- Which year’s profits, turnover and net worth will be reckoned for understanding the applicability of CSR?
Immediately preceding financial year Profit (Rs.5 crores), Turnover (Rs.1,000 crores) and Net Worth (Rs.500 crores) shall be taken into consideration.
- Whether applicability of CSR provisions is to be considered every year?
Once CSR provisions are applicable in any financial year, then it remains applicable for three financial years.
Applicability of CSR is not required to be checked every year except where the company ceases to be covered under section 135(1) for 3 consecutive financial years.
- What would be the course of action if CSR provisions cease to apply for three consecutive financial years?
Company can dissolve the CSR Committee by passing a Board Resolution.
However, the amount if any already earmarked as “CSR Expenditure” would still be required to be spent as per the provisions of Section 135 and all the provisions relating to disclosures and reporting would be complied with. Further, the expenditure and project activities shall be monitored by the Board itself.
- What are the ways of implementing the CSR activities?
There are 3 ways of implementing CSR activities:
- Implementation by company itself
- Implementation with one or more companies (Rule 4(4))
- Implementation through agencies.
- What are the types of agencies through which CSR can be implemented?
Established by Company- Section 8, Trust or Society
- Government agencies - Section 8, Trust or Society
- Statutory Bodies - entity under Act of Parliament or state legislature
- Public agencies - Section 8, Trust or Society having 3 years track record
- What types of agencies require registrations with MCA?
- Agencies as mentioned above (i) to (iv) with MCA by filing form CSR-1.
- IT registrations (Section 12AA & Section 80G of IT Act: (i) and (iv)
- Registrar of Assurances: Trusts.
- Can a company collaborate with other companies for CSR?
Company can now collaborate with one or more companies for taking up a common project on CSR, provided the companies should be able to report the CSR expenditure in their CSR annual report separately as per the provisions of Section 135 of the Act on such common CSR project.
- What activities are permissible as CSR Activities?
Permitted Activities permissible under CSR are:
- Promoting Health Care
- Promoting education
- Promoting gender equality, empowering women.
- Ensuring environmental sustainability, ecological balance, conservation of natural resources and maintaining quality of soil, air and water.
- Protection of national heritage, art and culture.
- Measures for the benefit of armed forces veterans, war widows and their dependents.
- Training to promote rural sports, nationally recognized sports, Paralympic sports and Olympic sports
- Contribution to the prime minister's national relief fund or any other fund set up by the central govt. for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women;
- Contributions or funds provided to technology incubators located within academic institutions which are approved by the central govt.
- Rural development projects
- Slum area development.
- Disaster management, including relief, rehabilitation and reconstruction activities.
- What activities are not permissible as CSR Activities?
Activities which are not allowed as CSR are:
- Normal Course of business activities
- Activities undertaken outside India
- Contributions to Political Parties
- Employees benefitting activities
- Marketing benefitting activities
- Activities undertaken for fulfilling the statutory obligations. Exceptions the following:
- R&D activities with respect to new vaccine, drugs and medical devices in normal course of business
- Training of Indian Sports personnel outside India.
- How would the average net profit be calculated?
The average net profit for the purpose of determining the spending on CSR activities is to be computed in accordance with the provisions of Section 198 and will also be exclusive of the items given under Rule 2(f) of the CSR Rules and dividends received from other companies complying the CSR.
The computation of net profit for CSR expenditure, would be based on profit before tax (PBT) rather profit after tax (PAT).
- What if in any of the three immediately preceding financial years under consideration, the company has loss or negative profit?
Companies are expected to spend 2 % of the average net profit of the last three financial years. Hence, even for two consecutive years if the company has been in loss, but on an average, the company has been in profit over the last three years, then the company would be required to spend 2 % of the average net profit on CSR.
However, if the average net profit of three years is negative, then there would be no requirement to spend on CSR.
- What happens to the unspent CSR amount?
CSR amount can be spend for
- CSR activities or
- Creation or acquisition of a capital asset, which shall be held by the Implementation entities/beneficiaries/ public authority
Note: In case of any capital asset held by the parties other than mentioned above before the 22.01.2021, then within 180 days of 22.01.2021, such assets should be transferred as per the provision.
- In case the company fails to spend:
a) In case of Ongoing Projects:
- Transfer the unspent CSR amount to a special account (Unspent CSR Account) within 30 days from the end of financial year
- Amount in Unspent CSR amount shall be spent towards the CSR Policy within a period of three financial years from the date of such transfer.
