Companies are the biggest contributors to our exchequer in the form of Direct and Indirect taxes and they are actively playing a lead role in bridging the unemployment gap of the Country. Apart from paying taxes and creating the job opportunities, Companies are now compelled to spend a specific amount out of their profits for Corporate Social Responsibility (CSR) activities. The intention behind this section is to ensure participation of the corporates in nation building and thereby support the weaker and marginalised section of the public. The impact that can be created by such contributions is readable from the figures published by the Ministry of Corporate affairs.
Analysis of CSR contributions by Corporates.
As per the data published by the Ministry of Corporate Affairs(MCA), the during the financial year 2014-15 the companies had earmarked or expended Rs. 8,803 /- Crores (Rupees Eight Thousand Eight Hundred and Three Only) for CSR activities. The said amount has been increased to Rs. 9822/- Crores during the year 2015-16. It is worth to note that, the said amount is being expended for the wellbeing of the society and the same is over and above the tax contributions.
Sector wise CSR spending.
The following table depicts the sector wise allocation/spending of CSR funds by corporates during the financial year 2015-16. The majority of the funds are routed for healthcare and poverty eradication, education and rural development.
From the above it is evident that the introduction of CSR is definitely a game changer and it will create a direct impact on the socio economic situations of the marginalised society.
CSR and its applicability
Under the provisions of Section 135 of the Companies Act, 2013 it is mandatory for a company, whether public or private, to spend at least 2% of the average net profits made during the three immediately preceding financial years. If the net worth of a company is Rupees Five Hundred Crores or more or turnover of a company exceeds Rupees One Thousand Crores or more or Net Profit of the company attains Rupees Five Crore or more, then the provisions of the said section will become applicable to that company. The Companies (Amendment) Act, 2017 had added an explanation to the provision to section 135 explaining the terms “Net Profit”. As per that explanation Net profit means profit which is calculated as per provisions of section 198. As the income tax paid has to be excluded from the calculation, the profit before tax is to be considered along with other add backs mentioned in section 198 for arriving at net profit.
The rules regarding CSR is applicable for all types of Companies. It covers every company including holding company or subsidiary company, and a foreign company who is having branch office or place of business in India.
Activities which may be included in CSR.
Schedule VII of the Companies Act provided the list of following activities which can be considered for CSR activities.
Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.
promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.
promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.
protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional art and handicrafts;
measures for the benefit of armed forces veterans, war widows and their dependents;
training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports
contribution to the prime minister's national relief fund or any other fund set up by the central govt. for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women;
contributions or funds provided to technology incubators located within academic institutions which are approved by the central govt.
rural development projects
slum area development.
How to undertake CSR Activities?
A company which is covered under the eligibility criteria (Rupees Five Hundred Crores or more or turnover of a company exceeds Rupees One Thousand Crores or more or Net Profit of the company attains Rupees Five Crore or more) can undertake the activities as per its CSR policy. In order to under the CSR activity, the same has to be approved by the CSR committee constituted by the Board of the company. The Board can undertake its CSR activities through a Section 8(Charitable Company), a registered Trust, or a registered society which is established by the Company. The said entity (section 8 company or trust or society) can be promoted by the Company alone or along with another company. The Section 8 Company or registered trust or registered society established by Central/State Government or and entity established under an Act of Parliament or State legislature is also eligible to undertake the CSR activities of the eligible companies. The Board of a company decides to undertake its CSR activities through a company established under section 8 of the Act or a registered trust or a registered society, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects and the company has specified the projects or programs to be undertaken, the modalities of utilisation of funds of such projects and programs and the monitoring and reporting mechanism. A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.
Restrictions on activities.
Inorder to be covered under the provisions of Section 135 of the Act, the CSR projects or programmes or activities should be carried out only in India. Any CSR activities which are carried out outside India shall not be considered as CSR activities and such expenditure shall be disallowed also. Similarly, the CSR projects or programmes or activities for the benefit only of the the employees of the company and their families shall not be considered as CSR activities. Contribution of any amount directly or indirectly to any political party shall not be considered as CSR activity.
How much to spend on CSR Activities.
Every company covered under the eligibility criteria shall ensure that it spends, atleast 2% of the average net profits of the company made during the three immediately preceding financial years. While identifying the CSR projects the companies should give preference to the local area and areas around it where it operates. The average Net profit means profit which is calculated as per provisions of section 198. As the income tax paid has to be excluded from the calculation, the profit before tax is to be considered along with other add backs mentioned in section 198 for arriving at average net profit.
Reporting on CSR.
The Board’s Report of a company covered under these rules shall include an annual report on CSR containing particulars. Apart from the said disclosure the company have to publish the contents of its CSR policy on its website for the information of the general public and its stakeholders.
Bijoy P Pulipra FCS, RP
The author is a practicing Company Secretary and Insolvency Professional