The Companies Act 2013 introduced several changes that companies were bound to adopt, with Section 135 being no exception. This section had mandated corporate social responsibility spending by companies meeting the following criteria:
- Companies with a net worth of Rs 500 crore or more
- Or, companies with a turnover of Rs 1000 crore or more
- Or, companies with a net profit of Rs 5 crore or more
In every financial year, all eligible companies are required to spend two per cent of their average net profit earned in the three preceding financial years. However, if they are unable to spend the required amount, they need to give reasons for their inability to spend the amount. Furthermore, a committee has to be formed with at least three directors, with one being an independent director.
The companies worst hit were small and medium enterprises (SMEs) as the section was triggered for a lot of them due to the criteria of the profit being greater than Rs five crore. Earlier, CSR spending in India was considered a philanthropic activity. So, it was more like a voluntary spending towards society rather than a mandatory expenditure.It ultimately also led to limited disclosures.
The introduction of this section has not only brought greater responsibility for companies to give back to the community but also increased the transparency of the expenditure made. This is evident from the elaborate information about CSR activities available in annual reports of companies.
When it comes to CSR expenditure, this section has directed companies to focus on their surrounding areas of operations first. Furthermore, CSR spending can be made on as many as 11 activities specified under the section, including promoting education, gender equality (setting up homes and hostels for women and orphans, etc), contributing to various government funds, such as the "Clean Ganga Fund," to name a few. However, spending on activities other than the specified ones would not be considered as CSR expenditure.
To make matters worse, even though CSR expenditure would decrease profits and cash flows for the year it was incurred (as it is classified under "other expenses" in the P&L), they are not tax-deductible, as clarified by the Central Board of Direct Taxes (CBDT).
A total of 1,280 listed companies are eligible as per the criteria defined in the section. Out of them, only 500 companies, i.e. only 39 per cent, are compliant and spend the required two per cent of their three-year average net profit on CSR-related activities. Currently, there is an unspent amount of Rs 1500 crore, even though 5 years have passed since the section came into effect. The following table lists companies that have not spent the required amount on CSR activities, as per the latest annual report data available.
According to the latest media reports*, the cabinet has approved certain changes in the section, which has brought CSR in the limelight once again. The government has proposed making it mandatory to transfer the unspent amount to a separate bank account and any amount unspent in that account after three years will be transferred to the National CSR fund, set up by the government. Furthermore, a penalty has been proposed for non-compliance. As such,companies will no longer be able to evade this section with a mere explanation and the unspent amount of the mandatory CSR will result in actual cash outflow.
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