CSR exemption for firms making losses; eligibility to be checked every year

Companies making losses in the immediate preceding financial year will be exempted from undertaking corporate social responsibility (CSR) activity that year if they were eligible for CSR due to their net profit, reveals the latest government notification.

Companies, however, will have to spend the carry forward or unspent CSR obligation of the previous year. This exemption will be available only to those companies eligible for CSR due to their profits.

“The eligibility of a company to do CSR has to be checked every year. Earlier if you were eligible once, the CSR obligation fell upon you for the next three years,” says Ankit Singhi, partner, Corporate Professionals.

CSR rules are applicable to companies with a net profit of over Rs 5 crore or networth of over Rs 500 crore or turnover of Rs 1,000 crore.

Legal experts say that prior to these amended rules, companies having losses in the immediate preceding financial year had to undertake CSR activity in the current financial year, if they had reported profits of over Rs 5 crore in any of the previous three financial years.

The reporting format of the CSR form has also been changed with no CSR activity details sought, except the total amount spent. But if a company has created a capital asset, the form now specifies that information like address, location, and pincode be mentioned.

“As a stakeholder, how will I know where the company is putting its CSR money now? It is a surprising move by the Ministry of Corporate Affairs,” says a senior company law expert.

The new rules have also revised the amount to be spent on impact assessment of the CSR project to 2 per cent of the total CSR obligation or Rs 50 lakh, whichever is higher. This expenditure on impact study will be part of the CSR obligation.

“For example, if the CSR obligation of any company is Rs 100 crore in a year, earlier only Rs 50 lakh was allowed to be spent on impact assessment which will now be allowed up to Rs 2 crore. The quantum of CSR funds for India Inc is about Rs 25,000 crore annually. A proper assessment of impact done by these CSR activities is of national priority,” says Makarand Joshi, founding partner, MMJC and Associates — a corporate compliance firm.

Company law experts say the changes convey the notion that either the money must be spent or it must be transferred to a fund listed under Schedule VII.

The Companies (Accounts) Amendment Rules, 2022, have also introduced the e-form CSR-2, which mandates disclosure of company information, the composition of the CSR committee, ongoing projects, and the transfer of unused CSR funds.

“The legislator’s goal appears to be to compel businesses to give back to society from which they receive their earnings to promote societal development. The goal is to control and increase transparency in how money is spent and put to use for the greater good of society,” says Sonam Chandwani, managing partner, KS Legal and Associates.

The fine print
 

CSR applicability criteria 

If a company has a networth of more than Rs 500 crore or,

Its turnover is more than Rs 1,000 crore or,

Net profit is more than Rs 5 crore
 

Key changes
 

Look-back period (to assess CSR applicability) of three years removed 

Eligibility has to be checked every year

2% of CSR obligation or Rs 50 lakh on impact assessment

e-form CSR-2 introduced