Corporate Social Responsibility refers to the activities undertaken by a company beyond its statutory obligations under Section 135 of the Companies Act. The definition under rule 2(1)(d) of the CSR Rules clarifies that these activities must align with the company’s CSR policy and exclude specific types of undertakings.
The CSR framework prohibits activities carried out in the normal course of the company’s business. However, an exception was made during financial years 2020-21, 2021-22, and 2022-23, allowing companies engaged in research and development of new vaccines, drugs, and medical devices to continue such activities if they were related to COVID-19. These activities had to be conducted in collaboration with institutes or organisations listed in item (ix) of Schedule VII of the Act and had to be separately disclosed in the Annual CSR Report within the Board’s Report.
Activities carried out outside India are generally excluded from being classified as CSR activities. The only exception to this rule pertains to the training of Indian sports personnel representing India or any state or union territory at the national or international level.
Contributions to political parties, either directly or indirectly, are strictly prohibited as CSR activities. Additionally, activities that solely benefit the employees of a company, as defined in section 2(k) of the Code on Wages, 2019, are also excluded. Sponsorship activities aimed at deriving marketing benefits for the company’s products or services cannot be considered CSR.
Another category of non-qualifying activities includes expenditures that fulfil other statutory obligations under prevailing laws in India. The definition provided in the CSR Rules is exhaustive and limits the scope of qualifying CSR activities. However, any activity that is not excluded under the rules and can be linked to the activities mentioned in Schedule VII of the Act can be considered a valid CSR initiative, as clarified by official circulars issued by the Ministry of Corporate Affairs.
Companies must undertake CSR activities strictly according to their CSR policies and avoid those performed in their regular business operations.
Activities That Do Not Qualify as CSR
Certain specific activities have been excluded from the definition of CSR by Rule 2(1)(d) of the CSR Rules, as further clarified by the Ministry of Corporate Affairs through multiple circulars and FAQs.
These include activities undertaken in the normal course of business, any activity conducted outside India with the exception of sports training, direct or indirect contributions to political parties, CSR initiatives benefiting only employees or their families, sponsorship-based marketing events, and statutory compliance obligations under any other prevailing laws.
These exclusions are significant in ensuring that CSR funds are genuinely directed towards social development rather than promotional, political, or internal employee benefit purposes.
CSR Spending Obligation
As per section 135(1) of the Companies Act, companies falling under the CSR mandate are required to spend at least 2 percent of the average net profits of the preceding three financial years on CSR initiatives. If a company has not completed three financial years since its incorporation, the average net profits for the years completed will be considered.
The law further encourages companies to prioritize their spending in local areas where they operate. However, in the case of companies with operations spread across multiple locations, the choice of spending region remains with the company.
The underlying purpose of the CSR law is to align corporate activities with national development goals, including the Sustainable Development Goals. Hence, spending should reflect a broader vision and responsibility toward social progress.
In instances where companies fail to spend the prescribed 2 percent, the Board of Directors must provide reasons for the same in their Board’s Report. Moreover, unless the unspent amount pertains to an ongoing project, it must be transferred to one of the funds specified in Schedule VII of the Act within six months from the end of the financial year.
Determining the CSR Outlay
The CSR obligation of a company is calculated based on the average net profit derived by section 198 of the Companies Act. Section 198 provides a specific method for calculating net profits that excludes certain incomes and includes specific adjustments.
This calculation excludes profits generated by overseas branches and dividend income received from other companies in India that are also compliant with section 135 of the Act. Profit before tax is generally used as a base, but further adjustments as per section 198 and Rule 2(i)(h) are required to arrive at the final net profit figure for CSR applicability.
In case of foreign companies operating in India, the net profit is determined as per the profit and loss account prepared under section 381(1)(a), read with section 198.
Earlier, the CSR Rules created ambiguity as they excluded certain income types from the calculation that were not addressed in section 198. This was clarified through the Companies (Amendment) Act, 2017, ensuring that the CSR net profit calculation aligns fully with section 198 and related rules.
Therefore, gross profit or simple profit before tax cannot be relied upon for determining the CSR obligation. Companies must strictly follow the provisions of section 198 and Rule 2(i)(h) to arrive at an accurate CSR spending figure.
