Understanding CSR Applicability: Is Your Company Compliant with Section 135 ?
Corporate Social Responsibility (CSR) is no longer just a moral imperative—for many businesses, it is a statutory obligation. Under Section 135 of the Companies Act, 2013, CSR spending becomes mandatory for companies that meet specific financial thresholds during the immediately preceding financial year.
If your company has crossed the threshold of a Rs.5 crore net profit, you must closely evaluate your regulatory compliance requirements.
The 3 Criteria for CSR Applicability
A company is legally required to constitute a CSR Committee and formulate a CSR policy if it satisfies any one of the following conditions in the preceding financial year:
(i) Net Worth: ₹500 crore or more.
(ii) Turnover: ₹1,000 crore or more.
(iii) Net Profit: ₹5 crore or more.
Meeting even a single criterion triggers immediate applicability.
Calculating Your CSR Expenditure.
Once a company qualifies under Section 135, it must allocate a dedicated budget to eligible CSR activities.
a) The 2% Mandate: Qualified companies must spend a minimum of 2% of their average net profits made during the three immediately preceding financial years.
b) The Timeline Logic: While eligibility is determined solely by the financial health of the immediately preceding fiscal year, the actual expenditure amount is derived from a three-year rolling average of your net profits.
Critical Tax Implications: Section 37(1) vs. CSR
When planning your corporate finances, it is vital to distinguish between operational business expenses and statutory CSR spending:
a) No General Business Deduction: As per the Income Tax Act, CSR expenditures generally do not qualify for a standard business deduction under Section 37(1). The rationale is that CSR is an application of profit rather than an expense incurred directly for business operations.
b) Exceptions Apply: While general CSR spend cannot be used to reduce taxable business income, certain specific expenditures or donations made under permitted routes may qualify for deductions under other specific provisions of the Income Tax Act (such as Section 80G). Companies should consult with their tax advisors to optimize these outlays.
Strategic Takeaway
CSR compliance requires proactive financial planning. Evaluating your net worth, turnover, and net profits at the close of each financial year ensures you remain fully compliant while effectively managing your corporate tax footprint.
Please ask from your financial advisors or Chartered Accountant before taking any decision.