively for undertaking CSR activities or where the corpus is created exclusively for a purpose directly relatable to a Schedule VII item.