Corporate Social Responsibility (CSR)
Corporate Social Responsibility (CSR) is generally understood in a broader sense, as a self-regulatory mechanism, whereby a business entity monitors and ensures its active compliance with the spirit of the law, ethical standards and international norms.
United Nation's Industrial Development Organization(UNIDO) defines CSR in terms of the responsiveness of businesses to stakeholders’ legal, ethical, social and environmental expectations. According to them, Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is the way through which a company achieves a balance of economic, environmental and social imperatives (“Triple-Bottom-Line- Approach”), while at the same time addressing the expectations of shareholders and stakeholders. In this sense, UNIDO draws a distinction between CSR, which is a strategic business management concept, and charity, sponsorships or philanthropy. Even though the latter can also make a valuable contribution to society and directly enhance the reputation and brand image of the company, the concept of CSR goes beyond that, according to UNIDO.
However, in India, CSR is defined to mean those philanthropic and social welfare enhancing activities specified in Schedule VII to the Companies Act, 2013, undertaken by the consistently well off companies incorporated in India under the Companies Act.
Thus, in India, CSR is more in the style of charity sponsorship or philanthropy. The magnitude of CSR is measured in terms of the expenditure incurred thereon on the specified set of activities, excluding activities undertaken in pursuance of normal course of business of a company.
India is considered as the first country to have made CSR a statutory liability for the corporate entities.
Legal backing for CSR
Unlike many other countries wherein CSR activities are voluntary, the same is mandated by law in India.
Section 135 and Schedule VII of the Companies Act, 2013, relates to CSR related spending by companies. Companies (Corporate Social Responsibility Policy) Rules, 2014 was notified on 27th February 2014 and came into force from 01.04.2014. These Rules provide for the manner in which CSR activities shall be formulated, undertaken, reported and monitored.
There are no specific tax exemption/concessions to companies under the Income Tax Act, 1961 for expenditure incurred by companies towards CSR. However, spending by companies on several activities like rural development projects, skill development projects, agricultural extension projects, contribution to Prime Minister’s National Relief Fund etc., which find place in Schedule VII of the Companies Act, 2013, may qualify for tax exemptions under relevant provisions of Income Tax Act, 1961 subject to the fulfilment of any specified conditions.
Who all are covered by CSR norms?
As per Section 135 of Companies Act 2013, every company having net worth of Rs. 500 crore or more, or turnover of Rs. 1000 crore or more or a net profit of Rs. 5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee and shall spend in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy (as framed by the CSR committee and decided by the Company).
CSR spending is applicable to every company incorporated in India, including its holding or subsidiary, and a foreign company having its branch office or project office in India.
Thus, CSR funding becomes mandatory if either of the three qualifying criteria (turnover, net profit or networth) comes out to be true for the company in any financial year, provided it had a positive average net profit for the past three years preceding that financial year wherein it was found to be coming under CSR spending provisions.
Thus, CSR funding excludes infant companies and kicks in, if everything goes well, in the fourth year of operation after clocking positive and substantial profits.
Actual calculation of “profit” for CSR purpose may vary from the notion of Profit After Tax or PAT, generally reported by the companies for accounting purposes. For instance, in the CSR arrangement, profit generated from the global arms (whether as a separate company or branch) and dividends received from those other companies incorporated in India, which are coming under CSR provisions, are excluded from the calculation of net profit.
CSR norms are applicable only to companies (including foreign companies) registered under the Companies Act, 2013 and not to other forms of body corporate like limited liability partnerships.
CSR Rules are applicable to all companies including central public sector enterprises (CPSEs). In case of public sector enterprises, Department of Public Enterprise (DPE) had issued the first Guidelines on CSR in April 2010 which were revised effective from April 2013. However, the above DPE guidelines have ceased to exist after CSR Rules notified by Ministry of Corporate Affairs (MCA) came into effect on 1 April, 2014. Several CPSEs have known to have demanded that DPE should also issue guidelines on CSR & Sustainability within the overall mandate of the Companies Act, 2013. The draft guidelines of DPE for CPSEs to supplement CSR Rules are presently under consideration of MCA.
