CSR expenditure and other restrictions

Companies meeting the prescribed criteria are required to spend, in every financial year, at least  2% of the average net profits of the company made during the immediately preceding three financial  years towards CSR activities.

Further, the CSR activities must be carried out in India only and preference must be given to the  local areas and areas around which the company operates. The CSR Rules also exclude the following  from the ambit of CSR activities:

  • Activities undertaken in the normal course of business of the company;
  • Programs and activities that benefit only the employees of the company and their families;
  • Any kind of contribution of funds (whether directly or indirectly) to any political party. CSR activities may be revenue generating, however the CSR policy must state that the surplus  arising out of CSR activities will not form part of the business profit of the company.

Constitution and role of the CSR Committee

The CSR Committee must comprise of three or more directors of the Board of the company, at least  one of whom shall be an independent director. Further, the CSR Rules also provide that:

  • Unlisted public companies and private companies may set up the CSR Committee without an  independent director.
  • Private companies that have only two directors on its Board can set up the CSR Committee with the  two directors.
  • Foreign companies can set up the CSR Committee comprising of at least two persons, one being the  authorised representative of such company in  India and the other being a person nominated by the  foreign company.

CSR policy

It is the role of the CSR Committee to formulate and recommend a CSR policy to the Board of the  company indicating the activities to be undertaken by the company, to recommend the expenditure to  be incurred on CSR activities and to monitor the CSR policy of the company.

It must be noted that the CSR policy must indicate any of the activities related to the ones  enlisted in Schedule VII of the Act only, which are as follows:

  1. “eradicating hunger, poverty and malnutrition, promoting health care including preventive  health care and sanitation and making available safe drinking water;
  2. promoting education, including special education and employment enhancing vocation skills  especially among children, women, elderly, and the differently abled and livelihood enhancement  projects;
  3. 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;
  4. 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;
  5. 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;
  6. measures for the benefit of armed forces veterans, war widows and their dependants;
  7. training to promote rural sports, nationally recognised sports, paralympic sports and Olympic  sports;
  8. contribution to the Prime Minister’s National Relief Fund or any other fund set up by the  Central Government for  socio-economic development and relief and welfare of the Scheduled Castes, the Schedule Tribes, other backward classes, minorities and women;
  9. contribution or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
  10. rural development projects.”

Companies must note that all expenditures on any activity outside the purview of Schedule VII would  not be considered towards the mandated CSR expenditure under the Act.

Obligation of the Board and reporting of CSR

Taking into account the recommendations of the CSR Committee, the Board of the company is required  to approve and adopt the CSR policy. The Board must also ensure that the CSR policy is implemented  by the company and disclose the contents of the CSR policy in the Board’s report laid before a  company in general meeting. The CSR policy must also be placed on the company’s website (if any). If the company fails to meet the  mandated CSR expenditure, the Board has to state the reasons for such failure in its report.

The Board’s report shall include the details of the CSR policy developed and implemented by the  company, as per the format prescribed in the CSR Rules. Foreign companies are also required to  submit the report on CSR activities in the prescribed format to the Registrar of Companies along  with their balance sheet and other documents as specified under the Act.

CSR is not merely a donation or charity to charitable organisations or trusts or societies  undertaking noble causes and covers a much broader scope. By putting the duty on the Board of the  company to ensure that the CSR policy is actually implemented by the company and by continuously  monitoring and reporting the CSR activities, the Act has the aim of ensuring benefit to the society  through the actual implementation of CSR.

Implementation of CSR activities

In the CSR policy of the company formulated by the CSR Committee, the company must identify  projects or programs, which can be either new or ongoing, that it desires to undertake as part of  CSR activities. The CSR activities can then be undertaken through any of the following modes:

  • Setting up a registered trust, a registered society, or a non- profit company established by the  company or its holding or subsidiary or associate company.
  • A company can also implement its CSR policy through established trusts/ societies/ non-profit  companies, provided that such concerned trust/ society/ non-profit company has an established track  record of 3 years in undertaking similar programs or projects as stated by the company in its CSR  policy. The company must specify the projects that would be undertaken by the company through these  entities, modalities of utilization of funds, monitoring and reporting of the CSR activities.
  • Joint CSR activities with other companies - A company can also collaborate with other companies  to engage in CSR activities; however, such companies shall have to report separately on such  projects or programs.
  • Contribute to established funds - Companies are also given the option to contribute to Prime  Minister’s Relief Fund or other funds established by the Central Government as described in  Schedule VII.

Capacity building for company’s own personnel

Companies can train their own personnel as well and those of its implementing agencies to build CSR  capabilities, which can be done through institutions with established track records of at least  three financial years. However, expenditure towards such capacity building must not exceed 5% of  the CSR expenditure of the company a financial year.

Other issues

The extension of the applicability of the CSR provisions under the Act to branch offices and  project offices of foreign companies in India may pose various practical implementation issues. The  Act is silent on the calculation of the net worth or turnover of a branch office or project office  in India.

Further, by providing a list of activities under Schedule  VII of the Act which can be undertaken  by a company as part its CSR initiatives, the Government has restricted the scope of activities.  Companies previously engaged in CSR activities must also now realign their activities with those  specified in Schedule VII.

Non-profit organizations to hold a registration certificate for accepting foreign contribution

Indian companies that are subsidiaries of foreign companies must also note that their contribution  towards CSR activities to non-profit organizations will be deemed foreign contribution under the  provisions of the Foreign Contribution (Regulation) Act, 2010. Hence, prior to making contributions  to a non-profit organizations towards CSR, it is important for the contributing companies to ensure that the relevant non-profit organization  holds a valid registration certificate under the Foreign Contribution (Regulation) Act, 2010.

Tax exemptions on CSR expenditure

There is lack of clarity on the tax deduction that companies can claim for their expenditure on CSR  activities since no specific provision has been provided in applicable tax laws on the same.  Clarity should be brought forth in this regard by the Government.


On the international stage, India is on the forefront of CSR law, being the only country to have  legislation on CSR. For the CSR law to meet its objective, it is important that the companies should not view the CSR  obligation as an onerous reporting requirement and as a necessary cost  of doing business in India,  but should consider it as an opportunity to create positive impact in the communities where they work and the communities they affect. If done strategically, spending under the CSR law  can develop business goodwill with shareholders, consumers, the Indian government, Indian citizens,  and the international public at large.