Example of Net Profit Calculation
To determine the net profit for CSR, a company starts with the profit before tax and adjusts it as per section 198 and Rule 2(i)(h). These adjustments include adding certain reserves, subtracting capital gains, changes in asset valuation, and unrealized gains.
Further deductions include profits from overseas branches and dividend income from CSR-compliant Indian companies.
Once the adjusted net profit is calculated for each of the three preceding financial years, the average is taken to determine the CSR outlay for the current year.
If one of the years has a loss, it is factored into the average. For instance, if a company had profits of 10 crore in 2019-20, a loss of 2.5 crore in 2020-21, and a profit of 5.5 crore in 2021-22, the average net profit for CSR would be 4.33 crore. Accordingly, 2 percent of this average would determine the CSR obligation.
Calculating CSR Expenditure
Once the obligation is determined, the company calculates how much has been spent on CSR projects, including both ongoing and new initiatives. The total expenditure also includes permissible administrative overheads and impact assessment costs, wherever applicable.
Administrative overheads are limited to 5 percent of the total CSR expenditure and must be directly related to the general management of CSR functions. These do not include expenses incurred by external implementing agencies.
Impact assessment costs can be up to 2 percent of the total CSR expenditure or fifty lakh rupees, whichever is higher. This limit is in addition to the administrative overheads cap.
The total of these three components—project costs, administrative overheads, and impact assessments—constitutes the total CSR expenditure.
Unspent CSR Amount
If a company has unspent CSR funds at the end of a financial year, it must determine whether these relate to ongoing or non-ongoing projects.
For ongoing projects, the unspent amount must be transferred to a separate ‘Unspent CSR Account’ within 30 days of the end of the financial year and spent within the next three years. If the amount is not spent within this period, it must be transferred to a fund specified in Schedule VII within 30 days after the end of the third year.
For non-ongoing projects, any unspent amount must be transferred to a fund listed under Schedule VII within six months of the financial year’s end. During these six months, the company is not allowed to undertake any CSR spending from these unspent funds.
CSR Implementation Strategies
The implementation of CSR activities is a critical phase that involves translating plans and policies into concrete actions. Effective CSR implementation begins with identifying the company’s core values, business objectives, and stakeholder expectations. Companies must develop CSR policies that align with the requirements under the Companies Act, 2013, and the rules framed thereunder. Once the CSR policy is in place, the company must ensure it is approved by the board of directors and that the details of the policy are disclosed in the annual board report and on the company’s website. To implement the CSR initiatives, companies can execute projects themselves or collaborate with external implementing agencies. These agencies must be registered under section 12A and 80G of the Income Tax Act and should have a track record in CSR-related activities. The company must also establish a CSR committee that will oversee the implementation and ensure alignment with the approved CSR policy. An effective implementation plan should include specific, measurable, achievable, relevant, and time-bound (SMART) goals, timelines, responsibilities, and budgets. Companies should also ensure that community needs are assessed and taken into consideration before initiating a CSR project. Periodic stakeholder consultations and feasibility assessments are helpful in customizing initiatives that bring long-term social impact and sustainability.
Selection of Implementing Agencies
Choosing the right implementing partner is critical to the success of a CSR initiative. Under the Companies (CSR Policy) Rules, 2014, the implementing agency must be a registered trust, society, or company established under section 8 of the Companies Act, 2013. The agency should have a minimum track record of three years in undertaking similar activities and must be registered with the Ministry of Corporate Affairs (MCA) by filing the Form CSR-1. While selecting a partner, companies must assess the agency’s financial health, operational capacity, governance structure, and past performance. Due diligence should include background checks, review of financial statements, and interaction with beneficiaries of previous projects. A well-defined memorandum of understanding (MoU) should be signed with the selected partner detailing the scope of work, performance indicators, reporting mechanisms, dispute resolution provisions, and timelines. Building a transparent and collaborative relationship with implementing agencies helps improve accountability and ensures the effective use of CSR funds.
Execution and Project Lifecycle
The CSR project lifecycle typically includes four stages: initiation, planning, execution, and closure. During the initiation phase, the CSR team identifies project goals, conducts baseline surveys, and develops a business case. In the planning stage, detailed project plans are created, budgets are allocated, and responsibilities are assigned. The execution stage involves rolling out the activities as per the plan, managing resources, and coordinating with stakeholders. It is essential to track progress using key performance indicators (KPIs) and make course corrections if necessary. During the closure phase, the project is evaluated for outcomes and impact, lessons are documented, and a final report is prepared. CSR projects should be aligned with Schedule VII of the Companies Act, 2013, and any surplus arising from the CSR activity should not form part of the business profit of the company. Additionally, ongoing projects must be completed within three years from the end of the financial year in which they were commenced. Failing to do so will result in the reclassification of the unspent amount as a fund transfer obligation to specified CSR accounts.
Challenges in CSR Implementation
Despite the best intentions, implementing CSR activities comes with its own set of challenges. One common issue is the lack of clarity in identifying the most impactful CSR activities within the permitted scope of Schedule VII. Some companies also struggle with balancing their business objectives and social goals. Another challenge is ensuring the consistency and sustainability of CSR programs, particularly when the implementing partners lack adequate resources or expertise. Compliance with regulatory requirements, such as timely reporting, fund utilization, and third-party auditing, can also be demanding. Inadequate stakeholder engagement may result in community resistance or low participation, which affects the success of the project. Further, monitoring mechanisms are often weak, making it difficult to track the effectiveness and long-term impact of the activities. To overcome these challenges, companies must invest in capacity-building, create robust monitoring and evaluation systems, and develop strong internal governance frameworks to support CSR initiatives.
Integration of CSR with Business Strategy
For CSR to deliver lasting impact, it must be integrated into the core business strategy rather than being treated as a peripheral activity. Strategic CSR aligns social objectives with business goals, allowing companies to create shared value for both society and shareholders. Companies can focus on areas where they possess technical expertise, infrastructure, and market influence. For instance, a pharmaceutical company may invest in healthcare camps, while a technology company may focus on digital literacy. Integrating CSR into the business model helps in better resource utilization, improved stakeholder relations, enhanced brand reputation, and employee satisfaction. Companies can embed CSR goals into performance appraisals, incentivize social innovation, and encourage employees to participate in volunteering activities. Such integration also helps companies anticipate social risks, comply with evolving regulatory standards, and build resilient and inclusive value chains.
Monitoring and Evaluation of CSR Initiatives
Importance of Monitoring
Monitoring CSR activities is crucial to ensure the proper execution of planned projects, evaluate their impact, maintain transparency, and comply with statutory requirements. A structured monitoring mechanism provides continuous feedback on the performance of CSR programs and helps identify any deviations or improvements needed. Monitoring also allows stakeholders to assess the effectiveness of resources and strategies used.
Internal and External Monitoring Mechanisms
Effective CSR monitoring involves both internal and external mechanisms. Internally, companies can constitute dedicated CSR committees or departments to oversee implementation. This includes periodic field visits, review meetings, and internal audits. CSR performance metrics are established to track goals, milestones, and outcomes. Externally, companies may engage third-party auditors or agencies to evaluate the implementation, adherence to project timelines, fund utilization, and impact on beneficiaries. The independent review helps reinforce accountability and objectivity.
Role of the CSR Committee
Under the Companies Act, 2013, the CSR Committee plays a pivotal role in monitoring. It is responsible for formulating the CSR policy, recommending activities and expenditure, and regularly reviewing the implementation progress. The Committee ensures alignment between company goals and CSR initiatives and reports performance to the Board. It must also ensure that reporting requirements under Section 135 of the Act are met, including disclosures in the annual report.
Impact Assessment
Impact assessment is a process of evaluating the social, economic, and environmental changes brought about by CSR activities. As per the Companies (CSR Policy) Amendment Rules, 2021, companies with an average CSR obligation of ten crore rupees or more in the three preceding financial years must undertake impact assessments through independent agencies for CSR projects with outlays of one crore rupees or more. This assessment provides qualitative and quantitative evidence of outcomes, contributing to strategic learning and future planning. The assessment report must be placed before the CSR Committee and annexed to the annual report.
