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In case of companies having multi-locational operations, which local area of operations should the company choose for spending the amount earmarked for CSR operations?
For companies operating in multiple locations, the CSR expenditure should ideally be directed toward areas where the company has the most significant operational presence. Here are some key points to help decide: Core Area of Operations:Companies are encouraged to spend at least 15% of their CSR funRead more
For companies operating in multiple locations, the CSR expenditure should ideally be directed toward areas where the company has the most significant operational presence. Here are some key points to help decide:
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- The location of the main office or headquarters.
- The concentration of the workforce.
- The area where the company’s core production, services, or business activities take place.
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See lessCore Area of Operations:
Companies are encouraged to spend at least 15% of their CSR funds in the area where they have their primary business activities. This is usually determined by factors such as:
Flexibility to Spread Impact:
While a significant portion of CSR spending should target the core area, companies are not restricted to only one location. They can also allocate funds to other areas where they operate if it creates additional social benefits. However, it’s important to ensure that the chosen area reflects the company’s primary business interests and community impact.
Objective of CSR Spending:
The main goal is to generate a positive impact on the local community that is most closely associated with the company’s operations. Thus, the decision should be based on where your company can make the most meaningful contribution.
Documentation and Reporting:
Whatever allocation you choose, maintain clear records. This will help in CSR reporting and ensure compliance with the guidelines under the Companies Act and the associated CSR Regulations.
In case the company has appointed personnel exclusively for implementing the CSR activities of the company, can the expenditure incurred towards such personnel in terms of staff cost etc. be included in the expenditure earmarked for CSR activities?
Yes, if a company has appointed personnel exclusively for implementing its CSR activities, the expenditure incurred on these personnel (such as salaries, wages, and related benefits) can be included as part of the CSR expenditure. Here’s what you need to know: Key Points: Exclusive Engagement:The stRead more
Yes, if a company has appointed personnel exclusively for implementing its CSR activities, the expenditure incurred on these personnel (such as salaries, wages, and related benefits) can be included as part of the CSR expenditure. Here’s what you need to know:
Key Points:
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See lessExclusive Engagement:
The staff must be exclusively engaged in CSR-related activities. Their work should directly contribute to the implementation, monitoring, or administration of CSR projects.
Direct Attribution:
Only those expenses that are directly attributable to CSR activities can be included. This means that if an employee is working solely on CSR projects, their compensation, travel, and other expenses may be counted as part of CSR spending.
Proper Documentation:
It’s crucial to maintain clear records and segregate these costs in your accounts. Proper documentation will help substantiate that these expenditures are solely for CSR purposes if ever reviewed by regulators.
Compliance with CSR Mandates:
Even though these personnel costs are allowed as CSR expenditure, they must still fall within the overall CSR spending limits and guidelines set under Section 135 of the Companies Act, 2013.
Are the provisions with regard to CSR applicable to foreign companies?
The CSR (Corporate Social Responsibility) provisions under the Companies Act, 2013 are designed for companies that are incorporated in India. This means: Indian-Incorporated Companies:Companies that are incorporated in India and meet the financial thresholds (net worth, turnover, or net profit) mustRead more
The CSR (Corporate Social Responsibility) provisions under the Companies Act, 2013 are designed for companies that are incorporated in India. This means:
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See lessIndian-Incorporated Companies:
Companies that are incorporated in India and meet the financial thresholds (net worth, turnover, or net profit) must comply with the CSR requirements as specified under Section 135.
Foreign Companies:
Pure foreign companies (i.e., companies not incorporated in India) are not required to follow the CSR provisions under the Companies Act, 2013.
Indian Subsidiaries of Foreign Companies:
However, if a foreign company has a subsidiary or branch incorporated in India, that entity must comply with the CSR requirements if it meets the prescribed thresholds.
Where CSR activities lead to profits, how should such profits be treated?
CSR (Corporate Social Responsibility) activities are primarily undertaken for social welfare rather than for profit-making. However, in some cases, a CSR initiative might generate a surplus or profit. Here’s how such profits should be treated: 1. Separation from CSR Mandated Spend CSR Obligation RemRead more
CSR (Corporate Social Responsibility) activities are primarily undertaken for social welfare rather than for profit-making. However, in some cases, a CSR initiative might generate a surplus or profit. Here’s how such profits should be treated:
1. Separation from CSR Mandated Spend
Even if a CSR project generates a profit, the company’s obligation to spend at least 2% of its average net profit on CSR (as per Section 135) remains unaffected.
The profits earned from CSR activities cannot be set off against the mandated CSR expenditure.
2. Treatment as Business Income
Any profit arising from a CSR activity is treated as ordinary business income of the company.
Such profits are subject to tax in the usual manner, just like income from any other business venture.
3. Reinvestment Option
Although the profits must be taxed as business income, companies may choose to reinvest these funds in further CSR initiatives.
Reinvesting the profit does not provide an additional tax deduction specifically for the fact that it originated from a CSR activity.
