Corporate Social Responsibility (CSR) became a mandatory obligation for certain companies in India with the introduction of the Companies Act, 2013. This landmark legislation transformed CSR from a voluntary initiative to a statutory requirement, making India one of the first countries globally to legislate corporate giving.
What is CSR Under the Companies Act?
The Companies Act, 2013, particularly Section 135, mandates that qualifying companies must spend a portion of their profits on social welfare initiatives. This provision aims to ensure that the corporate sector contributes to national development and social welfare objectives.
Companies That Must Comply
The CSR provisions apply to companies that meet any of these criteria during the preceding financial year:
- Net worth of ₹500 crore or more
- Turnover of ₹1,000 crore or more
- Net profit of ₹5 crore or more
If the amount to be spent by the Company does not exceed Rs. 50 Lacs, constitution of CSR shall not be required and functions of such Committee shall be discharged by the Board of Directors.
Key Requirements Under Section 135
1. CSR Committee Formation
Every qualifying company must constitute a CSR Committee consisting of:
- At least three directors, with 1 Independent Director (for companies requiring independent directors)
- At least two directors (for other companies)
If a Company has any amount in its Unspent Corporate Social Responsibility Account, it shall constitute a CSR Committee.
2. Mandatory Spending
Companies must spend at least 2% of their average net profits made during the 3 immediately preceding financial years on CSR activities.
3. CSR Policy
The CSR Committee formulates and recommends a CSR Policy to the Board, which outlines the activities to be undertaken and the monitoring mechanisms.
4. Disclosure Requirements
Companies must disclose their CSR activities in the annual board report, including:
- Composition of the CSR Committee
- CSR Policy overview
- Projects approved
- Amount spent on projects
- Reasons for unspent amounts (if applicable)
Eligible CSR Activities
Schedule VII of the Act outlines the areas where CSR funds can be utilized.
Click here to read the list of activities allowed under Schedule VII.
Compliance and Reporting
Annual Reporting
Companies must include a detailed report on CSR activities in their annual board report, specifying:
- Brief outline of the CSR policy
- Composition of the CSR Committee
- Web-link to CSR policy and projects
- Amount spent on CSR and implementation details
- Amount unspent (if any) and reasons thereof
CSR-1 Form
Implementation agencies must register with the Ministry of Corporate Affairs by filing form CSR-1, which is mandatory for all entities through which companies implement their CSR activities.
CSR-2 Form
From FY 2021-22, companies must file an annual report on CSR activities in form CSR-2, providing comprehensive details of their CSR initiatives.
Non-Compliance Consequences
Financial Penalties
- The company is liable to a penalty ranging from twice the unspent amount or ₹1 crore, whichever is less
- Officers in default may face penalties up to one-tenth of the unspent amount or ₹2 lakhs, whichever is less
Disclosure Requirements
Companies failing to spend the mandated amount must disclose reasons in their board report, which can affect their public image and stakeholder relations.
Best Practices for CSR Implementation
- Strategic Alignment: Align CSR initiatives with the company’s core competencies and business objectives
- Due Diligence: Conduct proper assessment of implementing partners
- Impact Measurement: Develop robust metrics to measure the social impact
- Transparency: Maintain clear documentation and reporting of all CSR activities
Frequently Asked Questions (FAQs)
Q1: Can CSR funds be used for activities outside India?
A: No, CSR activities must be undertaken within India. The only exception is for training of Indian sports personnel representing any state or the country at national or international level.
Q2: Are all companies required to constitute a CSR Committee?
A: Only companies meeting the threshold criteria (net worth ≥₹500 crore, turnover ≥₹1,000 crore, or net profit ≥₹5 crore) must constitute a CSR Committee. Companies with CSR obligation below ₹50 lakhs are exempted from forming a committee.
Q3: What happens if a company doesn’t spend the prescribed CSR amount?
A: Unspent CSR funds must be transferred to a special account. For ongoing projects, the unspent amount must be transferred to an “Unspent CSR Account” within 30 days of the end of the financial year and spent within three years. For non-ongoing projects, unspent amounts must be transferred to funds specified in Schedule VII within six months of the end of the financial year.
Q4: Can a company implement CSR activities through its own foundation?
A: Yes, companies can implement CSR activities through their own foundations or Section 8 companies, provided these entities are registered with the Ministry of Corporate Affairs by filing form CSR-1.
Q5: Is contribution to the Prime Minister’s Relief Fund eligible as CSR?
A: Yes, contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development is recognized as an eligible CSR activity under Schedule VII.
Q6: Can CSR funds be used for employee benefit?
A: No, activities benefiting only the employees of the company and their families are not considered CSR activities.
Q7: How should capital assets created through CSR be treated?
A: As per the 2021 amendment rules, capital assets created through CSR must be held by: (a) a company established under Section 8 of the Act, or a registered public trust or registered society with charitable objectives and CSR registration, (b) beneficiaries of the CSR project, such as self-help groups or public authorities.
Q8: Can political contributions qualify as CSR?
A: No, contributions to political parties do not qualify as CSR expenditure.
Q9: Is CSR spending tax-deductible?
A: CSR expenditure is generally not tax-deductible under Section 37 of the Income Tax Act. However, specific deductions may be available under other sections depending on the nature of the activity.
Q10: Can surplus arising from CSR activities be added back to business profits?
A: No, any surplus generated from CSR activities must be ploughed back into the same project or transferred to the Unspent CSR Account and spent as per CSR Policy and annual action plan, or transferred to a Fund specified in Schedule VII.
Conclusion
The CSR provisions under the Companies Act, 2013, represent a significant shift in corporate governance in India, establishing a framework for businesses to contribute meaningfully to social development. While compliance requirements are stringent, they provide an opportunity for companies to create lasting positive impact while enhancing their reputation and stakeholder relations.
Companies that approach CSR strategically—rather than as mere compliance—stand to gain substantial benefits in terms of brand value, employee engagement, and community goodwill, while contributing to sustainable development goals.
This blog is for informational purposes only and does not constitute legal advice. For specific legal guidance related to your company’s CSR obligations, please consult with a qualified legal professional.
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