INDIA’S CORPORATE SOCIAL RESPONSIBILITY (CSR) REGIME SIMPLIFIED

General framework of CSR

Section 135 of Companies Act, 2013 (Act).  Every company with a net worth of INR5 billion, revenue (turnover) of INR10 billion or net profit of INR50 million, during the preceding financial year, is required to spend a minimum of 2% of the average net profits in the 3 preceding financial years on CSR. In assessing whether CSR obligations apply, the net profit is to be computed as profit before tax and not profit after tax.

CSR is specific to each company. It is applicable to a holding or subsidiary company only when such company fulfills the prescribed eligibility criteria.

It is also applicable to a foreign company having a branch or project office in India.

The government has no direct role in the implementation of CSR projects. It is a process driven by a company’s Board of Directors (Board).

Schedule VII of the Act includes a broad range of CSR activities. CSR expenditure cannot be incurred beyond the activities and funds listed in Schedule VII.

In addition to Section 135 and Schedule VII of the Act, the Companies (CSR Policy) Rules, 2014, govern India’s CSR regime.

Key changes to the CSR regime

CSR covers Covid-19 assistance

As per the amendments and clarifications issued by the Indian government, CSR includes:

funds spent for Covid-19 in relation to promotion of health care, including preventive health care and sanitation, and disaster management;

contributions to the Prime Minister’s National Relief Fund, the PM CARES Fund, and the state disaster management authority;

research and development activity of new vaccines, drugs and medical devices related to Covid-19 up to FY2023, but only in collaboration with a government organization;

awareness or public outreach campaigns on Covid-19 vaccination;

setting up makeshift hospitals and temporary Covid-care facilities; and

funds spent for Covid-19 vaccination of persons other than a company’s employees and their families.

funds spent for Covid-19 in relation to promotion of health care, including preventive health care and sanitation, and disaster management;

contributions to the Prime Minister’s National Relief Fund, the PM CARES Fund, and the state disaster management authority;

research and development activity of new vaccines, drugs and medical devices related to Covid-19 up to FY2023, but only in collaboration with a government organization;

awareness or public outreach campaigns on Covid-19 vaccination;

setting up makeshift hospitals and temporary Covid-care facilities; and

funds spent for Covid-19 vaccination of persons other than a company’s employees and their families.

Tax issues in relation to Covid-19 assistance

Generally, Covid-19 relief measures provided by employers to employees is not considered as a deductible CSR expenditure.

However, financial assistance received by an employee from the employer or any other person towards Covid-19 medical expenses, during the financial year 2019-20 and subsequent years, is not subject to income tax.

Ex-gratia payments received by family members of an employee from the employer or any other person on account of death from Covid-19, during the financial year 2019-20 and subsequent years, are exempt from income tax.

Transfer of unspent CSR amount

Any unspent CSR amount is to be utilized for CSR purposes only and is required to be transferred, with effect from financial year 2020-21, as follows:

For ongoing projects:

to the ‘Unspent CSR Account,’ i.e., a separate bank account of the company created for each financial year but not for each ongoing project; and

within 30 days from the end of the financial year

For projects which are not ongoing:  

to any fund included in Schedule VII of the Act; and

within 6 months from the end of the financial year. Companies cannot spend the unspent CSR amount during this intervening 6-month period for any CSR activity.

If the company is not able to meet its CSR obligations, transfer of the unspent CSR amount is considered as sufficient compliance.

Set off

Excess of the prescribed CSR amount spent during a financial year can now be set off against CSR obligations during the next 3 financial years.

Implementation of CSR activities

Three routes:

1.through the company itself;

2.through certain specified intermediaries like section 8 companies, registered public trusts and registered societies; or

3.through collaboration with other companies.

Intermediaries are required to register with the Central Government by filing form CSR[1]1 on the MCA portal, with effect from April 1, 2021. ▪ The registration is not required when the company itself undertakes the CSR activities. ▪ An international organization cannot act as an intermediary to implement the CSR activities.

CSR expenditure

The Indian government has clarified that CSR expenditure:

cannot be utilized to fund government schemes;

cannot be deemed to be a business expenditure;

does not provide specific tax exemptions; and

includes amount spent towards acquisition of a capital asset, including stamp duty and registration charges, if such asset is held by certain prescribed entities like section 8 companies, registered public trusts, registered societies, self-help groups, or a public authority.

CSR contributions cannot be in kind. Involvement of the company’s employees in CSR projects cannot be monetized and shown as CSR expenditure.

Any surplus arising out of CSR activities, i.e., income generated from CSR activities, is to be used only for the purposes of CSR.

Annual Report and Disclosure Requirements

An annual report on CSR is to be included in the Board’s report in the prescribed format for each financial year.

The Board must disclose:

1/the composition of the CSR committee;

2.the CSR Policy; and

3.the projects approved by the Board, on its website.

Impact Assessment

Every company having average CSR obligations of at least INR100 million in the preceding 3 financial years and any company with a CSR project of at least INR10 million is required to conduct an impact assessment of such CSR projects.

The rationale is to assess the social impact of a CSR project and encourage companies to make judicious decisions towards CSR spending.

The impact assessment report is to be annexed to the annual report on CSR. However, providing a web link to access the impact assessment report and its executive summary in an annual CSR report is also sufficient compliance.

Decriminalization

Criminal penalties for non-fulfillment of CSR obligations have now been omitted.

Breach of CSR regulations is only a civil wrong now. ▪

The applicable penalty is only in case of non-transfer of the unspent CSR amount in a financial year, as follows:  

twice the unspent amount, or INR10 million, whichever is less, in case of a company; or

1/10 th of the unspent amount, or INR200,000, whichever is less, in case of every officer in default.

The penalty is over and above the unspent CSR amount required to be transferred.

Impact

A company can no longer just provide reasons in the Board’s report for failing to spend the CSR amount.

A company will necessarily have to spend the prescribed amount for CSR purposes, or in the alternative, transfer the unspent CSR amount to the prescribed government funds.

The government has now made CSR mandatory and akin to a surcharge, which will have an impact on corporate balance sheets.

Companies will now be able to set off any excess spending against future CSR obligations.

Registration of intermediaries and conducting an impact assessment study for projects crossing a certain threshold are additional compliances. The government may be able to better monitor the CSR activities implemented by intermediaries.

Given the foregoing, companies should take a detailed look at their CSR policies to reassess their CSR obligations and plan their CSR expenditure appropriately.

By Majmudar & Partners, India, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact india@transatlanticlaw.com

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