Centre may broaden the range of activities eligible for CSR expenditure
The government is contemplating adjustments to corporate social responsibility (CSR) norms, aiming to broaden their reach and enhance compliance by revising penalty structures, according to sources familiar with the matter. Discussions are underway, and a final decision is expected soon. These modifications, once finalised, may be incorporated into amendments to the Companies Act, 2013, along with relevant regulations slated for introduction post-general election, one source mentioned.
Section 135 of the Companies Act mandates companies of a certain scale to allocate a minimum of 2% of their average net profits from the preceding three financial years towards specified CSR activities annually. Failure to meet this requirement subjects a company to a penalty of twice the unspent amount or ₹1 crore, whichever is lower. Additionally, officers in default may face a maximum penalty of ₹2 lakh.
However, despite the existing penalties being relatively high, they have failed to effectively deter non-compliance, particularly among companies with substantial CSR obligations, as per the sources. One source highlighted a loophole where companies could potentially evade significant CSR expenditure by facing only a ₹1 crore penalty, regardless of the unspent amount. Therefore, the government is considering revising this cap.
Furthermore, there is a discussion on broadening the range of activities eligible for CSR expenditure. Experts suggest removing unnecessary specifics in defining eligible activities to allow companies to cover a wider array of initiatives within broader categories.
In FY22, 3,984 obligated companies failed to spend any amount on CSR, while the total CSR expenditure slightly increased to Rs 26,279 crore compared to the previous year’s Rs 26,211 crore, as per official data. The government is also reconsidering the requirement for local area CSR spending, which has led to ambiguity due to a 2021 FAQ issued by the Ministry of Corporate Affairs. This FAQ clarified that the preference for local area spending is not mandatory, creating confusion over the law’s actual intent and necessitating clarification.
