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NEW DELHI : The credit that businesses earn for spending on corporate social responsibility (CSR) beyond their annual obligation will lapse unless adjusted against the spending requirements in the subsequent three years, the ministry of corporate affairs (MCA) said.

The flexibility of adjusting excess CSR spending in a given year against the spending obligation in the subsequent three years introduced in January this year is applicable prospectively, the ministry said in a set of clarifications issued on Thursday.

Therefore, no carry forward will be allowed for any excess amount spent in financial years prior to FY21.

The set of clarifications has been issued to guide businesses as many changes have recently been made to CSR rules. In January, the government notified sections of the Companies Act prescribing financial penalties for violation of CSR obligations and made sweeping changes to rules to make companies more accountable and to offer some flexibility in spending.

The ministry also clarified that CSR obligations are specific to individual companies, without reference to whether their holding or subsidiary companies are required to make CSR spending.

A holding company or subsidiary of a company is not required to comply with the CSR provisions unless they fulfil the eligibility criteria themselves. The requirement of a subsidiary to make CSR spending does not by itself make its holding company liable to spend on CSR. Companies with a net worth of 500 crore or more, or a turnover of 1,000 crore or more, or net profit of 5 crore or more, are required to spend 2% of their average net profit of the preceding three years on CSR activities.

Defaulting on CSR obligation is a civil wrong. The fine for companies is twice the unspent amount that was required to be transferred to a designated fund or 1 crore, whichever is less. If an officer is in default, the penalty is one-tenth of the unspent amount required to be transferred to the designated fund, or 2 lakh, whichever is less. Businesses that could not spend the full amount in a year are required to transfer it to a designated fund.

Also, with the view to align CSR activities with national priorities and augment corporate sector participation in achieving sustainable development goals, it has been clarified that the preference to ‘local area’ for these activities given in the Act is only directory, explained Suraj Nangia, partner, government and public sector advisory, Nangia Andersen Llp, a consultancy.

Companies have been directed to balance local area preference with national priorities, said Nangia.

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