CSR Compliance Under Section 135: When 2% Kicks In
Section 135 applicability, Schedule VII activities, CSR-1 registration for implementing agencies, and CSR-2 reporting.
CSR Compliance Under Section 135: When 2% Kicks In
Corporate Social Responsibility (CSR) under Section 135 of the Companies Act, 2013, mandates certain companies to spend at least 2% of their average net profits on specified social welfare activities. This obligation triggers based on net worth, turnover, or net profit thresholds. Non-compliance can lead to penalties, while proper adherence contributes to societal development and enhances corporate reputation.
What is Section 135 of the Companies Act, 2013?
Section 135 of the Companies Act, 2013, along with the Companies (Corporate Social Responsibility Policy) Rules, 2014, governs the framework for Corporate Social Responsibility in India. This section outlines which companies are required to constitute a CSR Committee, formulate a CSR Policy, and spend a specified amount on CSR activities. The core idea is to encourage companies to contribute to societal well-being beyond their primary business objectives.
The statutory provision states: "Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director: Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors."
Which companies are required to comply with CSR provisions?
Companies meeting specific financial thresholds in the immediately preceding financial year are required to comply with CSR provisions. These thresholds are a net worth of ₹500 crore or more, a turnover of ₹1,000 crore or more, or a net profit of ₹5 crore or more. Once these criteria are met, the company must establish a CSR Committee and formulate a CSR Policy. Even if a company ceases to meet these criteria for three consecutive financial years, the CSR obligations will no longer apply until it again meets the thresholds.
What activities qualify as CSR under Schedule VII?
Activities listed under Schedule VII of the Companies Act, 2013, are eligible for CSR expenditure, focusing on areas that promote social and environmental well-being. These activities include eradicating hunger, poverty, and malnutrition, promoting education, promoting gender equality, ensuring environmental sustainability, protection of national heritage, measures for the benefit of armed forces veterans, training to promote rural sports, contribution to the Prime Minister's National Relief Fund, and rural development projects. It is crucial that these activities are not part of the company's normal course of business and are undertaken within India.
Here's a snapshot of some key activities under Schedule VII:
| S. No. | Activity Description | Examples |
|---|---|---|
| (i) | 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 availability of safe drinking water. | Providing food to underprivileged, setting up health camps, constructing public toilets. |
| (ii) | Promoting education, including special education and employment enhancing vocational skills especially among children, women, elderly and the differently abled and livelihood enhancement projects. | Establishing schools, vocational training centers, scholarships for needy students. |
| (iv) | 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. | Tree plantation drives, wildlife conservation, water harvesting projects. |
| (vi) | 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 arts and handicrafts. | Restoring historical monuments, promoting local artisans, supporting cultural festivals. |
| (ix) | Rural development projects. | Building roads in villages, providing electricity to remote areas, improving irrigation facilities. |
What is CSR-1 and why is it important for implementing agencies?
Form CSR-1 is a mandatory registration form for entities that wish to undertake CSR activities on behalf of companies. This form ensures transparency and accountability in the implementation of CSR projects. Any entity, such as a company established under Section 8 of the Companies Act, a registered public trust, or a registered society, that intends to undertake CSR activities must register itself with the Central Government by filing Form CSR-1 electronically with the Registrar of Companies (ROC). Without this registration, a company cannot channel its CSR funds through such an entity.
What is the CSR-2 annual report and when is it filed?
The CSR-2 is an annual report on CSR activities that companies are required to file with the Ministry of Corporate Affairs (MCA). This form provides detailed information about the company's CSR expenditure, the projects undertaken, and the impact created. It is filed as an addendum to Form AOC-4 (Financial Statements) or AOC-4 XBRL. For the financial year 2020-21 onwards, companies must file CSR-2. The due date for filing CSR-2 is typically by March 31st of the subsequent financial year, following the due date for filing AOC-4.
Can excess CSR spending be set off in subsequent years?
Yes, if a company spends more than the mandated 2% in a financial year, the excess amount can be set off against the CSR obligation of the subsequent three financial years. This provision allows companies flexibility in managing their CSR budgets and encourages them to undertake larger, impactful projects that may require more significant initial investment. However, the excess amount available for set-off cannot include any surplus arising out of the CSR activities themselves.
The Companies (Corporate Social Responsibility Policy) Rules, 2014, state: "Where a company spends an amount in excess of the requirements of sub-section (5) of section 135, such company may set off such excess amount against the requirement to spend under sub-section (5) of section 135 for the succeeding three financial years: Provided that the excess amount available for set off shall not include the surplus arising out of the CSR activities, if any."
How SP & SC helps
Navigating the complexities of CSR compliance, from determining applicability to filing mandatory forms like CSR-1 and CSR-2, can be challenging. SP & SC Legal and Taxation Services offers comprehensive compliance services to ensure your company meets all statutory requirements efficiently and accurately. Our experts assist with CSR policy formulation, project identification, impact assessment, and timely filing of all necessary documents, helping you maintain good corporate governance and avoid penalties. Learn more about our services at /services/compliance/annual-filings.
Frequently asked questions
What happens if a company fails to comply with CSR provisions?
Failure to comply with CSR provisions can lead to penalties. The company can be liable to a penalty of twice the amount required to be transferred to the Fund specified in Schedule VII or the Unspent CSR Account, or ₹1 crore, whichever is less. Every officer in default can be liable to a penalty of one-tenth of the amount required to be transferred or ₹2 lakh, whichever is less.
Is CSR expenditure considered a business expense for tax purposes?
No, CSR expenditure is generally not allowed as a deduction for computing taxable business income under the Income Tax Act, 1961. Section 37(1) of the Income Tax Act explicitly states that any expenditure incurred by an assessee on account of CSR activities referred to in Section 135 of the Companies Act, 2013, shall not be deemed to be an expenditure incurred for the purpose of business or profession.
Can companies collaborate for CSR activities?
Yes, companies are encouraged to collaborate with other companies for undertaking CSR activities. This allows for pooling resources and expertise, potentially leading to larger and more impactful projects. When collaborating, each company must report its individual CSR expenditure separately.
What is the role of the CSR Committee?
The CSR Committee is responsible for formulating and recommending a CSR Policy to the Board, recommending the amount of expenditure to be incurred on CSR activities, monitoring the CSR Policy from time to time, and instituting a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.
What is the "Unspent CSR Account"?
If a company has an unspent CSR amount relating to an ongoing project, it must transfer such amount to a special account called the "Unspent Corporate Social Responsibility Account" within 30 days from the end of the financial year. This amount must then be spent within three financial years from the date of such transfer. If the amount remains unspent even after three financial years, it must be transferred to a fund specified in Schedule VII, such as the Prime Minister's National Relief Fund.
Are foreign companies operating in India subject to CSR provisions?
Yes, foreign companies having a branch office or project office in India are also covered under Section 135 of the Companies Act, 2013, if they meet the specified financial thresholds. Their net worth, turnover, or net profit criteria are assessed based on their Indian operations.