What is the minimum prescribed net profit threshold for Companies to be required to undertake Corporate Social Responsibility activities under clause 135 of the Companies Act, 2013?
2% of net profit
Understanding the requirements for Corporate Social Responsibility (CSR) under the Companies Act, 2013 is important for many businesses operating in India. Section 135 of the Act outlines the provisions related to CSR, including which companies are required to undertake these activities and the minimum amount they must spend.
Companies Act 2013: CSR Applicability and Section 135
Section 135 of the Companies Act, 2013, along with the Companies (Corporate Social Responsibility Policy) Rules, 2014, specifies the criteria that make companies eligible for mandatory CSR expenditure. Companies meeting any of the following thresholds during the immediately preceding financial year are required to constitute a CSR Committee and formulate a CSR Policy:
- Net worth of rupees five hundred crore or more.
- Turnover of rupees one thousand crore or more.
- Net profit of rupees five crore or more.
If a company meets any one of these conditions, it must comply with the CSR provisions.
Mandatory CSR Spending and Net Profit Threshold
For companies to which the CSR provisions apply, Section 135 mandates a minimum expenditure on CSR activities. The Act prescribes a specific percentage of the company's net profit that must be spent on these initiatives.
The law requires eligible companies to spend, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years. This is the minimum prescribed net profit threshold applied for calculating the CSR expenditure amount.
This requirement ensures that companies meeting certain financial benchmarks contribute a portion of their earnings towards social and environmental causes listed in Schedule VII of the Companies Act, 2013.
Calculation of CSR Expenditure
The minimum amount to be spent on CSR is calculated based on the average net profit of the preceding three financial years, not just the net profit of the current year or a single preceding year. This averaging helps provide a more stable base for CSR contributions, cushioning the impact of fluctuations in profit in a single year.
The calculation is as follows:
Minimum CSR Expenditure = 2% of (Average Net Profit of the three immediately preceding financial years)
Therefore, the minimum prescribed net profit threshold for calculating the mandatory CSR expenditure is 2% of the average net profit of the three preceding financial years for eligible companies.
| CSR Provision | Detail |
|---|---|
| Governing Section | Section 135 of Companies Act, 2013 |
| Applicability Trigger (any one condition) | Net worth ≥ ₹500 crore OR Turnover ≥ ₹1000 crore OR Net Profit ≥ ₹5 crore (in preceding FY) |
| Minimum Spending Requirement | At least 2% of average net profits of the three immediately preceding financial years |
Revision Table: Corporate Social Responsibility
Let's quickly recap the key points regarding the minimum CSR expenditure requirement:
- Eligible companies must spend on CSR.
- The spending is calculated based on net profits.
- The basis is the average net profit of the past three years.
- The minimum percentage is fixed by law.
- The minimum percentage is 2%.
Additional Information: CSR and Companies Act
Beyond the minimum expenditure threshold, the Companies Act, 2013 and associated rules cover several other aspects of CSR:
- CSR Committee: Companies meeting the criteria must form a CSR Committee of the Board.
- CSR Policy: The Committee must formulate a CSR Policy, recommending the activities to be undertaken (from Schedule VII) and the expenditure.
- Board Responsibility: The Board of Directors must approve the CSR Policy, disclose its contents in the Board's report, and ensure that the activities are implemented.
- Schedule VII: This schedule lists the activities that qualify as CSR, such as poverty alleviation, education, environmental sustainability, etc.
- Reporting: Companies must report their CSR activities and spending in the Board's report.
- Unspent Amount: Specific rules apply to unspent CSR amounts. If related to an ongoing project, it must be transferred to a special account within 30 days of the financial year-end. If not related to an ongoing project, it must be transferred to a specified fund within six months of the financial year-end.
Understanding these details provides a comprehensive view of the CSR obligations under the Companies Act, 2013.
Important Questions from Corporate Social Responsibility (CSR)
On which of the following principles is Andrew Carnegie's view on Corporate Social Responsibility, as reflected in his book, 'The Gospel of Wealth' based?
(a) Peter Principle
(b) Scaler Principle
(c) Charity Principle
(d) Steward Principle
Choose the correct option from the following:
Which of the following are part of Corporate Social Responsibility (CSR) to consumers?
a) Reasonable chances and the proper system for accomplishment and promotion
b) To supply goods at reasonable prices even when there is sellers market
c) Improving the efficiency of the business operation
d) To provide an opportunity for being heard and redress genuine grievances
Choose the correct answer from the options given below
As per Carroll Model, the four levels of Corporate Social Responsibility are :
What is the 'Triple Bottom Line Approach' in CSR as mentioned in the passage?
Given below are two statements :
Statement (I): CSR is a holistic and integrated management concept whereby companies integrate their industrial and future objectives with their business objectives.
Statement (II): In this modern digitalized world, business are required to be mindful both in terms of what they are doing and how they are doing.
In the light of the above statements, choose the most appropriate answer from the options given below:
