The Ministry (MCA) has issued Frequently Asked Questions (FAQs) on Corporate Social Responsibility (CSR) vide General Circular No. 14 /2021 dated 25th August 2021, in supersession of its earlier Clarifications/FAQs, for better understanding and facilitating effective implementation of CSR.
Some Key insights from FAQs on CSR by MCA are as follows:
1) Applicability of CSR provisions are company specific and CSR provisions are not applicable to a company merely because of applicability of CSR provisions to such company’s holding or subsidiary company.
2) CSR provisions are equally applicable to a Section 8 companies also.
3) CSR provisions are applicable to newly incorporated companies as well, if the criteria under Section. 135(1) is met irrespective of number of financial years it is in existence. However, for the purpose of calculation of CSR spending obligation average Net Profits made during immediately preceding financial year(s) to be considered (1/2/3 years as the case may be).
CSR by company & Government intervention:
4) CSR is a board-driven process; the Government has no direct role in the approval and implementation of the CSR programmes /projects of a company.
5) With effect from 22nd January, 2021 Non-compliance of CSR Provisions will be reckoned as Civil Offence and action can be initiated by the Government as per provisions of the Companies Act, 2013 (the Act) after due examination of records of such non compliant companies, and by following due process of law.
6) CSR should not be interpreted as a source of financing the resource gaps in Government Schemes. However, the Board may undertake similar activities independently.
Calculation of Average Net Profits:
7) i) Average Net Profits to exclude the items specified in Rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014 (viz., profits from overseas Branches & dividends received from other CSR applicable/compliant companies).
ii) Certain additions/deletions (adjustments) to be made while calculating the net profit of a company as per Section 198 (mainly it excludes capital payments/receipts, income tax, set-off of past losses).
iii) Profit Before Tax(PBT) is to be used for computation of net profit under Section 135 of the Act.
Project Cost vis-à-vis Administrative Overheads:
8) i) Project Cost: Expenses which are directly incurred for the designing, implementation, monitoring, and evaluation of a particular CSR project or programme. Expenses which are attributed to the project implementation shall be included in project cost only.
ii) Administrative Overheads: Administrative overheads generally comprise of items such as employee costs, utilities, office supplies, legal expenses, etc.
a) Permissible administrative overheads limit for a financial year is five per cent of the total CSR expenditure of the company.
b) CSR spending under Sec 135 cannot be claimed as business expenditure.
Admissible CSR Expense:
9) With effect from 22nd January, 2021, Contribution to corpus of any entity is NOT an admissible CSR Expenditure.
10) Expenses relating to transfer of capital asset such as stamp duty & registration fees, will qualify as admissible CSR expenditure in the year of such transfer.
11) a) Contributions to the *Funds specified in Schedule VII of the Act shall be admissible as CSR expenditure. Contributions to any other fund(s) is NOT an admissible CSR expenditure
*Funds in Schedule VII of the Act are as follows:
(i) Swachh Bharat Kosh
(ii) Clean Ganga Fund
(iii) Prime Minister’s National Relief Fund (PMNRF)
(iv) Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)
(v) Any other fund set up by the Central Government and notified by the Ministry of Corporate Affairs, for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.
b) The compliance of CSR is fulfilled when the company spends the prescribed amount as per its obligation.
However, in case the company fails to spend the requisite amount within the financial year, it shall fulfill its obligation by transferring the unspent amount to any fund. Further, the Board of the company is required to give the requisite disclosure in the Board report and annual report on CSR.
Excess CSR spending and Set off:
12) Excess CSR spending more than the required can be set off against the requirement of immediately succeeding 3 financial years subject to compliance with the conditions stipulated under rule 7(3). However, excess spent in financial years prior to FY 2020-21 shall not be allowed to carry forward.
Monetization not allowed:
13) CSR contribution CANNOT be in kind and CANNOT be monetized.
14) Involvement of employees in CSR projects of a company cannot be monetized and accordingly cannot be accounted for under the head of ’CSR expenditure.
Local Area preference:
15) The preference to local area in the Act is only directory and not mandatory in nature and companies need to balance local area preference with national priorities.
Self Interest/Brand Building by Company:
16) Companies shall not use CSR purely as a marketing (company’s product or Services) or brand building tool for their business, but brand building as a collateral benefit does not vitiate the spirit of CSR.
17) Registration of implementing agencies on MCA21 portal is aimed at creating a database of such agencies so that companys may engage them and strengthen the CSR eco-system with accountability and transparency.
18) No mandatory requirement of registration of implementation agency on MCA portal for undertaking projects approved between 22nd January, 2021 and 31st March, 2021.
19) Filing e-Form CSR-1 does not arise in case the company carries out CSR activities directly.
20) International organization cannot act as an implementing agency. However, company can engage international organizations for the limited purposes of designing, monitoring, and evaluation of the CSR projects or programmes, or for capacity building of personnel of the company involved in CSR activities.
21) The project should have commenced within the financial year to be termed as ‘ongoing’. An ongoing project will have ‘commenced’ when the company has either issued the work order pertaining to the project or awarded the contract for execution of the project.
22) The time period of an ongoing project cannot be extended beyond its permissible limit i.e., the financial year in which it is commenced +3 financial years.
23) The Board may abandon or modify an ongoing project, partially or wholly, under exceptional circumstances, during the prescribed project period as per the recommendation of its CSR Committee, and by providing reasonable justification to that effect.
24) The budget outlay earmarked/dedicated for one project can be used against another project.
25) Companies are not permitted to spend the unspent CSR amount, which does not pertain to ongoing project, on any CSR activity during the intervening period of six months after the end of the financial year.
26) Mere disbursal of funds for implementation of a project DOES NOT amount to spending unless the implementing agency utilizes the whole amount.
Treatment of Unspent CSR Amount:
27) Company needs to open a separate ‘Unspent CSR Account’ for each financial year w.r.t ongoing project(s) but not for each ongoing project.
28) The amount transferred to ‘Unspent CSR Account’ has to be used only for meeting the expenses of ongoing projects, and not for other general purposes of the company. The special account cannot be used by the company as collaterals or creating a charge or any other business activity.
29) The Board of the company is free to decide the treatment of the unspent CSR amount of previous financial years prior to FY 2020-21. The Board can either transfer the amount to ‘Unspent CSR Account’ or continue as per the previous accounting practices adopted by the company.
30) The penalty does not relieve/absolve the company from the obligations of transferring unspent amounts under Sec 135(5)/135(6).
31) Impact assessment of the CSR projects completed on or after January 22, 2021 is required to be undertaken by applicable companies. However, companies may voluntarily undertake impact assessment of completed projects of previous financial years.
32) Impact assessment reports shall be placed before the Board and shall be annexed to the report on CSR. However, web-link to access the complete impact assessment reports and providing executive summary of the impact assessment reports in the annual report on CSR, shall be considered as sufficient compliance.
33) Impact assessment carried out by one company for the common project may be shared with the other companies for the purpose of disclosure to the Board and in the annual report on CSR, if two or more companies choose to collaborate for the implementation of a CSR project. Sharing of the cost of impact assessment may be decided by such companies subject to their respective limits.
34) A CSR-eligible company shall include an annual report on CSR containing particulars specified in prescribed format.
35) Balance sheet of a CSR-eligible foreign company shall include an annual report on
36) CSR containing particulars specified in prescribed format.
The Board of Directors of the company shall mandatorily disclose composition of the CSR Committee, CSR Policy, & Projects approved by the Board on their website, if any, for public access.
Disclaimer: The above views are the personal views of the author and the Readers are requested to exercise their due diligence before taking action.