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Corporate Social Responsibility (CSR) and the Union Budget 2019-20

  May 27, 2020

Corporate Social Responsibility (CSR) and the Union Budget 2019-20

What is Corporate Social Responsibility (CSR)?

Corporate Social Responsibility (CSR) is a concept that suggests that it is the responsibility of the corporations operating within society to contribute towards economic, social and environmental development that creates positive impact on society at large. The concept revolves around that fact the corporations needs to focus beyond earning just profits. The term became popular in the 1960s and now is formidable part of business operations. 

Why should the company take up CSR?

Companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (“Triple-Bottom-Line-  Approach”), while at the same time addressing the expectations of shareholders and stakeholders. 

How is it different from charity?

It is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy. Even though the latter can also make a valuable contribution to poverty reduction, will directly enhance the reputation of a company and strengthen its brand, the concept of CSR clearly goes beyond that. CSR funds come from company finances and charity/philanthropy is personal.

What benefits will it bring to companies?

A properly implemented CSR concept can bring along a variety of competitive advantages, such as enhanced access to capital and markets, increased sales and profits, operational cost savings, improved productivity and quality, efficient human resource base, improved brand image and reputation, enhanced customer loyalty, better decision making and risk management processes.

Is it mandatory under Indian law?

Companies Act, 2013 is a landmark legislation that made India the first country to mandate and quantify CSR expenditure. The inclusion of CSR is an attempt by the government to engage the businesses with the national development agenda. The details of on corporate social responsibility is mentioned in the Section 135 of the Companies Act, 2013.

What are the criteria?

The Act came into force from April 1, 2014, every company, private or public limited, foreign or domestic, which either has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on Corporate social responsibility activities. The CSR activities in India should not be undertaken in the normal course of business and must be with respect to any of the activities mentioned in Schedule VII of the act.

The corporations are required to setup a CSR committee which designs a CSR policy which is approved by the board and encompasses the CSR activities the corporations is willing to undertake. The act also has penal provisions for corporations and individuals for failure to abide by the norms.

What activities are permitted under Corporate Social Responsibility (CSR)?

The following activities can be performed by a company to accomplish its CSR obligations:

How did the law change in the 2019 budget session?

Parliament in July 2019 passed amendments to the Companies Act under which unspent CSR allocations would have to be transferred to a fund specified by the government. Under the amended rules, company executives could face a three-year jail term and a penalty of Rs.50,000 to Rs.5 lakh, or both; and their employers a penalty of between Rs.50,000 and Rs.25 lakh for breach of CSR rules. 

The amendments of 2019 provide tor unspent CSR funds to be transferred by a company to its “Unspent Corporate Social Responsibility Account” in a bank within 30 days of the end of a financial year. According to the Act, the amount deposited in the bank shall be spent by it in CSR activities within a period of three financial years, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of 30 days from the date of completion of the third financial year. 

What is the rationale?

GOI provided them a three-year period to utilise the money. The law only ring-fenced the money to ensure that the money is not diverted elsewhere. Companies have one year [2019-20] plus three years to act. If they are not able to utilise the fund even in four years, the same will be transferred to a government-notified fund. While leaving the window open until 2024 for companies to use up their accumulated CSR money, the government is also working on setting up a national corpus with a “strong governance structure” to which unspent funds will need to be transferred if the deadline is not met. 

About Rs 50,000 crore has been spent on CSR since 2014-15 and around 30,000 crore still remain unspent. On average, annual CSR expenditure is about Rs 15,000 crore. 

Is everyone in agreement about the mandatory CSR spend?

Opinion is divided. Some say that companies should CSR for their own enlightened self interest. When companies take up CSR, they can pick and choose the projects in their neighbourhood. Others say that the taxes paid by the companies should be spent by government for social goods. CSR distracts from business focus.