CSR Applicability in India: Thresholds, 2% Calculation and the CSR Committee

Corporate Social Responsibility isn't only for India's largest corporations. The net profit threshold in particular catches many mid-sized private companies once their profits start to grow, and since 2021, spending is a legal obligation rather than something a company can simply explain away. This guide explains who CSR applies to, how the 2% obligation is calculated, and when a CSR committee is needed.

Who CSR Applies To

Under Section 135 of the Companies Act, 2013, CSR applies to every company, including a foreign company's Indian branch or project office, that in the immediately preceding financial year had:

• A net worth of ₹500 crore or more, or
• A turnover of ₹1,000 crore or more, or
• A net profit of ₹5 crore or more.

Crossing any one of these is enough. The test is applied each year on the previous year's figures, so a company that crosses a threshold in one year has CSR obligations from the next.

How Much to Spend

A company to which CSR applies must spend at least 2% of its average net profit made during the three immediately preceding financial years. A company that hasn't completed three years since incorporation uses the average over the years it has existed.

Net profit isn't the profit in your accounts

For CSR, net profit is calculated under Section 198 of the Act, which adjusts the accounting profit: for example, excluding certain capital profits and including specified deductions. Profits from overseas branches are also excluded, as are dividends received from other Indian companies that are themselves covered by CSR. The calculation is worth doing carefully, since the obligation follows from it.

An example

A company with net profits, as calculated under Section 198, of ₹4 crore, ₹5 crore and ₹6 crore in the three preceding years has an average of ₹5 crore, and a CSR obligation of ₹10 lakh for the current year.

The CSR Committee

A company to which CSR applies generally needs a CSR committee of the board:

• It's needed only if the CSR obligation for the year is more than ₹50 lakh. Below that, the board itself performs the committee's functions.
• The committee usually has at least three directors, including an independent director where the company is required to have one.
• A private company with only two directors can have a committee of those two directors.

The committee formulates the CSR policy, recommends the annual action plan and the amount to be spent, and monitors the policy's implementation.

The CSR Policy and Annual Action Plan

The board adopts a CSR policy, on the committee's recommendation, setting out the company's approach, focus areas, and how projects are chosen and monitored. Each year, the committee recommends an annual action plan listing the projects, how they'll be carried out, the budgets and timelines, and the monitoring arrangements, which the board approves. The policy and the committee's composition are disclosed on the company's website.

Once CSR Applies

Once a company is covered, CSR is a continuing obligation for each year it meets a threshold. If it stops meeting all three thresholds for three consecutive years, it's no longer required to constitute a CSR committee or comply with the CSR provisions until it crosses a threshold again. Many companies choose to continue their CSR programmes anyway.

Common Mistakes

• Missing the ₹5 crore net profit threshold because it's crossed for the first time.
• Calculating the obligation on accounting profit instead of Section 198 profit.
• Starting CSR in the year the threshold is crossed, rather than the following year.
• Forming a committee when it isn't required, or not forming one when it is.

Getting Help

Think Filing tests CSR applicability each year, calculates the obligation under Section 198, sets up the CSR committee and policy, and prepares the annual action plan.