Documentation and Record-Keeping
Proper documentation is vital to demonstrate compliance and facilitate audits. It includes maintaining records of CSR policy, project plans, expenditure, progress reports, Board and CSR Committee minutes, third-party assessments, and annual disclosures. These records help companies meet legal requirements and provide transparency to stakeholders. The documentation must be preserved for the prescribed period and be readily accessible during inspections or audits by regulatory bodies.
CSR Reporting Obligations
Section 135 of the Companies Act, 2013, and Rule 8 of the CSR Rules mandate companies to disclose their CSR performance in the Board’s Report in the format prescribed in Annexure I. The report should include:
- Composition of the CSR Committee
- CSR policy and overview of approved projects
- Amount spent or unspent
- Reasons for any shortfall
- Impact assessment findings
- Transfer of unspent CSR funds to the specified account
Non-compliance with reporting obligations can attract penalties and reputational damage.
Social Return on Investment (SROI)
SROI is an advanced tool used by companies to measure the value created through CSR initiatives relative to the investment made. It captures not only financial but also social, environmental, and cultural outcomes. Calculating SROI involves identifying stakeholders, defining inputs and outcomes, assigning monetary values to outcomes, and comparing the benefits to the costs. A high SROI ratio indicates that the CSR project has delivered substantial value, strengthening the company’s case for social investment. While not mandatory, many large companies adopt this measure to assess long-term impact and drive strategic decisions.
Role of Technology in CSR Monitoring
Technology enhances the efficiency and effectiveness of CSR monitoring. Companies increasingly use CSR management software, dashboards, mobile apps, and geographic information systems (GIS) to track project implementation in real-time. These tools facilitate data collection, analysis, visualization, and reporting. Digital platforms allow seamless collaboration among stakeholders, faster feedback loops, and better decision-making. Automation also reduces manual errors and improves the accuracy and credibility of information. For example, mobile-based surveys can capture beneficiary feedback instantly, and cloud-based documentation ensures access from multiple locations.
Challenges in Monitoring CSR
Despite best efforts, companies face several challenges in monitoring CSR activities:
- Difficulty in quantifying social outcomes
- Lack of reliable data from field partners
- Limited capacity of implementing agencies
- Inadequate monitoring frameworks for long-term projects
- Resistance to third-party evaluations
Overcoming these challenges requires capacity building, training, standardization of monitoring practices, use of technology, and open engagement with implementing partners. Companies must also invest in building long-term relationships with stakeholders and communities to improve data accuracy and trust.
Learning from Monitoring Outcomes
Monitoring and evaluation are not just compliance exercises but learning tools. The insights gained from periodic reviews help companies refine their CSR strategies, replicate successful models, discontinue ineffective programs, and allocate resources efficiently. Monitoring also fosters a culture of transparency and accountability across the organization. When linked with organizational learning, it helps integrate CSR into the core business strategy, leading to shared value creation for both the company and society.
Tax Implications and Legal Compliance in CSR Activities
Tax Treatment of CSR Expenditure
The Income Tax Act, 1961, under Section 37(1), specifically disallows any expenditure incurred by a company on CSR activities as deductible business expenditure. This means that although CSR spending is a statutory obligation under the Companies Act, it is not allowed as a deduction while computing the taxable income of a company. The rationale is that CSR expenses are considered an application of income and not incurred wholly and exclusively for the business purposes of the assessee.
However, certain types of CSR expenditures may still be eligible for deductions under other specific sections of the Income Tax Act, depending on the nature of the activity.
Allowable Deductions for Specific CSR Activities
Some CSR expenditures may qualify for tax deductions under distinct provisions if they meet the criteria of those sections, such as:
- Section 80G: Donations to certain funds and charitable institutions approved under Section 80G may qualify for deduction.
- Section 35AC / 35(1)(ii)/(iii) :(now phased out): Earlier allowed deductions for payments to approved institutions or projects, particularly in scientific research or rural development.
- Section 10(23C) and 11: Donations made to registered charitable trusts or institutions that fall under these provisions may be exempt from tax.
Companies must ensure that such donations are made to eligible institutions and that proper documentation (such as donation receipts and 80G certificates) is maintained.