Key Takeaways
- Mandatory CSR Spend Unaffected:
- Separate Accounting:
- Taxation as Usual:
See lessEven if a CSR project is profitable, the company must still meet the prescribed CSR spending obligation.
Profits from CSR activities should be accounted for as part of the company’s overall business income.
These profits are taxed at the applicable corporate tax rates.
What is the applicability of Section 135 of the Companies Act, 2013?
Section 135 of the Companies Act, 2013 lays down the provisions for Corporate Social Responsibility (CSR). It specifies which companies are required to undertake CSR activities, along with the extent of expenditure. Here’s what you need to know: Who Is Covered Under Section 135? A company is requireRead more
Section 135 of the Companies Act, 2013 lays down the provisions for Corporate Social Responsibility (CSR). It specifies which companies are required to undertake CSR activities, along with the extent of expenditure. Here’s what you need to know:
Who Is Covered Under Section 135?
A company is required to comply with Section 135 if, in any financial year, it satisfies any one of the following thresholds based on its immediately preceding financial year:
The company’s net worth is ₹500 crores or more.
The company’s turnover is ₹1,000 crores or more.
The company’s net profit is ₹5 crores or more.
Key Points:
Applicability to Both Public and Private Companies:
Both public and private companies meeting these financial thresholds must adopt a CSR policy and spend at least 2% of their average net profit (calculated over the preceding three financial years) on eligible CSR activities.
CSR Committee:
Such companies must form a CSR Committee (which must include at least one independent director) to oversee CSR activities and ensure transparency.
Exclusions:
Certain companies, like dormant companies or those falling under specific exemptions, may not be required to comply with CSR provisions even if they meet the financial criteria.
Year-by-Year Assessment:
The CSR obligation is determined annually based on the financial performance of the company in the immediately preceding financial year. If a company falls below the threshold in subsequent years, the CSR mandate does not apply for those years.
Summary Table
If any one of these criteria is met in the immediately preceding financial year, the company is obligated to implement CSR activities as per Section 135.
Conclusion
Section 135 applies to companies (both public and private) that meet the above financial thresholds. If a company qualifies, it must form a CSR Committee, develop a CSR policy, and spend at least 2% of its average net profit (from the past three years) on projects listed under Schedule VII of the Act.
See lessDoes ‘any financial year’ mentioned in section 135(1) mean at any time in the history of the company.
No, the phrase “any financial year” in Section 135(1) of the Companies Act, 2013 does not mean that the CSR obligation applies for every financial year throughout the entire history of the company. Instead, it means that the CSR provisions are applicable in any particular financial year during whichRead more
No, the phrase “any financial year” in Section 135(1) of the Companies Act, 2013 does not mean that the CSR obligation applies for every financial year throughout the entire history of the company. Instead, it means that the CSR provisions are applicable in any particular financial year during which the company meets the prescribed thresholds.
Key Points to Understand:
Assessment Based on Specific Years:
The CSR obligation is determined by checking whether the company satisfies certain criteria (such as net worth, turnover, or profit thresholds) in the immediately preceding financial year or on an average over the preceding three years. It’s not a lifetime condition based on one single financial year from the company’s inception.
Yearly Evaluation:
For each financial year, the company’s performance is evaluated. If in that financial year (or in any of the relevant preceding years) the thresholds are met, then the company is required to spend the prescribed percentage on CSR activities for that year.
Not an “Evergreen” Obligation:
If the company’s performance later falls below the thresholds, the CSR obligation may no longer apply for those subsequent financial years.
Conclusion:
The term “any financial year” refers to the fact that the CSR requirement is assessed on a year-by-year basis (or using the average of specific recent years), rather than implying that CSR spending is mandatory for every financial year in the entire history of the company.
See lessIs CSR mandatory for private companies also?
CSR (Corporate Social Responsibility) is not automatically applicable to all companies—it depends on whether a company meets certain financial thresholds specified in Section 135 of the Companies Act, 2013. This applies to both public and private companies. Key Points: Mandate Criteria:CSR is mandatRead more
CSR (Corporate Social Responsibility) is not automatically applicable to all companies—it depends on whether a company meets certain financial thresholds specified in Section 135 of the Companies Act, 2013. This applies to both public and private companies.
Key Points:
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- Net Worth: ₹500 crores or more
- Turnover: ₹1,000 crores or more
- Net Profit: ₹5 crores or more
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- Many smaller private companies may not meet these thresholds and, therefore, are not required to comply with CSR provisions.
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See lessMandate Criteria:
CSR is mandatory for a company if, in the immediately preceding financial year, it meets any of these thresholds:
For Private Companies:
If a private company meets any of the above criteria, it is required to have a CSR policy and spend the prescribed percentage of its profits on eligible CSR activities.
Reporting:
Companies subject to CSR must disclose their CSR activities in their Annual Report and Directors’ Report, even if they are private companies.