Know your CSR Obligation!

On April 1, 2014, India became the first country to legally mandate corporate social responsibility. The new rules in Section 135 of India’s Companies Act make it mandatory for companies of a certain turnover and profitability to spend two percent of their average net profit for the past three years on CSR. However, there is a looming ambiguity regarding collective compliance of CSR Expenditure under Companies Act, 2013 and its allowability as a deduction under Income Tax Act, 1961.

In following paragraphs, provisions regarding CSR Expenditure have been explained along with their respective applicability:-

As per Section 135 of Companies Act, 2013: Company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or net profit of rupees five crore or more during the immediately preceding financial year is required to comply with CSR provisions.

The Board of Directors shall make sure that the company spends in every financial year, minimum of 2% of the average net profits made during the 3 immediately preceding financial years as per CSR policy.

Further, Ministry of Corporate affairs (Circular No. 14 /2021)[i] has notified the amendments in Section 135 of the Act as well in the CSR Rules on 22^nd January 2021 with an aim to strengthen the CSR ecosystem, by improving disclosures and by simplifying compliances. A set of FAQs has also been provided with the circular for better understanding and facilitating effective implementation of CSR. Key Changes in 2021 Amendment are:-

Treatment of any unspent CSR amount remaining from any ‘ongoing project.’ According to section 135(6) of the Act, the company must open an account for the unspent amount, namely, ‘Unspent CSR Account’, and transfer the funds there.
Under rule 7 of the New CSR Rules, the ‘administrative overheads’ must not surpass five per cent of the total spending on CSR as ascertained by the Board. However, under rule 8(3)(c), companies have been permitted to avail the “five per cent of total CSR expenditure or fifty lakh rupees, whichever is less”—provided they carry out impact assessments of their project.

Any remaining surplus from the implementation of CSR activities must either be “utilized in the same project or transferred to the unspent CSR account or transferred to a Fund specified under Schedule VII within six months from expiry of the financial year.