KEY HIGHLIGHTS OF THE COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY) RULES, 2014 (“CSR Rules”) AND SCHEDULE VII OF THE COMPANIES ACT, 2013

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KEY HIGHLIGHTS OF THE COMPANIES (CORPORATE SOCIAL RESPONSIBILITY
POLICY) RULES, 2014 (“CSR Rules”) AND SCHEDULE VII OF THE COMPANIES ACT,
2013
WHAT COMPRISES OF THE CSR COMMITTEE?
Section 135 of the Companies Act, 2013 (“Act”) provides that a company having net worth of
rupees five hundred crores of more or turnover of rupees one thousand crores or more or a net
profit of rupees five crores or more must constitute a corporate social responsibility committee
(“CSR Committee”) consisting of three or more directors, one out of whom must be an
independent director. The CSR Rules have been notified on 27 February 2014 and will come
into force on 1 April 2014.
The CSR Rules have clarified that the companies that that are covered under Section 135 of the
Act and are not required to have an independent director on its board of directors (Section 149
of the Act) may constitute a CSR Committee without the inclusion of an independent director
thereto. Hence, for an unlisted public company or private company, there is no requirement to
have an independent director. Also, a private company having only two directors can form a
CSR Committee constituting of two directors only. For foreign companies, the CSR Rules have
clarified that of the two directors on the CSR Committee, one must be a resident of India who
has been authorized to accept on behalf of the company any notices or other documents
required to be served on the company.
WHAT COMPRISES OF THE CSR POLICY?
The CSR Committee is required to formulate a corporate social responsibility policy (“CSR
Policy”), while bringing clarity on the definition of a CSR Policy (recommended by the CSR
Committee and approved by the board of directors), the final CSR Rules provide a broad
framework for the CSR Policy, allowing each company to be as elaborate/ specific on each of
the following domains:
1. List of corporate social responsibility (“CSR”) projects/programmes relating to activities
specified in Schedule VII of the Act (“CSR Activities”)
2. Modalities of execution
3. Transparent monitoring mechanism
4. Expenditure/budget for the CSR Activities
Additionally, it is required that the CSR Policy adopted by the company must specify that, any
surplus arising out of CSR Activities will be re-directed towards CSR Activities and not the
business of the company. Further, the board of directors are required to submit a report under
Section 134 (3) of the Act, and the relevant portions of the CSR Policy must be disclosed in the
said report, also, the relevant portions of the CSR Policy adopted by the Company must be
disclosed on the company’s website.

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WHO CAN BE ENGAGED TO IMPLEMENT YOUR CSR AGENDA?
A significant addition to implementation partners are companies incorporated under Section 8
(erstwhile Section 25) of the Act.
CSR Activities can now be implemented through the company’s own established:
● registered trust
● registered society
● company or its subsidiary or holding or associate company under Section 8.
If such a trust, society or company is not established by the company, then it must have an
established track record of three years in undertaking similar projects or programs. Further, a
company may also collaborate with other companies for undertaking CSR activities such that
the CSR Committees of the respective companies are in a position to report separately on such
CSR Activities in accordance with the CSR Rules.
There may be some flexibility around who can implement the CSR policy, keeping in mind that a
lot of companies have very successfully deputed in-house resources to implement CSR.
Clarifications from the MCA is awaited in this regard.
WHAT TYPE OF PROGRAMMES/PROJECTS FIT WITHIN CSR EXPENDITURE?
The final Rules clearly define what can be included and what must be excluded under CSR
expenditure. Two key guidelines repeated through the rules pertain to inclusion of ONLY
programmes/projects that are in-line with Schedule VII of the Act and exclusion of activities that
are undertaken in ‘pursuance of normal course of business of a company’. A good practice
would be to map and state a broad framework of the ‘normal course of business’ to clearly
differentiate with CSR Activities.
Here is a description of what counts and what doesn’t, as per the rules:
Activities included in CSR expenditure:
● Expenditure on programs related to CSR Activities approved by the board of directors,
and on the recommendation of the CSR Committee (must be cited in the CSR Policy)
● Expenditure on building capacity of CSR team (up to 5 percent of CSR expenditure),
through institutions with an established track record of at least three years
● Contribution to corpus.
Activities excluded from CSR Expenditure:
● Political contribution
● Activities that are solely for benefit of employees and their families
● Activities that are in pursuance of business-as-usual / activities undertaken in pursuance
of normal course of business of a company.