What are CSR eligible activities?
CSR fund can be utilized by companies only in India and not abroad. Activities which are related to normal course of business are excluded from the purview of CSR activities.
Schedule VII of the Companies Act specifies the list of items on which CSR fund can be used and the same are given below (as substituted, vide Notification dated 27 February 2014, for the original provisions in the Companies Act, 2013):
Activities relating to:—
- eradicating hunger, poverty and malnutrition, promoting health care including preventive healthcare 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, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water;
- protection of national heritage, alt 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 dependents;
- training to promote rural sports, nationally recognized sports, Paralympics 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 Scheduled Tribes, other backward classes, minorities and women;
- contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government
- rural development projects.
With effect from 6 August 2014, slum area development was added to the CSR eligible list.
Contributions to political parties are not considered as an eligible CSR spending.
How to do CSR?
The CSR activities can be undertaken by the company as projects or programs or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business. It cannot be a project or program or activity that benefit only the employees of the company and/or their families.
The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through a registered trust or a society or through a company established by it or its holding or subsidiary or associate company under section 8 of the Act (earlier known as Section 25 companies or charitable or non-profit oriented companies). The activities can also be undertaken through a registered trust or a society or a Section 8 company if the same has three years of established track record and is undertaken as per the company's specified norms on outcomes, monitoring etc. A company can also collaborate with other companies for implementing CSR activities provided there is neat separation of expenditures for reporting purposes.
CSR expenses are to be disclosed in annual reports of the companies and the CSR policy and activities are to be published in their website.
The Ministry of Corporate Affairs constituted a High Level Committee on 3 February, 2015 to suggest measures for monitoring the progress of implementation of Corporate Social Responsibility (CSR) policies by companies.The Committee submitted its report alongwith its recommendations on 22 September, 2015, which may be seen here.
Based on the committee recommendations, the Ministry of Corporate Affairs, in its circular dated 12 January 2016, has clarified that, the Board of the Company is free to decide whether any unspent amount from out of the minimum required CSR expenditure is to be carried forward to the next year. This provision is uniformly applicable to all CSR eligible companies including Public Sector Undertakings.
Implementation of CSR
Corporate Social Responsibility (CSR) provision of the Companies Act, 2013 came into force from 1st April, 2014. The year 2014-15 was the first year of implementation of CSR by companies under the legislation. A study of just 460 listed companies, which have placed annual returns on CSR on their websites, estimated that 51 Public Sector Undertakings (PSUs) and 409 private sector companies spent about Rs. 2386.60 crore and Rs. 3950.76 crore respectively on CSR during the year 2014-15, thereby totaling Rs. 6337 crores (Source Press release of Ministry of Corporate Affairs dated 15 March 2016). May see here for a snapshot of the latest data.
The Ministry of Corporate Affairs has issued a set of Frequently Asked Questions (FAQs) on 12.01.2016 to facilitate effective implementation of CSR and to ensure compliance by companies under the legislation.
A High Level Committee, set up by the Ministry of Corporate Affairs to suggest measures for monitoring the progress of implementation of Corporate Social Responsibility (CSR) policies by companies, submitted its report on 22 September, 2015. Committee was of the view that CSR should not be used as a tool for plugging the resource gap of the Government. Some of the major recommendations are:
- Board and the CSR Committee should be managing the monitoring of their own CSR at their level. However information contained in the annual report of companies may be compiled by Ministry of Corporate Affairs.
- Government should have no role to play in engaging external experts in monitoring the quality and efficiency of CSR expenditure of Companies.
- The unspent balance out of the CSR fund should be allowed to be carried forward with a sunset clause of five years, after which the unspent balance should be transferred to one of the funds listed in Schedule VII.
- An omnibus clause may be included in Schedule VII of the Act to suggest that CSR activities must be for larger public good and for any activity that serves public purpose and /or promotes the wellbeing of the people, with special attention to the needs of underprivileged.
- CSR should not be applicable to charitable companies (Section 8 Companies)
- Tax treatment for all CSR expenditures should be the same
- Public and private sector companies should be treated on par when it comes to compliance.