Corporate Social Responsibility Under Section 135 of Companies Act 2013 provides a detailed overview of CSR obligations for companies in India. This article explains the key provisions of Section 135, including eligibility criteria, CSR committee formation, and mandatory expenditure requirements. It also outlines the types of activities that qualify as CSR and offers guidance on developing and implementing effective CSR strategies.
Corporate Social Responsibility is a vital aspect of corporate governance. It has gained significant importance in recent years. Under Section 135 of the Companies Act 2013 in India, CSR has been mandated for certain companies. It obligates the companies to contribute to society and address social and environmental challenges.
This section requires qualifying companies to allocate a specified percentage of their profits towards Corporate Social Responsibility activities, fostering sustainable development and inclusive growth. This provision aims to positively impact various stakeholders and promote a more equitable and sustainable business environment by encouraging businesses to embrace their responsibility towards society. In this article, we will discuss the various aspects of CSR under the Companies Act 2013.
CSR Applicability in India
Under Section 135 of the Act, certain companies are required to comply with CSR provisions. It aims to promote responsible business practices and contribute towards the welfare of society. The criteria for Corporate Social Responsibility applicability are based on the company’s net worth, turnover, and profit.
As per Section 135 of the Companies Act 2013, every company meeting certain criteria must constitute a CSR committee and undertake Corporate Social Responsibility activities.
The criteria are as follows:
- Companies with a net worth of ₹ 500 crore or more, or
- Companies with a turnover of ₹ 1,000 crore or more, or
- Companies with a net profit of ₹ 5 crore or more
Such companies are mandated to spend at least 2% of their average net profits made during the preceding three financial years on Corporate Social Responsibility activities.
Impact Assessment
By rule 4 of the Companies (Policy) Rules, 2014, a company can execute Corporate Social Responsibility activities through three modes of implementation:
- Implementation by the company itself
- Implementation through eligible implementing agencies
- Implementation in collaboration with one or more companies
Rule 4(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 outlines the eligible entities that can serve as implementing agencies for conducting CSR activities.
These include:
1. A company established under Section 8 of the Act, a registered public trust, or a registered society exempted under certain clauses of Section 10 or registered under Section 12A and approved under 80G of the Income Tax Act, 1961, established by the company, either individually or jointly with another company.
2. A company established under Section 8 of the Act, a registered trust, or a registered society established by the Central Government or State Government.
- Any entity established under an Act of Parliament or a State legislature.
- A company established under Section 8 of the Act, a registered public trust, or a registered society exempted under certain clauses of Section 10 or registered under Section 12A and approved under 80G of the Income Tax Act, 1961, with a proven track record of at least three years in undertaking similar activities.
3. All implementing agencies intending to conduct any Corporate Social Responsibility activity must register themselves with the Central Government by electronically filing the CSR-1 form with the Registrar, effective from 1 April 2021.
Importance of Corporate Social Responsibility
- Corporate Social Responsibility helps companies be socially responsible and give back to society.
- It improves the company’s reputation.
- CSR activities attract and retain employees.
- It helps build long-term stakeholder relationships.
- CSR can have a positive impact on the environment.
- It can also benefit the communities in which the company operates.
Role of Board of Directors
The Board of Directors plays a crucial role in ensuring that the company meets its CSR obligations. The Board must approve the company’s CSR policy and ensure that the company spends at least 2% of its average net profits of the preceding three years on CSR activities. The Board must also ensure that the company has a CSR committee in place and that the committee is functioning effectively.
Net Profit for CSR Applicability
Net profit is a crucial factor in determining the applicability of provisions in India. Under Section 135 of the Companies Act 2013, qualifying companies are required to allocate a specified percentage of their net profits towards CSR activities.
The net profit for calculating CSR spending is the profit before tax, as per Section 198 of the Companies Act 2013. This means that companies cannot deduct taxes from their profits when calculating the 2% CSR spending requirement.
Transfer and Use of Unspent Amount
The transfer and use of unspent amounts in the context of CSR refer to the treatment of funds allocated for CSR activities that remain unutilized at the end of the financial year.