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Any surplus earned through CSR Activities (or interest earned on corpus funding) will, however,
need to be plowed back as additional CSR spend.
ARE SALARIES OF CSR TEAM/VOLUNTEERING INCLUDED IN CSR EXPENDITURE?
There is no mention of whether salaries/Full-Time Equivalents (FTE) of CSR teams and
volunteers can be included in the CSR Activities budget.
Companies may therefore consider shifting equivalent costs (teams) to their subsidiary Section
8 company that they may want to/have set up for such purpose ( and which has a year to year
track record) or trust or society, implementing the CSR Activities. There is a need for better
clarity, on this, from the Ministry of Corporate Affairs (“MCA”).
Volunteering time-value of the contribution of personnel towards CSR has not been included in
the current rules.
WHAT HAS CHANGED IN SCHEDULE VII?
The MCA has re-vamped Schedule VII of the Act, which now covers a broad range of issues
pertaining to social development challenges faced in India. For companies with already
established CSR programs, it is important to align them to cater to the causes and beneficiaries
mentioned in Schedule VII of the Act.
Eligible activities as per Schedule VII
 Eradicating hunger, poverty & malnutrition, promoting preventing health care and sanitation and making
available safe drinking water;
 Promoting education, including special education and employment enhancing vocation skills especially
among children, women, elderly, differently abled and livelihood enhancement projects;
 Promoting gender equality, empowering women, setting up homes and hostels for women and orphans;
setting up old age homes, day care centres and facilities for senior citizens, measures for reducing
inequalities faced by socially and economically backward groups;
 Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare,
agroforestry, conservation of natural resources and maintaining quality of soil, air and water;
 Protection of national heritage, art and culture including restoration off buildings and sites of historical
importance and works of art; setting up public libraries; promotion and development of traditional arts
and handicrafts;
 Measures for the benefit of armed forces veterans, war widows and their dependents;
 Training to promote rural sports, nationally recognised sports, Paralympic and Olympic sports;
 Contribution to the Prime Minister’s National Relief Fund or any other fund set up by Central Government
for socio-economic development and relief and welfare of Scheduled Castes, Scheduled Tribes other
backward classes, minorities and women;
 Contributions or funds provided to technology incubators located within academic institutions which are
approved by the Central Government;
 Rural development projects.

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HOW IS NET PROFITS CALCULATED AND WHAT ARE THE TAX IMPLICATIONS OF CSR?
The CSR Rules state that net profits are to be computed as per Section 198 of the Act. Sub
section (5) (a) of Section 198 states that income tax and super tax payable shall not be
deducted while calculation of net profit. Therefore, net profit may still be calculated as profit
before tax. The CSR Rules state that while computing net profits, companies must exclude
dividends from other Indian companies that are complying with Section 135 of the Act and
exclude profits generated outside India.
The tax treatment of CSR spends, i.e. whether it will be considered as eligible for deduction for
income tax purposes is not clear. A clarification by CBDT for tax treatment of CSR may be
required.
At present, tax deductions under Income Tax Act 1961 (Section 80G)
I. Following donation allowed subject to a maximum of 10% of the Adjusted Gross Total Income:
A. Donations to government for promoting family planning, etc, 100% allowed
B. Eligible for 50% deduction:
• Donations to government for other charitable purpose
• Donation for housing accommodation/ improvement of cities, towns or villages etc.
II. Eligible for 100% deduction w/o maximum limit:
• Donation to PM’s National Relief Fund
• Donation to State Government Fund for Medical Relief to the Poor
• National Illness Assistance Fund
• Chief Minister's or Lt. Governor's Relief Fund
• Approved university or educational institution of national eminence, etc.
HOW WILL NET PROFIT BE CALCULATED FOR INDIAN BRANCHES OF FOREIGN
COMPANIES & INDIAN COMPANIES WITH FOREIGN BRANCHES?
For Indian branches and project offices of foreign companies, net profit will be calculated as per
profit and loss account prepared in terms of clause (a) of Section 381 read with section 198 of
the Act.
For Indian companies with foreign operations, any profit arising out of overseas branches
whether operated as a separate entity or otherwise will not be included in calculating net profits.
WHAT ARE THE NORMS FOR REPORTING - TIMELINE & WHERE?
The CSR Rules provide that the board of directors of a company will be required to submit an
annual report of the company pertaining to the financial year commencing on or after 1 April
2014. The timeline is consistent with all other statutory reporting and will have to include
particulars in relation to CSR as follows:-

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• Brief outline of the company’s CSR Policy, including overview of projects or programs to
be conducted and a reference to the web link to the CSR Policy and projects or programs;
• Composition of the CSR Committee;
• Average net profit of the company for the last three financial years;
• Prescribed CSR expenditure;
• Details of CSR spent during the financial year;
• In case the company has failed to spend the prescribed 2% of the average net profit of the
last three financial years or any part thereof, the company is required provide the reasons
for not spending the amount;
• Responsibility statement of CSR Committee that the implementation and monitoring of
CSR Policy, is in compliance with CSR objectives and policy of the company.
The CSR Policy should be displayed on the company website. For a foreign company, this
report may be annexed to the balance sheet.
Other Observations:
• Exclusion of State Government funds from Schedule VII of the Act and only funds set up
by the Central Government are included.
• Political contribution will not be considered as CSR Activity under the final CSR Rules.
• For listed companies that operate in multiple countries, where their India only net profits
are not publicly displayed, MCA has unofficially always maintained that if the broader law
does not need the company to disclose net profits, then the company is not required to do
it for the sake of Section-135 of the Act.
• Removal of ‘amount carried forward from earlier years’ from CSR reporting format -
indicating contribution to corpus as optional.
• Once a company is covered under the CSR provisions as per sub section (1) of Section
135, the company will have to comply with the rules for three consecutive financial years,
even if in the subsequent years, these rules do not apply to them. However, any company
that ceases to be covered under Section 135 of the Act for three consecutive financial
years will not be required to comply with the provisions relating to CSR till such time it
meets the criteria specified in sub section (1) of Section 135.
(The above content has been prepared in consultation with NextGen, BMR Advisors
and NASSCOM Foundation. It contains general information and guidance as on date of
preparation and does not express views or expert opinion. Queries related to the law
can be raised at: http://csrquery.nasscomfoundation.org/).