Corporate Social Responsibility (CSR) in India: A Comprehensive Guide

Introduction: Corporate Social Responsibility (CSR) has evolved from simple philanthropic activities to a structured way of doing business with a clear focus on social and environmental impacts. With specific legal frameworks governing CSR in India, it becomes crucial for businesses to understand its various facets.

1. Fundamentals of CSR:

• Corporate Social Responsibility(‘’CSR”) is the corporate initiative to assess and take responsibility for the company’s effects on the environment and its impact on social welfare .
• The origin of CSR can be traced to philanthropic activities of corporations through donations and charity. CSR is not charity or mere donations but it is a way of conducting business, by which corporate entities visibly contribute to the social great. CSR is used to integrate economic, environmental and social objectives with the company’s operations and growth.

2. Company Law Perspective on CSR:

• In India the scope of CSR is dealt under Section 135 of Companies Act 2013 read with Schedule VII and Companies (Corporate Social Responsibility policy) Rules 2014 are the special provisions under the new company law regime.
• Section 135 of Companies Act 2013 states every company having
• Net profit of Rs 5 crores or more or
• Net worth of Rs 500 crores or more or
• Turnover of Rs 1000 crores or more

The figures pertaining to Net profit, Net worth, turnover, shall be based on audited financial statement pertaining to previous financial year. If any one criteria is satisfied then CSR comes into play

• Every Company includes holding or subsidiary and a foreign company having its branch office or project office in India which satisfies any one criteria also needs to comply with the same. It also includes Section 8 Company as defined under Companies Act shall also comply with corporate social responsibility if fulfiller any one criteria.
• It also clearly stated that merely because holding company satisfies the CSR conditions and the subsidiary does not then for subsidiary CSR is not applicable.
• If CSR becomes applicable then CSR committee has to be constituted with three or more directors (including at least one independent director). On the other hand if Company is not required to appoint an independent director then CSR committee shall be formed with 2 or more directors.
• Every company shall spend in every financial year at least two percent of the average net profit of the company made during the three immediately preceding financial year (or where company has not completed the period of three financial years since its incorporation during such immediately previous financial years) by giving preference to local area and the area which it operates.
• If the company spends an amount in excess of the prescribed criteria it may be set off such excess amount against the requirement to spend for such number of succeeding financial years and in such manner as can prescribed. If the company decides not to carry forward such excess spend in full or in part the same to the extent not carry forward to be recognize as expense.
• Where the amount to be spent by a Company does not exceed 50 lakhs then the requirement of the CSR shall not be applicable and functions shall be discharged by the board.
• The board shall approve disclose CSR policy and ensure undertaking of CSR activities and spending of amount. It shall transfer unspent amount within 30 days from the end of financial year to ‘unspent CSR A/c opened for that financial year. The same shall be spend within 3 financial years from date of transfer if the same is not spend then transfer the same to a fund specified in schedule VII within 30 days from date of completion of the 3^rd financial year.
• The CSR activities shall be undertaken by the company as per CSR policy and shall undertake through company established under section 8 or trust or society established by the company or central government. Merely incurring CSR expenditure at concessional rates or activities in the ordinary course of business cannot be constituted as CSR expenditure. It is also clarified that CSR programs or activities that benefit only the employees and families not considered as CSR activities. Contribution of any amount directly or indirectly to political party not considered as CSR activity. Expenditure made in kind cannot qualify as CSR spend.
• To book an expenditure towards CSR now 2% of total expenditure for that FY or 50 lakhs, whichever is higher.
• If a company default in complying 135(5),135(6) the company shall be liable for a penalty of twice the amount required to be transferred by the company to the fund or unspent CSR responsibility or one core which is less. In addition to every officer who in default shall be liable for a penalty of one tenth amount required to be transferred by the company to such fund specified in schedule VII, or the unspent Corporate social responsibility account as case may be or two lakhs which is less.

3. Auditing Perspective of CSR:

• As per Clause (xx) of CARO 2020 the auditor shall check
• whether, in respect of other than ongoing projects, the company has transferred unspent amount to a Fund specified in Schedule VII to the Companies Act within a period of six months of the expiry of the financial year in compliance with second proviso to sub-section (5) of section 135 of the said Act;
• whether any amount remaining unspent under sub-section (5) of section 135 of the Companies Act, pursuant to any ongoing project, has been transferred to special account in compliance with the provision of sub-section (6) of section 135 of the said Act;

4. Accounting Perspective on CSR:

• CSR in cash

CSR expenditure A/c DR

To Bank/cash

• CSR in kind

CSR expenditure A/c DR

To purchase /cost of goods consumed

• CSR spends in excess of the amount

CSR expenditure A/c DR

To Cash/Purchase/good consumed

To CSR to be deposited in fund

• CSR not fully spend for an ongoing project

CSR expenditure A/c DR

To Cash /Purchase /good consumed

To CSR to be ongoing project

• CSR when spent in excess in advance

CSR expenditure A/c DR

CSR pre-spent A/c DR

To Cash /purchase /good consumed

5. Income Tax Perspective on CSR:

• CSR expenditure which is of the nature described in Section 30 to Section 36 of Income-Tax Act(‘’IT ACT”) shall be allowed as a deduction provided that utilized for the purpose meant. If CSR expenditure is of nature under section 37 then no deduction shall be allowed.
• The expenditure incurred for CSR is allowed as deduction and no disallowance can be invoked. The donation which made under to CM relief fund is allowable as deduction. (Security Printing Minting Corporation vs. Add CIT (ITA NO 272/del/2019)(AY 2014-15).(Delhi ITAT)
• On account of Covid 19 Pandemic the donation were given to PM cares fund and state disaster management authority the same is not allowed as a deduction while computing business income but the same is allowed as a deduction under 80G of IT ACT.
• Donation to chief minister relief fund or state relief fund do not qualify as CSR expenditure.
• The requirement for Section 37(1) and 80 G are different but notwithstanding two are mutually exclusive. Thus these are overlapping areas between the donations given by the assessee  and the business expenditure incurred by the assesse. In other words though there are certain amount though in the nature of donations and nonetheless the amounts may be deductible under section 37(1) as well.
• Companies which are governed by Minimum alternative tax may not have direct impact on account of CSR expenditure since such expenditure is allowable as deduction while computing book profit. However such CSR expenditure may impact the carry forward of MAT credit in the hands of such companies.

6. GST Implications on CSR:

• To claim Input tax credit on corporate social responsibility relating to inwards supplies fundamental check has to be made as to whether expenses incurred in further course of business and whether it is blocked under section 17(5) of CGST act 2017.
• Based on case law of Essel Propack limited vs Commissioner of CGST it was held that CSR expenses are those incurred in the furtherance of business.
• ITC can be taken on CSR expenses if expenses do not fall under Blocked entity as laid under Section 17(5) as laid that work contract services when supplied for construction of immovable property (other than Plant machinery) except where it is an input service for further supply of work contract service.

Conclusion: CSR, in India, is not just a moral responsibility but a structured mandate with clear legal, accounting, and tax implications. By understanding its multifaceted nature, companies can better align their business goals with broader societal and environmental objectives.