Corporate Social Responsibility (“CSR”) is a responsibility for big companies to contribute some part of their earnings towards societal good. CSR is a viable option for companies to invest in the well being of society than merely doing a Charity or a Donation. By CSR, companies can invest in the well being of the society for their long term benefit rather than just giving charity.
Corporate Social Responsibility (CSR) by companies requires them to publicly furnish their information to the society and some necessary disclosures are also required to be made for better transparency of operations towards the investor public. This is the way by which corporate get into philanthropy.
The Companies legislation “The Companies Act, 2013’’ prescribes for the fulfillment of Corporate Social Responsibility (CSR) by Companies as a part of their essential compliance.
Why Corporate Social Responsibility?
CSR is a commitment of business for ethical behavior which earns it a better public image. For each company including its holding or subsidiary having Net Worth over Rs 500 crore or Rs 1000 crore in case of turnover or Rs 5 crores in case of Net Profit, a mandatory spend of 2% of average profits of the past three years towards CSR is to be done by the Companies as per the Company (Corporate Social Responsibility) Rules, 2014.
Amendments in CSR Rules, 2019
a) Calculation of CSR Amount:
For calculation of the appropriate amount of CSR spending in a year, the text ‘’ or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years’’ has been included after ‘’ three immediately preceding financial years’’ in the definition of Section 135(5).
This means for companies where three financial years had not lapsed, shall take into consideration profits of preceding financial year/s- two years total of profits from its date of incorporation for calculation of CSR Amount to spend. For instance, company incorporation in 2016, shall contribute to CSR in 2018 taking in profits of 2016 and 2017.
b) Guided use of Unspent CSR Amount:
For unspent CSR amount allocated for the contribution in the ongoing project in a Financial Year, the CSR Rules, 2019 prescribed for transfer of remaining unspent CSR amount by companies within 30 days of completion of the financial year to a Special Account named as Unspent Corporate Social Responsibility Account opened and maintained in notified bank and to make the funds accessible only for CSR operations. (as per Subsection (6) in Section 135)
c) Punishment in contravention of Company Social Responsibility Rules:
For companies those ignoring CSR provisions, new penal provisions have been included in the act, where companies in default would be charged with a fine of Rs 50,000 which can even extend to Rs 25 lakhs and where the person/s found in default to be charged with imprisonment or fine or both.
Guidelines for Company Social Responsibility Spending by Companies
a) Spending of CSR Amount:
For companies, that did not qualify for CSR reporting criteria, the department did not place any obligation to spend for CSR. While for companies in the qualification, essential expenditures have to be made in following (refer Schedule VII):
- eradicating extreme hunger and poverty;
- promotion of education;
- promoting gender equality and empowering women;
- reducing child mortality and improving maternal health;
- combating human immunodeficiency virus, acquired immune deficiency
- syndrome, malaria and other diseases;
- ensuring environmental sustainability;
- employment enhancing vocational skills;
- social business projects;
- Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and such other matters as may be prescribed.
b) Non-spending of CSR Amount:
Where the company does not undertake any CSR activity – with the new “Comply or Explain Basis ” provision, it shall have to place the complete CSR Amount to a special fund account as stated in Schedule VII. If CSR funds are saved for any existing CSR Project, the saved balance is to be kept in a separate bank account opened in the name ‘’Corporate Social Responsibility Account ‘’ within 30 days of closure of the financial year.
Terms to Know
Companies that registered under Companies Act, 2013 with reference to Section 135 of the act are required to constitute a Corporate Social Responsibility Committee to take care of CSR spending and all other CSR activities by the Company.
Schedule VII of Companies Act, 2013:
Schedule VII of the Act prescribes certain activities that require a contribution by the companies in a financial year based on the contributions of the average of 3 years. The list is prepared taking care of the interest of the public and economy for growth as the companies are taking resources from society only.
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