Corporate Social Responsibility (CSR) has become a crucial component of business operations in India, aligning corporate growth with social welfare. Section 135 of the Companies Act, 2013, along with Schedule VII and the Companies (CSR Policy) Rules, 2014, guides companies in their CSR activities, ensuring that they contribute towards social and environmental sustainability. In this blog, we will address some frequently asked questions (FAQs) regarding CSR as outlined under these provisions, focusing on the key aspects that businesses and stakeholders need to understand.
1. What is Corporate Social Responsibility (CSR) as per the Companies Act, 2013?
Corporate Social Responsibility (CSR) refers to the responsibility of a company to operate in a socially responsible manner, contributing to the economic, social, and environmental well-being of society. As per Section 135 of the Companies Act, 2013, CSR encompasses activities that promote social welfare, address environmental concerns, and create a positive impact on society.
2. Which companies are required to undertake CSR activities?
Section 135 of the Companies Act, 2013 mandates CSR for companies that meet any of the following criteria:
- Net worth of ₹500 crore or more, or
- Annual turnover of ₹1,000 crore or more, or
- Net profit of ₹5 crore or more during the immediately preceding financial year.
Such companies are required to spend at least 2% of their average net profits over the previous three financial years on CSR activities.
3. What are the key provisions of Section 135 of the Companies Act, 2013?
Section 135 of the Act outlines the following key provisions:
- Companies meeting the specified financial criteria must form a CSR committee.
- The CSR committee should formulate and recommend a CSR policy to the board.
- The board must ensure that at least 2% of the company’s average net profits for the last three years are spent on CSR activities.
- CSR activities must be aligned with Schedule VII of the Act.
4. What are the CSR activities under Schedule VII of the Act?
Schedule VII provides a list of activities that qualify as CSR under the Act. These include:
- Eradicating hunger, poverty, and malnutrition.
- Promoting education, including special education and employment-enhancing vocational skills.
- Promoting gender equality and empowering women.
- Reducing child mortality and improving maternal health.
- Ensuring environmental sustainability.
- Protection of national heritage, art, and culture.
- Measures for the benefit of armed forces veterans, war widows, and their dependents.
- Contribution to the Prime Minister’s National Relief Fund.
- Rural development projects.
These activities are broad and allow companies to choose projects that align with their goals and contribute meaningfully to society.
5. Can companies undertake CSR activities beyond Schedule VII?
No, CSR activities must align with the areas mentioned in Schedule VII of the Act. However, companies can interpret the provisions of Schedule VII in a broad manner to include activities that directly or indirectly contribute to social, economic, and environmental development.
6. What is the CSR committee, and what are its responsibilities?
The CSR committee is a group appointed by the board of directors, and its primary responsibilities include:
- Formulating and recommending a CSR policy to the board.
- Recommending the amount of expenditure on CSR activities.
- Monitoring the implementation of the CSR policy and ensuring that the projects undertaken are aligned with the company’s CSR goals.
The CSR committee must consist of at least three directors, with at least one independent director.
7. What should a CSR policy include?
A CSR policy is a formal document that outlines a company’s approach to CSR activities. It must include:
- A list of CSR projects and programs the company plans to undertake.
- The modalities of execution of such projects and programs.
- Monitoring mechanisms for CSR projects.
- The CSR expenditure and how it will be allocated to different projects.
The CSR policy should be published on the company’s website for transparency.
8. How are CSR funds to be utilized?
The Companies Act, 2013 mandates that CSR funds be utilized exclusively for CSR activities mentioned in Schedule VII. The CSR funds should be spent in a manner that ensures the benefits reach the targeted communities or groups. The company can either implement the CSR projects directly or partner with implementing agencies such as NGOs or other social organizations.
9. What happens if a company fails to spend the required CSR amount?
As per the Companies (Amendment) Act, 2021, if a company fails to spend the requisite CSR amount, the unspent CSR amount must be transferred to a fund specified under Schedule VII (such as the Prime Minister’s National Relief Fund) within six months from the end of the financial year. Additionally, any unspent amount on ongoing projects should be transferred to an “Unspent CSR Account” within 30 days, which should be spent within three years.
