Corporate Social Responsibility: A Complete Guide to Compliance and Reporting in India
In India, Corporate Social Responsibility (CSR) has evolved from a voluntary act of corporate conscience to a significant legal obligation for many businesses. For companies of a certain size, it is no longer a choice but a mandate that requires careful planning, execution,and reporting. Understanding corporate social responsibility compliance is essential not only for avoiding penalties but also for building a powerful brand reputation and contributing to sustainable national growth. Whether you’re a growing business owner wondering about your obligations or an individual keen to understand corporate ethics, this guide breaks down everything you need to know about CSR in India.
What is Corporate Social Responsibility (CSR) in the Indian Context?
Corporate Social Responsibility, as defined under the Companies Act, 2013, is a company’s commitment to operate in an economically, socially, and environmentally sustainable manner. It’s a self-regulating business model that helps a company be socially accountable—to itself, its stakeholders, and the public. This is fundamentally different from simple one-off charity or donations. CSR involves integrating social and environmental concerns directly into a company’s business operations and strategy. India holds a unique position globally, as it was one of the very first countries to make CSR spending and reporting mandatory for qualifying companies. This legal framework has institutionalized the best corporate responsibility practices in India, pushing businesses to look beyond profits and actively contribute to societal welfare in areas like education, healthcare, and environmental protection.
Does CSR Apply to My Company? The Applicability Criteria
The most pressing question for any business owner is whether these mandatory rules apply to them. The provisions for CSR, laid out in Section 135 of the Companies Act, 2013, are triggered if your company meets any one of the following financial thresholds during the immediately preceding financial year.
Net Worth Threshold
Your company falls under the CSR mandate if its total net worth is ₹500 crore or more.
Turnover Threshold
If your company’s turnover is ₹1,000 crore or more, the CSR rules become applicable.
Net Profit Threshold
The most common trigger for many growing businesses is the net profit threshold. If your company has a net profit of ₹5 crore or more, you are required to comply with CSR regulations.
Actionable Tip: As a business owner, it’s crucial to review your financial statements from the last financial year. If you cross even one of these three thresholds, you must start preparing for CSR compliance in the current year. For detailed legal text, you can refer to the official Companies Act, 2013 on the MCA portal.
A Step-by-Step Guide to Corporate Social Responsibility Compliance
Once you’ve determined that your company falls under the CSR net, the next step is to implement a structured compliance process. Following a clear roadmap ensures you meet all legal requirements and your contributions create a meaningful impact. Here is a step-by-step guide to achieving full corporate social responsibility compliance.
Step 1: Constituting a CSR Committee
The first formal step is to establish a CSR Committee of the Board. This committee is responsible for formulating and recommending the CSR policy, recommending the amount of expenditure, and monitoring the policy from time to time.
- Composition: The committee must consist of three or more directors, with at least one director being an independent director.
- Exceptions: For a private company with only two directors on its Board, the CSR Committee can be formed with just those two directors. Similarly, for an unlisted public company or a private company not required to appoint an independent director, the committee can be formed without one.
Step 2: Formulating a CSR Policy
The CSR Committee’s primary task is to create a detailed CSR Policy. This document acts as the guiding framework for all your company’s CSR initiatives. It should be approved by the Board and must clearly outline:
- The company’s CSR vision and objectives.
- A list of CSR projects or programs that the company plans to undertake, aligning with activities specified in Schedule VII of the Companies Act.
- The modalities of execution for these projects (e.g., through a registered public trust, a registered society, or a Section 8 company).
- A robust monitoring process to track the progress of each project.
- The roles and responsibilities of the personnel involved.
Step 3: The 2% Spending Mandate
This is the core financial obligation of CSR. The law mandates that the company’s Board must ensure it spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years. The calculation of “net profit” should be done as per Section 198 of the Companies Act, which excludes certain profits like those from premium on shares and profits on the sale of forfeited shares. This consistent investment ensures that companies make a sustained contribution to social development.
Step 4: Approved CSR Activities (Schedule VII)
You cannot spend your CSR funds on just any social cause. The Companies Act provides a specific list of approved activities in Schedule VII. It’s crucial that your CSR Policy and projects align with these. Following these compliance guidelines for CSR India is non-negotiable. Some of the key areas include:
- Eradicating hunger, poverty, and malnutrition.
- Promoting healthcare, including preventive healthcare and sanitation.
- Promoting education, including special education and employment-enhancing vocational skills.
- Ensuring environmental sustainability, ecological balance, and conservation of natural resources.
- Protection of national heritage, art, and culture.
- Rural development projects.
- Contributions to the PM-CARES Fund or any other fund set up by the Central Government for socio-economic development and relief.
CSR Reporting Requirements India: What You Must Disclose
Effective compliance doesn’t end with spending the money; transparent and accurate reporting is equally critical. The CSR reporting requirements India mandates are designed to ensure accountability and provide stakeholders with a clear view of the company’s social contributions.