Any unspent CSR amount must be transferred to a special CSR account within six months of the end of the financial year. This amount must be spent on CSR activities within three years, failing which the unspent amount must be transferred to a fund specified by the government.
CSR Committee Applicability
Companies that meet the CSR criteria must constitute a CSR committee consisting of at least three directors, including one independent director. The CSR committee must formulate and recommend the company’s CSR policy to the Board of Directors for approval.
The committee must consist of at least three directors, with at least one of them being an independent director. These directors bring diverse perspectives and expertise to the committee’s discussions and decision-making processes, ensuring an effective CSR governance structure within the company.
Duties of the CSR Committee
The CSR committee has several duties, including:
- Formulating and recommending the CSR policy to the Board of Directors
- Recommending the CSR activities to be undertaken by the company
- Monitoring the CSR activities of the company
- Recommending the amount of Corporate Social Responsibility spending
CSR Reporting
Companies must disclose their CSR activities in their annual report, including details of the CSR committee, the CSR policy, the amount spent on CSR activities, and the impact of the activities. The annual report must also include a statement indicating that the company has complied with the CSR provisions of the Companies Act 2013.
CSR Policy
The CSR policy of the company must include the following:
- The activities to be undertaken by the company
- How the activities will be undertaken
- The geographical areas in which the activities will be undertaken
- The reasons for undertaking the activities
- The expected impact of the activities
List of Permitted Activities To Be Included by Schedule VII of the Companies Act, 2013
The activities that the company can undertake as part of its Corporate Social Responsibility activities are listed in Schedule VII of the Companies Act 2013.
The activities include:
- Eradicating hunger, poverty, and malnutrition
- Promoting education
- Promoting healthcare, including preventive healthcare
- Promoting gender equality and empowering women
- Ensuring environmental sustainability
- Protection of national heritage, art, and culture
- Supporting armed forces veterans, war widows, and their dependents
- Promoting sports
Ineligible Activities under CSR Provisions
Ineligible activities under Corporate Social Responsibility provisions include contributions to political parties and activities undertaken in the normal course of business. Additionally, expenses incurred for the benefit of employees and their families are also not considered eligible for Corporate Social Responsibility activities.
1. Any activities conducted within the normal course of the company’s business, except for companies engaged in the research and development of new vaccines, drugs, and medical devices, may undertake research and development related to COVID-19 for the financial years 2020-21, 2021-22, 2022-23, provided that:
- Such research and development endeavors are conducted in collaboration with any of the institutes or organizations listed in item (ix) of Schedule VII to the Act
- Details of such activities are separately disclosed in the Annual CSR report included in the Board’s Report.
2. Additionally, any activities conducted by the company outside India, except for the training of Indian sports personnel representing any State or Union territory at the national or international level, are not included.
3. Activities benefiting employees of the company, sponsored activities aimed at deriving marketing benefits for its products or services, and activities conducted to fulfill other statutory obligations under any law in force in India are also exempt.
Fines and Penalties for Non-Compliance
If a company doesn’t follow the rules about spending money on social responsibility activities, they can be punished with a fine of at least ₹ 50,000. This fine can go up to ₹ 25 lakh. Also, any officer of the company who doesn’t follow the rules can be punished with imprisonment for up to three years or a fine of at least ₹ 50,000. This fine can go up to ₹ 5 lahks, or they could face both imprisonment and a fine.
GST Input Credit on CSR Expenses
According to GST regulations, input tax credit can be claimed on any goods or services used or intended to be used in the course or advancement of one’s business.
Although Corporate Social Responsibility expenses are not typically considered business expenditures, the Telangana Authority for Advance Ruling (AAR), responding to an application by M/s. Bambino Pasta Food Industries Private Limited (TSAAR Order No. 52/2022), ruled that CSR expenditure is eligible for Input Tax Credit (ITC). This ruling is based on the understanding that non-compliance with CSR provisions under Section 135(7) of the Companies Act, 2013 can result in penalties of up to ₹1 crore, potentially impairing a company’s business operations significantly. Thus, the expenditure incurred for CSR is deemed to be made in the furtherance of the business. Consequently, taxes paid to fulfil obligations under Section 135 of the Companies Act,2013 are eligible for ITC under GST provisions.
