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.
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:
- “eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and 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;
- 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;
- measures for the benefit of armed forces veterans, war widows and their dependants;
- 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 Government for socio-economic development and relief and welfare of the Scheduled Castes, the Schedule Tribes, other backward classes, minorities and women;
- contribution or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
- 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.
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.