GST Implications on CSR
The treatment of CSR expenses under the Goods and Services Tax (GST) regime has been subject to debate. While CSR activities are generally non-business transactions, there are certain aspects to consider:
- Input Tax Credit (ITC): The availability of ITC on goods and services used for CSR has been contentious. The Authority for Advance Rulings (AARs) has given differing views—some allow ITC if CSR is mandated by law, while others disallow it, treating CSR as non-business expenditure.
- Free Distribution of Goods: When goods are given away free under CSR, they may attract GST as deemed supply under Schedule I of the CGST Act.
- Taxable Supplies under CSR: If the CSR activity includes any supply of goods or services in the course of business, GST may be applicable.
Companies should carefully evaluate the GST treatment on a case-by-case basis, maintain clear documentation, and consult with tax professionals to mitigate exposure.
Transfer of Unspent CSR Amounts
The Companies (CSR Policy) Amendment Rules, 2021, impose clear obligations regarding unspent CSR funds:
- For ongoing projects: The unspent amount must be transferred to a special account called the “Unspent CSR Account” within 30 days from the end of the financial year. It must then be utilized within the next three financial years.
- For other than ongoing projects: The unspent amount must be transferred to a fund specified in Schedule VII (like PM CARES, Swachh Bharat Kosh, etc.) within six months of the end of the financial year.
Failure to comply attracts penal consequences, including a fine for the company and its officers in default.
Penal Provisions for Non-Compliance
The Companies Act prescribes penalties for non-compliance with CSR obligations:
- As per Section 135(7), if a company fails to spend the prescribed amount and does not transfer the unspent funds as required, it shall be liable to a penalty twice the amount required to be transferred or one crore rupees, whichever is less.
- Officers in default shall be liable to a penalty of one-tenth of the amount required to be transferred or two lakh rupees, whichever is less.
These penalties emphasize the importance of timely spending and correct reporting of CSR activities.
Audit and Regulatory Scrutiny
CSR compliance is subject to audit and regulatory oversight. Auditors are required to comment on whether the company has disclosed the CSR details correctly and whether the spending is as per the approved policy and legal requirements. Any discrepancies, misstatements, or under-spending may invite scrutiny from regulators such as the Ministry of Corporate Affairs (MCA).
Companies should:
- Maintain detailed books and ledgers for CSR expenditures
- Keep vouchers, receipts, and agreements with implementing agencies.
- Prepare impact assessment reports if required.
- Ensure CSR policy is updated and available on the company website.
Corporate Governance and CSR
CSR is increasingly viewed as an integral part of corporate governance. Boards are expected to ensure ethical conduct, social accountability, and stakeholder engagement. Companies adopting robust CSR frameworks often witness stronger investor confidence, better employee morale, and enhanced brand reputation. Integration of CSR with risk management, sustainability reporting, and board strategy leads to long-term value creation and regulatory goodwill.
International Tax Considerations
For multinational companies operating in India, CSR contributions made in India may not be tax-deductible in their home jurisdiction unless permitted by the respective tax laws. This issue often arises for foreign-controlled Indian subsidiaries. They must align local CSR spending with global corporate social responsibility and sustainability goals while managing transfer pricing compliance.
Cross-border donations or collaborations may also trigger foreign contribution regulations (like the Foreign Contribution (Regulation) Act, 2010), especially when CSR involves foreign sources or overseas partners.
Conclusion
Corporate Social Responsibility (CSR) has evolved into a vital element of modern corporate governance, particularly in India ,where it is backed by statutory requirements. From identifying eligible activities and creating effective implementation strategies to establishing robust monitoring mechanisms and understanding associated tax implications, CSR compliance is no longer just a goodwill exercise, it’s a legal, financial, and reputational imperative.
For companies, aligning CSR initiatives with core business objectives and stakeholder expectations can deliver sustainable value, not only to beneficiaries but also to the brand itself. A transparent approach to execution, diligent record-keeping, third-party verification, and timely disclosures are essential for successful CSR management. Simultaneously, optimizing the tax benefits associated with CSR while staying within the boundaries of statutory norms requires proactive planning and consultation with tax experts.