When determining a company’s obligation for Corporate Social Responsibility (CSR) under Section 135(5) of the Companies Act, 2013, the “average net profit” is generally calculated on the basis of net profit before tax.

Key Points:

• Accepted Practice:
  Although the statute does not explicitly state “before tax” or “after tax,” the common interpretation—and the practice followed by most companies—is to use net profit before tax. This approach is supported by guidelines issued by the Ministry of Corporate Affairs.

• Rationale:
  Using net profit before tax provides a more consistent measure of a company’s performance because it is not affected by variations in tax rates or tax planning strategies. This ensures that the CSR obligation is based on the company’s true operating performance.

• Implication for CSR:
  The average net profit calculated over the preceding three financial years (using the before-tax figures) is compared against the prescribed threshold to determine if a company is required to spend on CSR activities.

Conclusion:

For CSR compliance under Section 135(5), companies use net profit before tax as the basis for calculating the average net profit. This is the prevailing interpretation and practice to ensure consistency and transparency in assessing CSR obligations.