The recent declaration by the Ministry of Commerce and Industry established that Corporate Social Responsibility (CSR) contributions towards the Chief Minister’s Relief Fund or State relief fund will not be recognized, whereas donations to the PM CARES Fund will be. This development has drawn criticism from various circles and sparked a conversation about CSR as defined by the Companies Act, 2013.
Understanding the context
The new regulation does not consider donations towards the State Relief Fund for Covid-19 or the Chief Minister’s Relief Fund as permissible CSR expenditure because these funds are not included in Schedule VII of the Companies Act 2013. The law outlines a list of activities under Schedule VII that are recognized as qualifying CSR initiatives.
Some political parties have criticized this decision, arguing that it discriminates against the principles of federalism. However, donations made to the State Disaster Management Authority for battling Covid-19 are still counted as admissible CSR expenditures.
What is Corporate Social Responsibility?
Corporate Social Responsibility refers to initiatives taken by corporations to evaluate and take ownership of the company’s environmental impact and its influence on social welfare. These practices are directed by Clause 135 of the Companies Act, 2013 in India.
The nation stands out as the first worldwide to introduce compulsory CSR spending, complete with a framework for identifying potential CSR initiatives. Applicable to companies with an annual turnover exceeding INR 1,000 crore, a net worth surpassing INR 500 crore, or a net profit over INR 5 crore, the Act mandates the formation of a CSR committee.
The Role of CSR Committees
The CSR committee’s role is to recommend a comprehensible CSR Policy to the company’s Board of Directors and oversee its proper implementation periodically. The legislation encourages businesses to allocate 2% of their average net profits over the previous three years to CSR activities.
Recognized CSR Activities
Schedule VII of the Act specifies the indicative activities, which a company can engage in as part of its CSR strategy. These include eradicating extreme hunger and poverty, promoting education and gender equality, empowering women, combating diseases like HIV and AIDS, ensuring environmental sustainability and contributing to governmental funds.
The Prime Minister’s National Relief Fund or other funds established by the Central Government for socio-economic progress, disaster relief, and welfare initiatives targeting Scheduled Castes, Scheduled Tribes, Other Backward Classes, minorities, and women, are all included in the recognized list of CSR activities according to the Act.
It is within this context that the new ruling from the Ministry of Commerce and Industry limiting the scope of CSR contributions towards relief funds generates debate and requires further deliberation.