FAQs on Corporate Social Responsibility- Series II
As per Section 135 of the Companies Act, 2013, it is a mandatory requirement for Companies to spend atleast 2% of the average net profit of the preceding three years towards ‘CSR Expenditure’ as per the CSR policy.
In CSR Series-II, we have tried answering some frequently asked questions on the topic ‘CSR Expenditure’.
How is average net profit calculated for the purpose of section 135 of the Act? Whether ‘profit before tax’ or ‘profit after tax’ is required for net profit computation
Net Profit is calculated in accordance with the provisions of section 198 of the Companies Act, 2013 and will also exclude of the items given under rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014. Section 198 of the Act also specifies certain additions/deletions (adjustments) to be made while calculating the net profit of a company (which mainly excludes capital payments/receipts, income tax, set-off of past losses).
Profit Before Tax (PBT) is considered while calculating net profit under section 135 of the Act.
Whether contribution to the corpus of an entity is an admissible CSR expenditure?
Corpus contributions are of capital nature given for specific purpose. The provision relating to contribution to corpus as admissible CSR expenditure has been amended and the contribution to corpus of any entity is not an admissible CSR expenditure w.e.f. 22nd January 2021.
Whether expenditure related to transfer of capital asset as provided under rule 7(4) of the Companies (CSR Policy) Rules, 2014, will be considered as admissible CSR expenditure?
Yes, the expenses relating to transfer of capital asset such as stamp duty and registration fees, will qualify as admissible CSR expenditure in the year of such transfer.
If a company spends more than the requirement provided under section 135, can that excess amount be set off against the mandatory 2% CSR expenditure in succeeding financial years?
Yes, the excess amount spent on CSR activities over and above the mandatory 2% as required, can be set off up to the immediately succeeding three financial years subject to compliance with the conditions stipulated under rule 7(3) of the Companies (CSR Policy) Rules, 2014. This position is applicable from 22nd January 2021 and has a prospective effect and no retrospective effect. Thus, no carry forward shall be allowed for the excess amount spent, if any, in financial years prior to FY 2020-21.
Whether CSR expenditure of a company can be claimed as a business expenditure?
No, the amount spent by a company on or towards CSR cannot be claimed as business expenditure. Explanation 2 to section 37(1) of the Income Tax Act, 1961 which was inserted through the Finance Act, 2014 provides that any expenditure incurred by an assessee on the activities relating to CSR referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.
What tax benefits can be availed under CSR?
There are no specific tax exemptions have been extended to CSR expenditure. The Finance Act, 2014 also clarifies that expenditure on or towards CSR does not form part of business expenditure.
Whether contribution in kind can be monetized (converted into money) to be shown as CSR expenditure?
The requirement comes from section 135(5) that states that “The Board of every company shall ensure that it spends…” Therefore, CSR contribution cannot be in kind and monetized.
Can CSR expenses be spent on activities beyond Schedule VII?
No, CSR expenditure cannot be spent on activities beyond Schedule VII of the Act. The activities undertaken as illustrated in the CSR policy of the company must be in consonance with the Schedule VII of the Companies Act, 2013. The items listed in Schedule VII of the Act have broad scope and are intended to cover a wide range of activities. The entries in the said Schedule VII must be interpreted liberally to capture the essence of the subjects enumerated in the said Schedule.
What are the different modes of incurring CSR expenditure?
CSR expenditure can be incurred in multiple modes:
(i) ‘Activities route’, which is a direct mode wherein a company undertakes the CSR projects or programmes as per Schedule VII of the Act, either by itself or by engaging implementing agencies as prescribed in Companies (CSR Policy) Rules, 2014.
(ii) ‘Contribution to funds route’, which allows the contributions to various funds as specified in Schedule VII of the Act.
(iii) Contribution to incubators and R&D projects, as specified in item (ix)(a) and contribution to institutes/organisations, engaged in research and development activity, as specified under item (ix)(b) of Schedule VII of the Act
Which are the funds specified in Schedule VII of the Act for the purpose of CSR contribution?
Contributions to the following funds shall be admissible as CSR expenditure:
(i) Swachh Bharat Kosh
Will contribution to any other fund set up for carrying out the activities mentioned in Schedule VII of the Act, be an admissible CSR expenditure
No, the Act does not recognise any contribution to any other fund, which is not specifically mentioned in Schedule VII, as an admissible CSR expenditure.
Can CSR funds be utilised to fund Government schemes?
The objective of CSR provisions is to involve the corporates as partners in the social development process. Use of corporate innovations and management skills in the delivery of ‘public goods’ is at the core of CSR implementation by the companies. Therefore, CSR should not be interpreted as a source of financing the resource gaps in Government Schemes. However, the Board of the eligible company may undertake similar activities independently subject to fulfilment of Companies (CSR Policy) Rules, 2014.
Whether involvement of employees of a company in their CSR projects can be monetized and accounted for under the head of ’CSR expenditure’
No, involvement of employees in CSR projects of a company cannot be monetized. Contribution and involvement of employees in CSR activities of the company will no doubt generate interest/pride in CSR work and promote transformation from Corporate Social Responsibility (CSR) as an obligation to Socially Responsible Corporate (SRC) in all aspects of their functioning. Companies, therefore, should be encouraged to involve their employees in CSR activities.
A Company contributes certain amount to an NGO which runs a platform with the aim to bringing together corporates and NGOs for a cause. The platform conducts sports events for which Companies can register, so that employees of the Company can participate. Of the contribution made, some percentage of the amount gets spent towards the administration expenses for managing the event and rest towards supporting the NGO.
Whether such expenditure counts as a valid CSR activity:
The actual amount expended by the corporate to support the NGO after debiting the admin expenses, shall be considered as a valid CSR expenditure.
What is the treatment for reimbursements received from the local and Central governments under different schemes. If claimed and received by the Company?
As part of the good corporate governance, the Company should maintain a separate accounts for CSR related expenses and incomes. The reimbursements received from the local and Central governments under different schemes in the same financial year, shall get deducted from the total eligible CSR expenses and the difference amount shall be shown as CSR expenses.
In case where the reimbursements will be received from the local and Central governments under different schemes in the next financial year or next to next financial year as the case may be, then the treatment w.r.t such reimbursements should be in line with the accounting standards and discussed with the Finance team. In addition, as a good corporate governance practice, Company should disclose the same in their annual report/ annual CSR report.
We at SimplyBiz have been extensively advising Corporates & NGOs on the CSR compliances applicable to them and responding to specific queries on CSR Rules. In case you are interested in availing our services or have any queries on Corporate Social Responsibility (CSR), please write to us at the mail ID email@example.com or SimplyCorp@simplyBiz.in.