Addressing growing concerns that compulsory CSR spending under the Companies Act, 2013, could be used for funding government schemes, the Ministry of Corporate Affairs (MCA) has come out with a detailed Frequently Asked Questions (FAQs) on CSR norms. It says that Companies’ corporate social responsibility (CSR) funds should not be used as a source of funding government schemes, and such spending should have a larger multiplier effect. The Ministry said that such spending cannot be considered as business expenditure and are also not entitled for tax benefits. Additionally contributions made to political parties and projects that benefit only employees of a firm and one-off events like charitable contribution do not qualify as CSR spending under the companies Act.
“CSR should not be interpreted as a source of financing the resource gaps in government scheme,” the Ministry said. “In principle, CSR fund of companies should not be used as a source of funding government schemes. CSR projects should have a larger multiplier effect than that under the government schemes,” it said.
The Ministry noted the objective of CSR provision is in fact to involve the corporates in discharging their social responsibility with their innovative ideas, management skills and with greater efficiency to obtain better outcomes. It said that the board of a company is competent to take decision on supplementing any government scheme, provided that scheme permits corporates’ participation and all provisions of Section 135 are complied with.
Under the Companies Act, certain class of entities have to shell out at least 2% of the previous 3 years average net profit towards CSR activities and is applicable for companies with a net worth of INR 500 Cr or more, turnover of INR 1,000 Cr or net profit of INR 5 Cr or more in any financial year. Providing clarity, the Ministry said ‘average net profit’ for CSR purpose refers to ‘profit before tax’. “Computation of net profit for Section 135 is as per Section 198 of the Companies Act, 2013 which is primarily Profit Before Tax (PBT),” it said. Section 135 and Schedule VII of the Act pertains to CSR activities.
Emphasizing that the government has no role in the monitoring of CSR spending by companies, the Ministry has further clarified that Section 8 or not-for-profit companies are also required to follow the norms.