Busting the Myths on CSR Regime in India

By Rishi Agrawal

With the government pushing for greater CSR monitoring and enforcement, an increased onus now lies on corporate India to play its part in the developmental progress of the country.

In 2014, India became the first country to legally mandate companies to spend on corporate social responsibility (CSR). In the seven years since the country’s CSR spending has crossed the Rs. 1 lakh crores mark. Its relevance in the Indian context reached its peak during the pandemic, with corporates contributing to the fight against COVID-19 in furtherance of their statutory CSR obligations.

In view of its growing importance, the government amended the law on CSR by introducing changes in the Companies Act, 2013 (Act) and the Companies (Corporate Social Responsibility Policy) Rules, 2014 (Rules). Unfortunately, despite this greater policy thrust, there are several misconceptions around CSR fuelled primarily by a general lack of awareness.

This article busts some of these common myths.

Myth: All profitable companies must adhere to CSR norms

CSR norms apply to only those companies with a minimum net worth of Rs. 500 crores, a turnover of Rs. 1,000 crores, or a net profit of Rs. 500 crores. Additionally, CSR spending in a financial year is mandatory only to the extent of 2% of average net profits in the preceding 3 financial years. If a company has not completed 3 financial years since its incorporation, the spending is calculated based on the preceding financial years since incorporation.

Myth: CSR spending can be done on any ‘social’ activity

Schedule VII of the Act provides an exhaustive list of permissible CSR activities. The broad categories of activities include socio-economic development, environment conservation, promotion of culture, heritage and sports, the welfare of armed forces veterans, contribution to government-funded R&D projects and universities, funding for rural and slum area development projects and disaster management relief and contributions towards funds set up by the Union Government.

Additionally, rule 2(1)(d) specifically excludes the following activities from CSR:

a. Activities are undertaken in pursuance of the normal course of business of the company. However, the exemption is provided till FY 2022-23 for companies engaged in R&D activities for new vaccines, drugs, and medical devices related to COVID-19

b. Activities are undertaken outside India, except for training of Indian sports personnel at the national or international level;

c. Contribution to any political party;

d. Activities benefiting employees;

e. Sponsorship activities for deriving marketing benefits;

f. Activities for fulfilling statutory obligations.

Myth: It is mandatory to carry out CSR activities in local areas

Although section 135(5) provides that companies should give preference to local areas, it is discretionary and not mandatory. Hence, companies are free to contribute to any permissible activity without any strict geographical considerations.

Myth: CSR spending includes expenses for administration of CSR activities

All administrative overheads (i.e. expenses incurred for general management and administration of CSR functions) are included within the scope of total CSR spending. The maximum limit for administrative overheads is 5% of total CSR spending. However, the expenses which are directly incurred for designing, implementing, monitoring, and evaluating CSR projects are not included in administrative overheads.

Myth: CSR spending exceeding the mandatory limit cannot be set off

The excess CSR spending can be set off against the required 2% expenditure up to the 3 succeeding fiscal years. This is applicable from January 22, 2021, with prospective effect. Hence, no carry forward is permissible for the excess amount spent before FY 2020-21. However, the amount of CSR spending cannot be claimed as business expenditure as per section 37(1) of the Income Tax Act, 1961. Hence, no tax exemptions are available for the same.

Myth: CSR activities must be implemented by the company itself

There are three different modes available to a company for the implementation of its CSR activities. These include implementation by the company, implementation through eligible implementing agencies under rule 4(1), and implementation in collaboration with one or more companies as per rule 4(4).

Myth: A company will be penalised for an unspent CSR amount

If a company spends less than the mandatory CSR amount, the Board shall specify the reasons for not spending in its report. If the unspent amount pertains to an ongoing project, it can be transferred to a separate bank account called Unspent CSR Account within 30 days from the end of the financial year. Otherwise, the unspent amount can be transferred to any fund under Schedule VII within 6 months from the end of the financial year.

However, failure to transfer unspent CSR funds within the prescribed time limit is a civil wrong and attracts the following penalties:

a. For company: Twice the unspent amount or Rs. 1 crore (whichever is less) to be transferred to any fund under Schedule VII or Unspent CSR Account, as the case may be.

b. For officers in default: 1/10th of the unspent amount or Rs. 2 lakh (whichever is less) is required to be transferred to any fund under Schedule VII or Unspent CSR Account.

At the same time, the penalty does not relieve the company from its CSR obligations. It is over and above the obligated CSR amount required to be transferred.

Conclusion

Evidently, CSR has assumed a crucial role in the welfare and development of the country. It provides an instrumental avenue for corporations to contribute toward nation-building. In many ways, it strikes a critical balance between the prevailing economic and social imperatives. As CSR gains further momentum and non-compliance attracts heftier penalties, companies and concerned officers can no longer ignore their statutory obligations. Hence, detailed checklists, periodic monitoring and review, and employee training must be included in the compliance agenda. With the government pushing for greater CSR monitoring and enforcement, an increased onus now lies on corporate India to play its part in the developmental progress of the country.