Corporate Social Responsibility spending under the companies law should not be interpreted as a source of financing the resource gaps in government schemes, the Ministry of Corporate Affairs has said as it issued a detailed set of FAQs for the effective implementation of CSR norms.
Activities undertaken by companies as part of the normal course of business is not considered CSR work. However, the ministry has provided an exemption for companies engaged in R&D activities for new vaccines, drugs and medical devices in their normal course of business with respect to COVID.
The exemption would be in place for three financial years till FY 2022-23, as per the FAQs (Frequently Asked Questions) dated August 25.
"This exclusion is allowed only in case the companies are engaged in R&D in collaboration with organisations as mentioned in item (ix) of Schedule VII and disclose the same in their board reports," the ministry said.
The organisations are specified under item ix of Schedule VII, which pertains to CSR, under the Companies Act, 2013. Such organisations include public-funded universities and the Indian Institute of Technology (IITs).
Under the Act, a certain class of profitable companies are required to shell out at least two per cent of their three-year annual average net profit towards CSR activities in a financial year.
Noting that the objective of CSR provisions is to involve the corporates as partners in the social development process, the ministry said the use of corporate innovations and management skills in the delivery of 'public goods' is at the core of CSR implementation by the companies.
"Therefore, CSR should not be interpreted as a source of financing the resource gaps in Government Schemes. However, the Board of the eligible company may undertake similar activities independently subject to fulfilment of Companies (CSR Policy) Rules, 2014," it noted.
It has also been made clear that the involvement of employees in CSR projects cannot be monetised and considered under the 'CSR expenditure' head by a company.
An international organisation cannot act as an implementing agency for CSR activities. However, a company can engage international organisations for the limited purposes of designing, monitoring, and evaluation of the CSR projects or programmes, or for capacity building of personnel of the company involved in CSR activities, the ministry noted.
Among other requirements, there is a provision for impact assessment for CSR projects done by the companies concerned and it came into effect on January 22, 2021.
It will be applicable for companies with a minimum average CSR obligation of Rs 10 crore in the immediately preceding three financial years. It will also be applicable for companies that have CSR projects with outlays of at least Rs 1 crore and which have been completed not less than one year before undertaking impact assessment.
According to the ministry, impact assessment shall be carried out project-wise only in cases where both the above conditions are fulfilled, and in other cases, it can be taken up by the company voluntarily.
Providing clarity, the ministry said expenditure incurred on impact assessment is over and above the specified administrative overheads of 5 per cent towards CSR work.
"Expenditure up to a maximum of 5 per cent of the total CSR expenditure for that financial year or 50 lakh rupees (whichever is lower) can be incurred separately for impact assessment," it added.
Also, the ministry said that the CSR costs of a company cannot be claimed as business expenditure.
In January, the ministry amended the CSR rules with an aim to strengthen the CSR ecosystem by improving disclosures and by simplifying compliances.
After receiving various references and representations from stakeholders seeking clarity on various CSR-related issues, the ministry has come out with FAQs and the responses for "better understanding and facilitating effective implementation of CSR".
Companies having at least Rs 500 crore net worth or a minimum turnover of Rs 1,000 crore or a net profit of Rs 5 crore or more are required to comply with CSR norms.
Anand Subramanian, Partner at Deloitte India, said the FAQs provide important clarifications related to various implementation questions for corporate India.
The clarifications related to eligibility of expenditure incurred on R&D activities up to fiscal 2022-23 by companies in the normal course of business for vaccines, drugs, and medical devices related to COVID in collaboration with specified organisations is a welcome step, he noted.
About the FAQs, Suraj Nangia, Partner - Govt & Public Sector Advisory - at advisory firm Nangia Andersen said it has been elucidated that if a company spends more than the required amount on CSR, the excess amount can be set off against the mandatory CSR expenditure in the succeeding three years with effect from January 2021.
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