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All About CSR: A Comprehensive Guide for Businesses

Introduction

Corporate Social Responsibility (CSR) has become a fundamental aspect of corporate governance, ensuring that businesses contribute to societal development. In India, CSR is governed by multiple regulations, including the Companies Act, 2013, the Income Tax Act, 1961, and the GST framework. This article provides a detailed breakdown of CSR obligations, calculations, compliance requirements, tax implications, and FAQs for businesses and professionals.

CSR Under the Companies Act, 2013

Applicability of CSR

Section 135 of the Companies Act, 2013 mandates CSR compliance for companies meeting any of the following criteria in the immediately preceding financial year:

  • Net Worth ≥ ₹500 crore
  • Turnover ≥ ₹1,000 crore
  • Net Profit (PBT as per Section 198) ≥ ₹5 crore

CSR Spending Requirement

Eligible companies must spend at least 2% of the average net profits (calculated as per Section 198) of the preceding three financial years towards CSR activities.

Computation of Net Profit for CSR (Section 198 Adjustments)

Net profit for CSR calculation is not simply PBT or PAT. Section 198 of the Companies Act requires adjustments by: ✔ Including income from normal business operations. ❌ Excluding capital receipts, profits from asset sales, and extraordinary incomes.

Formula:
CSR Obligation = 2% × Average Net Profit (as per Section 198) of the Last 3 Years

CSR Activities Allowed

CSR spending must align with Schedule VII of the Companies Act, 2013, which includes:

  • Eradicating hunger, poverty, and malnutrition
  • Promoting education, gender equality, and healthcare
  • Ensuring environmental sustainability
  • Rural development projects, etc.

Modes of CSR Implementation

CSR projects can be undertaken:

  1. Directly by the company
  2. Through Section 8 companies, trusts, or societies registered with MCA for CSR activities
  3. In collaboration with other companies (joint CSR projects)

CSR Reporting & Penalties

Companies must disclose CSR spending in their Board Report and Annual Report.

  • Non-compliance Penalty (if CSR obligation is not spent & unspent amount is not transferred):
    • Company: Fine up to ₹1 crore
    • Officers in Default: Fine up to ₹2 lakh

Taxation Aspects of CSR in India

Income Tax Treatment of CSR Expenses

  1. CSR Expenditure is NOT deductible under Section 37(1) of the Income Tax Act
    • The law explicitly disallows CSR expenses as business deductions since they are not incurred for generating business income.
  2. Deduction under other Sections:
    • Section 80G: Donations to eligible charitable organizations qualify for deductions.
    • Section 35(1)(ii)/(iii): CSR spent on scientific research, rural development, or universities can qualify for weighted deduction.

GST Implications on CSR Expenses

  • Input Tax Credit (ITC) on CSR Expenses:
    • Allowed: If CSR spending is considered as furtherance of business (as per AAR Rulings in some states).
    • Denied: Certain states (like UP AAR) have ruled that CSR does not directly contribute to business and thus ITC is ineligible.
  • GST Applicability on CSR Activities:
    • If goods/services are provided free of cost as CSR, no GST is applicable.
    • If CSR is done through a third-party entity (NGOs, trusts), GST may be applicable on services procured.

Scenarios & Practical Examples

Scenario 1: CSR Calculation for a Company

Company ABC Ltd. has the following net profits (as per Section 198) for the last 3 years:

  • FY 2021-22: ₹8 crore
  • FY 2022-23: ₹10 crore
  • FY 2023-24: ₹12 crore

Average Net Profit: (8+10+12)/3 = ₹10 crore
CSR Obligation: 2% of ₹10 crore = ₹20 lakh

Scenario 2: Tax Treatment of CSR Expense

ABC Ltd. donates ₹5 lakh to an NGO under Section 80G, and spends ₹15 lakh on community healthcare directly.

  • ₹5 lakh donation eligible for 50% deduction under Section 80G.
  • ₹15 lakh spent directly not deductible under Section 37(1).

Frequently Asked Questions (FAQs)

1. What happens if a company does not spend its full CSR amount?

Unspent CSR funds must be transferred to a CSR fund within 6 months from the end of the financial year, or penalties apply.

2. Can CSR expenditure be carried forward to future years?

No. However, excess CSR spending can be set off in subsequent years.

3. Is CSR mandatory for loss-making companies?

No, CSR applies only if net profit exceeds ₹5 crore.

4. Can companies claim ITC on CSR-related purchases?

Some states allow ITC for CSR purchases, but others deny it. Companies should check local AAR rulings before claiming ITC.

5. Is donation under CSR eligible for 80G deduction?

No, CSR expenses cannot be claimed as an 80G deduction, except in specific cases like donations to scientific institutions.

Conclusion

CSR is not just a compliance requirement but an opportunity for businesses to give back to society while maintaining sustainable growth. Companies should ensure compliance with CSR laws, optimize tax benefits, and structure CSR programs effectively. Understanding these aspects helps businesses align social responsibility with financial efficiency.

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