- On failing, company shall transfer the amount to a Fund specified in Schedule VII, within a period of 30 days from the date of completion of 3rd financial year.
b) In case of other cases:
- Tell the reason in the Board Report and transfer the unspent amounts to the Fund specified under Schedule VII within 6 months after the expiry of the financial year.
Ongoing Projects means
- Multi-year project undertaken by a Company in fulfilment of its CSR obligation;
- Project having 4 years duration including the year of commencement; and
- Projects whose duration has been extended beyond 1 year by the Board based on reasonable justification.
- Can a company set-off the excess CSR amount spent i.e., in excess of 2% of the average Net Profit?
Excess CSR amount can be set-off against the CSR obligation up to immediate succeeding three financial years.
Board shall pass a resolution to that effect that excess amount available for set off shall not include the surplus arising out of the CSR activities, if any.
- What would be the composition of CSR Committee?
Where a company is required to have appointed Independent Directors, the composition shall be minimum three or more Directors and out of which minimum one Director shall be an Independent Director.
Where there is no requirement of appointment of Independent Director, the composition shall be minimum two or more Directors.
- When should the CSR Committee hold its first meeting, its quorum and frequency of meetings?
Since the first task of the CSR Committee is to frame the policy, the Committee should hold its meeting soon after it is constituted. While nothing specifically is mentioned in the Act, the quorum shall be as that of Board Meetings i.e., minimum 2 or one third of total members; whichever is higher. There is no minimum number of meetings specified, although, to consider Annual CSR Expenditure Budget and monitoring the activities, it’s advisable to have appropriate number of meetings of this Committee.
- What are the contents of CSR policy and its approval?
The following should be the part of CSR policy duly approved by Board in the form of annual action plan among others:
- A list of CSR projects or programs that the company plans to undertakefalling within the purview of Schedule VII of the Act, specifying the process of execution of such project or project and the implementation schedule of the same.
- Process of monitoringthe projects or programs listed down.
- That the surplus arising out of the CSR projects or programs shall not form part of the business profit.
4. What are the circumstances under which a company is not required to form a CSR Committee?
In view of the amendments notified by the Companies Amendment Act, 2020 where the CSR expenditure required to be spent is less than INR 50 Lakhs, the Company is not required to constitute a CSR Committee, and the duties and functions of CSR committee shall be discharged by the Board of the Company.
- What are the implications of not spending post the CSR amount?
Any non-compliance with the provisions of CSR will attract the following penalties:
If company default in transferring the unspent amount to the special CSR account or to the funds specified in Schedule VII, then the Company is liable to a penalty of twice the amount required to be transferred or Rs. 1 crore, whichever is less.
2. Officer in Default:
Penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent CSR Account, as the case may be, or Rs. 2 lakhs, whichever is less.
- Whether the Board after transfer of unspent amount are free from providing the reason in their Annual report?
As per Section 135(2), Board is required to specify the reason in the Annual report, even after transferring the unspent CSR amount.
- What companies are required to conduct Impact Assessment?
Impact assessment is only mandatory for the following:
- A company is having average CSR obligation of Rs. 10 crore or more, in 3 immediately preceding financial years.
- Impact Assessment should be done for CSR projects having outlays of Rs. one crore or more; and which have completed at least one year.
- Who can conduct Impact assessment?
These Impact assessments must be undertaken by an independent agency.
- What is the expenditure allowed for Impact assessment?
Expenditure upto a maximum of 5% or 50 lacs, whichever is lower is allowed as Impact assessment expenditure in addition to 5% expenses of administrative overheads.
- What are the details required in Annual report?
Annual report on CSR to have additional disclosures as specified in the Annexure II.
- Details of Impact assessment of CSR projects
- Details of the amount available for set off and amount required for set off for the financial year
- Details of CSR amount spent against ongoing projects
- Details of CSR amount spent against other than ongoing projects
- Details of amount spent in Administrative Overheads
- Details of Unspent CSR amount for the preceding three financial years and so on
Annual report to specify the reason for not spending the CSR amount even after transfer of unspent CSR amount to the required fund or account.
The entire contents of this document have been developed based on relevant information and are purely for private circulation. Though the authors have made utmost efforts to provide authentic information, however, the authors expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and consequences of anything done or omitted to be done by any such person in reliance upon the contents of this document.