If the company fails to spend the amount within this period, it must transfer the unspent amount to the prescribed fund.
10. Can companies carry forward unspent CSR funds to the next financial year?
Yes, unspent CSR amounts on ongoing projects can be carried forward to the next financial year, provided they are transferred to the “Unspent CSR Account” and utilized within three years. If the company fails to spend this amount within three years, it must transfer the funds to the specified fund.
11. Are companies allowed to collaborate with other companies for CSR activities?
Yes, companies can collaborate with other companies to undertake CSR activities, provided that the CSR programs and reporting are done independently for each company. The collaboration should ensure that the activities align with each company’s CSR policy and Schedule VII.
12. What are the reporting requirements for CSR activities?
Companies are required to report their CSR activities in the annual report. The report should include:
- A detailed description of CSR activities undertaken during the financial year.
- The amount spent on CSR activities.
- Details of the CSR committee and their roles.
- A statement of reasons if the company fails to spend the required amount.
The CSR report should be part of the company’s annual board report and must be signed by the director or the CSR committee chairperson.
13. Can companies claim tax benefits on CSR expenditures?
No, CSR expenditures do not qualify as a business expenditure under Section 37(1) of the Income Tax Act, 1961. However, certain CSR activities listed under Schedule VII, such as contributions to the Prime Minister’s National Relief Fund or scientific research, may be eligible for tax exemptions under other sections of the Income Tax Act.
14. Are there penalties for non-compliance with CSR provisions?
Yes, companies that fail to comply with the CSR provisions of the Act may be penalized. As per the Companies (Amendment) Act, 2021, failure to transfer unspent CSR amounts to the specified funds or unspent CSR accounts can result in penalties. The company may face a fine of twice the amount required to be transferred or ₹1 crore, whichever is less. Additionally, the officer in default may be liable to a fine of ₹10 lakh or imprisonment.
15. Can CSR funds be used for employee welfare programs?
No, CSR funds cannot be used for activities that benefit only the employees of the company and their families. CSR activities should be focused on broader social and environmental causes and should benefit marginalized and underprivileged communities.
16. What is the role of implementing agencies in CSR?
Implementing agencies, such as NGOs, trusts, or Section 8 companies, play a crucial role in executing CSR projects on behalf of companies. Companies can partner with these agencies to implement CSR projects, ensuring that the funds are utilized effectively and the projects are executed as per the company’s CSR policy.
17. How has CSR evolved under the Companies Act, 2013?
The CSR provisions under the Companies Act, 2013 have undergone several amendments to improve transparency and accountability. The Companies (Amendment) Act, 2021 introduced stricter penalties for non-compliance, clearer guidelines on the utilization of unspent CSR funds, and an increased focus on the long-term impact of CSR activities.
18. What is the future of CSR in India?
The future of CSR in India looks promising as more companies recognize the importance of social and environmental responsibility. With growing awareness and stringent regulations, CSR activities are likely to become more impactful, focusing on sustainable development goals (SDGs), climate action, and community development.
Conclusion
Section 135 of the Companies Act, 2013, along with Schedule VII and the Companies (CSR Policy) Rules, 2014, provides a robust framework for CSR in India. Companies are encouraged to adopt responsible business practices and contribute to social, economic, and environmental sustainability. By aligning their CSR activities with the guidelines provided in the Act, companies can make a significant impact on the communities they serve and create long-term value for society.
CSR is not just a legal obligation but also an opportunity for companies to build trust, strengthen relationships with stakeholders, and contribute meaningfully to the development of India.
Drishti Foundation Trust, with its decade-long experience in implementing CSR projects, especially in areas such as tree plantation, biodiversity development, water bodies restoration, and disaster relief, exemplifies the positive impact that well-executed CSR initiatives can have on society and the environment.
Contact us to explore collaboration opportunities, learn more about our initiatives, or contribute towards making a difference that truly matters.
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