Corporate Social Responsibility

Applicability

Section 135 applies to a company that, in the immediately preceding financial year, meets any one of three thresholds — net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more. Applicability is tested each year, and a company can fall within the section and out of it again as its position changes.

Computation of the obligation

The obligation is 2% of the average net profits of the three immediately preceding financial years, computed under Section 198. Net profit for this purpose is not profit before tax as reported, and the adjustments prescribed by Section 198 are where computation most often goes wrong.

• Determination of applicability for the financial year
• Computation of net profit under Section 198 and of the resulting obligation
• Set-off of excess amounts spent in earlier years, within the permitted period

Committee, policy and board process

• Constitution of the CSR Committee, and the circumstances in which the board may discharge its functions instead
• Drafting the CSR policy, and the annual action plan the committee is required to recommend
• Board approval, disclosure on the website, and the record maintained of each decision

Permitted activities

Expenditure qualifies only if it falls within Schedule VII, and only if it is not activity undertaken in the normal course of business, not directed at employees or their families, and not a contribution to a political party. We advise on whether a proposed project qualifies before commitment rather than after.

Implementing agencies

Where a project is delivered through an implementing agency, that agency must be registered and hold a valid CSR-1 registration number. We assist with diligence on the agency, verification of its registration, and the documentation the company should hold to evidence utilisation.

Unspent amounts

An unspent obligation is not extinguished at the year end, and the treatment differs according to whether the amount relates to an ongoing project.

• Ongoing projects — transfer to a separate Unspent CSR Account within thirty days of the year end, and spend within three financial years
• Other unspent amounts — transfer to a fund specified in Schedule VII within six months of the year end
• Determination of whether a project properly qualifies as ongoing, which governs which treatment applies

Impact assessment

A company with an average CSR obligation of ₹10 crore or more in the three preceding financial years must have an impact assessment carried out on qualifying projects through an independent agency, and annex the report to its CSR report.

Reporting

• Annual Report on CSR, in the prescribed format, annexed to the board’s report
• Form CSR-2 filed with the Registrar of Companies
• Disclosure of the policy, projects and composition of the committee on the company’s website

Related

CSR sits alongside, but is distinct from, the broader sustainability reporting obligations dealt with under ESG Services. Where an institution is on the receiving end of CSR funding rather than the paying end, see NGO & NPO Management.