To address the ambiguity, the Finance Bill 2023 introduced an amendment to the Central Goods and Services Tax (CGST) Act. This amendment, through the addition of clause (fa) under Section 17(5) concerning blocked input tax credit, clarified that input tax credit (ITC) would not be permitted on goods or services utilized in activities related to Corporate Social Responsibility.
Further to Clarify the Ambiguity
By inserting clause (fa) under Section 17(5), which deals with blocked input tax credit, Finance Bill 2023 clarified, through an amendment to the Central Goods and Services Tax (CGST) Act, that input tax credit (ITC) will not be allowed on goods or services used in providing activities related to Corporate Social Responsibility.
Income Tax Provisions on CSR Expenditure
- The amount allocated by a company for Corporate Social Responsibility cannot be treated as business expenditure. The Finance Act of 2014 stipulates that any expenditure incurred by a taxpayer on activities related to CSR, as outlined in Section 135 of the Companies Act, 2013, will not be considered expenditure for business or professional activities.
- Furthermore, no specific tax exemptions are granted for CSR expenditure. Consequently, CSR expenses under Section 135 of the Companies Act, 2013, are not recognized as deductible expenses for Income Tax purposes.
- In cases where the company directly conducts CSR activities, the Tax Deducted at Source (TDS) provisions will be applicable in the same manner as they are for regular business expenditures.
Are There Any Exceptions to Setting up a CSR Committee?
| Type of Company | CSR Committee |
| Listed Company | CSR Committee shall consist of 3 or more directors out of which at least one director shall be independent |
| Unlisted company or private company that is not required to appoint an independent director as per section 149 of the Companies Act, 2013 | CSR Committee shall consist of 3 or more directors without an independent director. |
| A Private company having only two directors on its Board | CSR Committee shall be constituted with 2 such directors. |
| Foreign company | CSR Committee shall be constituted of 2 persons namely,
|
Reason For Introduction of CSR for Companies
The introduction of Corporate Social Responsibility provisions in the Companies Act 2013 aimed to promote CSR and encourage companies to give back to society. The government recognized that companies are responsible for society, and CSR was seen as a way to ensure that companies meet this responsibility. The provisions also help to promote sustainable development and inclusive growth in the country.
Conclusion
Corporate Social Responsibility is an important concept for companies in India, and the provisions under Section 135 of the Companies Act 2013 mandate certain companies to undertake CSR activities. The CSR activities can positively impact the environment, society, and the company’s stakeholders.
The Board of Directors plays a crucial role in ensuring that the company meets its CSR obligations, and companies must disclose their CSR activities in their annual report. Non-compliance with CSR provisions can lead to fines and penalties, and companies need to ensure that they meet their CSR obligations.
Vakilsearch can help companies in India with their (CSR) obligations. Vakilsearch can assist companies in drafting their CSR policy, identifying permitted activities, setting up a CSR committee, and complying with CSR reporting requirements. Contact our experts today.
FAQs on Corporate Social Responsibility
Why is CSR mandatory?
As per the Companies Act of 2013, CSR is regulated under section 135. Hence, companies falling under this section are obligated to adhere to CSR regulations in India.
What is Section 135 of the Companies Act MCA?
According to Section 135(1) of the Act, every company meeting the specified net worth, turnover, or net profit criteria is required to form a CSR committee. Therefore, even Section 8 companies must establish a CSR committee and adhere to CSR regulations upon reaching the defined net worth, turnover, or net profit thresholds.
What is Section 135 of the CSR rules?
Section 135 of the CSR rules mandates certain companies to allocate a portion of their profits towards social responsibility initiatives.
How much CSR is mandatory?
As part of CSR obligations, companies must allocate at least 2% of their net profit from the preceding three years.
Whether provisions of CSR apply to a section 8 Company?
Under Section 135(1) of the Act, companies meeting defined net worth, turnover, or net profit criteria are required to form a CSR committee. Therefore, even Section 8 companies must establish such a committee and follow CSR provisions upon reaching the specified financial benchmarks.
