Ministry of Corporate Affairs (hereinafter referred to as “MCA”) has issued General Circular No. 01/2016 dated January 12, 2016 on Frequently Asked Questions (hereinafter referred to as “FAQs”) with regard to Corporate Social Responsibility (hereinafter referred to as “CSR”) under section 135 of the Companies Act, 2013 (hereinafter referred to as “the Act”) . MCA has clarified many grey areas which were not defined earlier to this circular, however there are still many practical issues which are yet to be resolved.
Section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies CSR Policy Rules, 2014 read with General Circular No. 21/2014, Dated: 18th June, 2014 issued by the Ministry of Corporate Affairs, provide the broad contour within which eligible Companies are required to formulate their CSR policies including activities to be undertaken and implement the same in the right earnest.
To facilate the effective implementation of CSR, I would like to reproduced FAQs by including common queries of Corporates and professionals.
Q1. Whether CSR expenditure of a company can be claimed as a business expenditure?
A1. The amount spent by a company towards CSR cannot be claimed as business expenditure and the same has been mentioned in the Finance Act, 2014
Q2. What tax benefits can be availed under CSR?
A2. While no specific tax exemption has been extended to expenditure incurred on CSR, spending on several activities like contributions to Prime Minister’s Relief Fund, Scientific Research, Rural development projects, skill development projects, agricultural extension projects, etc. which find place in Schedule VII, already enjoy exemptions under different sections of the Income Tax Act, 1961
Q3. Which activities would not qualify as CSR?
A3. The following activities would not be covered under CSR:
- The CSR projects or programs or activities that benefit only the employees of the company and their families.
- One- off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc.
- Expenses incurred by companies for the fulfilment of any other Act/ Statue of regulations (such as Labour Laws, Land Acquisition Act, 2013, Apprentice Act, 2013, Apprentice Act, 1961 etc.)
- Contribution of any amount directly or indirectly to any political party.
- Activities undertaken by the company in pursuance of its normal course of business.
- The project or programmes or activities undertaken outside India.
Q4. Can contribution of money to a Trust/ Society/ Section 8 Companies by a Company be treated as CSR expenditure of the Company?
A4. It has been clarified that contribution to Corpus of a Trust/ Society/ Section 8 companies etc. will qualify as CSR expenditure as long as:
- The trust/ Society/ Section 8 company etc. is created exclusively for undertaking CSR activities; or
- Where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the Act.
Q5. Whether it is mandatory for Foreign Company to give report on CSR activity?
A5. In case of a foreign company, the balance sheet filed under sub-clause (b) of sub-section (1) of section 381 shall contain an Annexure regarding report on CSR.
Q6. If a Company spends in excess of 2% of its Average Net Profits of three preceding years on CSR in a particular year, can the excess amount spent be carried forward to the next year and be offset against the required 2% CSR expenditure of the next year?
A6. Any excess amount spent (i.e., more than 2% as specified in Section 135) cannot be carried forward to the subsequent years and adjusted against that year’s CSR expenditure.
Q7. Can the unspent amount from out of the minimum required CSR expenditure be carried forward to the next year?
A7. The Board is free to decide whether any unspent amount from out of the minimum required CSR expenditure is to be carried forward to the next year. However, the carried forward amount should be over and above the next year’s CSR allocation equivalent to at least 2% of the average net profit of the company of the immediately preceding three years.
Q8. Whether involvement of employees of the Company in CSR project/ programme of a Company can be monetized and accounted for under the head of ‘CSR expenditure’?
A8. Contribution and involvement of employees in CSR activities of the company will no doubt generate interest in CSR work and promote transformation from 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. However, monetization of pro-bono services of employees would not be counted towards CSR expenditure.
Q9. Who is the appropriate authority for approving and implementation of the CSR programmes/projects of a Company? What is government’s role in this regard?
A9. Government has no role to play in this regard. All CSR programmes/ projects should be approved by the Boards on the recommendations of their CSR Committees. Changes, if any, in the programme / project should also be undertaken only with the approval of the Committee / Board.
This MCA circular is very helpful for each one of us as there was no clarity provided on many matters due to which everyone has their own interpretation.
Now that things have been clarified, one can refer the same and proceed accordingly.
This document is intended to give an overview on ‘FAQs regard to CSR’ issued by MCA and should not be regarded as offering a complete explanation of the matters referred to. The contents of this document are solely for informational purpose.
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