The Annual Report on CSR
Every company that falls under the CSR criteria must include a detailed section on CSR in its Board’s Report. This annual report on CSR must be prepared in the format prescribed in the Companies (Corporate Social Responsibility Policy) Rules, 2014. Key components to be disclosed include:
- A brief outline of the company’s CSR policy.
- The composition of the CSR Committee.
- The average net profit for the last three financial years.
- The prescribed CSR expenditure (2% of the average net profit).
- Details of the amount spent on CSR during the financial year.
- If the company has failed to spend the 2%, it must provide reasons for the same in the Board’s report.
Handling Unspent CSR Amounts
The rules for handling unspent CSR funds are very specific and must be followed diligently. If your company fails to spend the full 2% amount, the treatment of the unspent funds depends on the nature of the project.
| Scenario | Action Required | Timeline |
|---|---|---|
| Unspent amount is for an ongoing project | Transfer the amount to a special account called the “Unspent Corporate Social Responsibility Account” opened with a scheduled bank. | Within 30 days from the end of the financial year. |
| Unspent amount is NOT for an ongoing project | Transfer the amount to a Fund specified in Schedule VII (e.g., Prime Minister’s National Relief Fund). | Within six months from the end of the financial year. |
The amount transferred to the Unspent CSR Account for an ongoing project must be spent by the company within a period of three financial years from the date of such transfer.
Understanding CSR Reporting Standards India
While the Companies Act provides the mandatory reporting format, forward-thinking companies often adopt global best practices to enhance their reporting. Following established CSR reporting standards India, such as those developed by the Global Reporting Initiative (GRI) or the Indian Institute of Corporate Affairs (IICA), can significantly boost transparency. These standards help in structuring data, measuring impact more effectively, and building greater trust among investors, customers, and the community.
The Cost of Negligence: Penalties for CSR Non-Compliance
The government has strengthened the penal provisions for CSR to ensure companies take their obligations seriously. Non-compliance is no longer just a matter of “disclose and explain.” The penalties are now significant and apply to both the company and its responsible officers. Adhering to the compliance guidelines for CSR India is crucial to avoid these financial repercussions.
- Penalty on the Company: If a company fails to comply with the rules regarding the transfer of unspent CSR amounts, it shall be liable for a penalty. The fine is twice the amount required to be transferred to the specified Fund in Schedule VII or the Unspent CSR Account, or ₹1 crore, whichever is less.
- Penalty on Officers in Default: Every officer of the company who is in default (which typically includes directors in the CSR committee) will also face a personal penalty. The fine is one-tenth of the amount required to be transferred by the company, or ₹2 lakh, whichever is less.
Conclusion
For Indian businesses of a specified scale, CSR is a multifaceted responsibility that blends legal duty with ethical conduct. The journey starts with understanding the applicability thresholds—a net worth of ₹500 crore, turnover of ₹1,000 crore, or a net profit of ₹5 crore. If your company qualifies, the path involves forming a CSR Committee, drafting a clear policy, dedicating 2% of average net profits to approved activities, and meticulously reporting every detail. Achieving robust corporate social responsibility compliance is not just about ticking a legal box; it is a strategic imperative that fortifies your brand’s reputation, enhances stakeholder trust, and contributes meaningfully to India’s development story.
Navigating corporate social responsibility compliance can be complex. At TaxRobo, our experts can help you understand your obligations, set up your CSR framework, and ensure flawless reporting. Contact us today to ensure your business is compliant and making a positive impact.
FAQs
1. What happens if a company is not able to spend the full 2% CSR amount in a financial year?
Answer: If a company fails to spend the full CSR amount, it must provide specific reasons for not spending the amount in its Board’s Report. Furthermore, the unspent amount must be transferred to the appropriate fund or account. If the amount relates to an ongoing project, it goes to an “Unspent CSR Account” to be used within three years. If not, it must be transferred to a fund specified in Schedule VII (like the PM National Relief Fund) within six months of the financial year’s end.
2. Can the salary paid to our staff be considered part of CSR expenditure?
Answer: No, salaries paid to the regular employees and staff of the company cannot be counted towards CSR expenditure. However, there are two exceptions. Salaries paid to a dedicated CSR team or personnel specifically appointed for CSR implementation are permissible. Additionally, reasonable administrative overheads, which can include staff costs directly related to CSR management, are allowed but are capped at 5% of the total CSR expenditure for that financial year.
3. Do CSR provisions apply to a Section 8 Company or a Trust?
Answer: The applicability of CSR provisions is determined by the financial thresholds (net worth, turnover, or net profit) of a company registered under the Companies Act. Therefore, if a Section 8 company (a non-profit organization) itself meets any of these criteria, it must comply with CSR rules. More commonly, other companies fulfill their CSR obligations by contributing to eligible Section 8 companies, registered public trusts, or registered societies that carry out charitable activities.
4. Can contributions to political parties be considered a CSR activity?
Answer: No. The law is very clear on this. Any amount contributed, whether directly or indirectly, to any political party under Section 182 of the Companies Act, 2013, shall not be considered a valid CSR activity. CSR funds must be used for the social development activities listed in Schedule VII.
