- Goutham Ravikumar
Corporate Social Responsibility
Corporate Social Responsibility or otherwise called as the CSR has become a part of the companies and the corporate world in most of the countries and is also considered as a voluntary, self-regulated and beyond the scope of legislation. This concept of CSR is usually associated with companies voluntarily undertaking activities to achieve social and environmental objectives that are present during the course of their daily business operations.
On the 1st April, 2014 India became the first country to mandate this Corporate Social Responsibilities activities as the Indian Companies Act 1935.
As per this Act, it is mandatory for the companies of certain turnover and profitability to spend two percent of their average net profits of the past threes years on CSR activities.
According to the United Nations Industrial Development Organisation, Corporate Social Responsibility is a management concept whereby all the companies integrate and identify social, environment and managerial concerns in their business operations by interacting with their stakeholders and other related parties. CSR is generally understood as being the way in which a company achieves a balance of economic, environmental and social imperatives.
Theirs nothing new in the concept of companies acting responsible but through the term corporate social responsibility (CSR) it has taken on a modern meaning. For bigger companies, corporate responsibility won a greater meaning and harsh working conditions prompted a growth of the issue in the collective consciousness.
Enactment of the Company Act
With the enactment of the Companies Act, 2013 by the Ministry of Corporate Affairs, it has now become mandatory for companies to take up CSR projects on Social Welfare activities. India is the only country which has regulated and mandated the implementation of CSR activities for certain categories in the companies.
In the present times, the grace of CSR activities has grown manifold and is playing a very important role in achieving the sustainable development goals and private-public partnership in nation-building. Even during this harsh times of the pandemic that has hit the entire world, CSR has helped in the development of the country.
During the COVID-19 pandemic, CSR has played a vital role with the corporates and individuals having been undertaking the corporate social responsibility projects over and above the minimum criteria determined by the law. Corporates have put a step ahead and have stood by the Government during the time of crisis to strengthen the country both socially and economically.
CSR in India and the Law
The law that stipulates the CSR activities should be undertaken only in the type of a project or a program, this law also provides a detailed guidelines regarding what kind of activities are eligible under this law. This law also talks about the various important and frequently happening crisis such as: hunger and poverty, education, health, gender equality and women empowerment, skills training, environment, social enterprise projects and other promotion of rural and national sports.
The ratio between the total number of companies and the number of companies actually conducting the CSR activities have conflicting figures i.e., on an average only 16,000-17,000 companies out of the 6,00,000 registered companies are conducting such activities. Just like the companies and the participation ratio, the companies and the amount spending ratio also comes upto 10,000 - 20,000 crore rupees or between one and a half to three billion USD (this is not an exact figure though and might vary).
CSR and Company
With the increasing importance of the CSR activities, it is highly important to set up certain guidelines with regards to the type of industry and related professionals on the accounting aspects of the amount spent for conducting these kind of activities, which can be also called as the CSR expenditure.
The board as to ensure that the company spends in at least 2% of the average net profits of the company made during the three immediately preceding financial years from the time of incorporation towards the Corporate Social Responsibility(CSR) in pursuance of its policy in this regard.
According to Section 135(5) of the Companies Act, 2013, it is required that the board of every eligible company shall ensure that the company spends in every financial year at least 2% of the average net profits of the company made during the three immediately preceding the financial years towards the conduct of the CSR activities. This act also says that, “if a company fails to spend such amount, the Board shall in its reports specify the reason for not spending the amount”.
When a company spends more than the required amount under the the law, a question arises as to whether the excess amount spent can be carried forward to be adjusted against amounts to be spent on CSR activities in the future period of time. In such cases wherein the companies are required to spend 2% profits out of the net profits earned from the immediately preceding the previous year or where the company has not yet completed the period of three financial years from the time of incorporation, during such immediately preceding financial years, in these two cases, the companies are not allowed to set off such excess amount against the requirement to spend under this sub-section.
Unspent CSR Account
The Amendment Act 2019, had introduced a new concept wherein if any amount unspent or the amount from the total allocated amount for the CSR activities remains unspent, the company is required to transfer the amount to a special account called as the Unspent Corporate Social Responsibility account within 30 days from the end of the financial year. This account can be opened in any of the scheduled banks under this act.
Penalty Amount in certain cases:
The Amendment Act, 2020 acts as the replacement of the penalty section inserted by the Amendment Act, 2019. This Act states that if at all a company defaults in complying with the provisions of spending the required amount:
The company shall be liable to: (a) a penalty of twice the amount required to be transferred by the company to the fund that is actually specified in the Schedule or the Unspent Corporate Social Responsibility Account; or (b) Rupees One Crore which ever is less; and
Every person of the company who is included or are related to this shall be liable to: (a) a penalty of one-tenth of the amount required to be transferred by the company to such fund specified in the Schedule, or to the Unspent Corporate Social Responsibility account; or (b) Rupees Two Lakhs, whichever is less.
Amendments in the Pipeline
With a view to the further streamline in the CSR related provisions, the Government of India has now proposed the Draft Companies Rules, 2020 and invited comments from the public and stakeholders with respect to the same. Theses Draft Rules speaks about the amends, amongst other things, CSR policy, what is meant by ongoing projects and the requirement to undertake an impact assessment for certain companies etc. Although the final form that these Draft Rules will take is still uncertain and is eagerly awaited.
Note: The content and the Acts at certain part of this blog is taken from various sources and are not own.