Economy

Government clarifications on the CSR policies and their doubtful impact-

CSR Policies: We all know that all the countries are currently in a race to make their nation a well-developed nation. In our country too, new investments are made every single day providing a boost to the economy. However, the economy has been through a lot during the pandemic and therefore the country needs more than ever investments daily in order to revive back.

With growing investments and the setting up of new businesses, there is one drawback, and that is the condition of the environment. We have been so busy developing our country and setting up new businesses daily that we fail to consider the condition of the environment. There is one basic rule that every firm has to follow- a firm uses the resources of society and therefore it is the sole responsibility of the firm to contribute to the development of the society and protection of the environment.

Therefore, the government of the country has been making new policies when needed in order to ensure that the businesses contribute some part of their earnings to society and the environment. In this article, we will discuss the amendment made in the Corporate Social Responsibility policy, why it is done and what will be its effects. To learn about everything easily, we shall start from scratch.

What is CSR?

Corporate Social Responsibility (CSR) is a policy launched by the government that provides a means through which a company incorporates social and environmental concerns into its actions which ensures that the working of the company is benefitting the environment.

CSR is more of philanthropic activity and it is to be done by every private and public company. The company has to spend a fixed percentage of its net profit on the activities for the development of society. With the rising needs for the development of society and improved functioning of the businesses, recently the Public Sector Banks and Limited Liability Partnership firms are also in discussion to be included in the CSRs.

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Companies with a minimum net worth of Rs 500 crore, turnover of Rs 1,000 crore or a net profit of Rs 5 crore are required to spend at least 2 per cent of their average profit of three years every on the activities of CSR every year.

What is the recent amendment in CSR?

Recently, the Ministry of Corporate Affairs has clarified that the excess expenditure on CSR activities prior to Financial year 21 cannot be used as future expenditure on CSR requirements. Moreover, they clarified that the donations given by corporates to government schemes will not be considered a part of CSR. This article will help you to understand the clarifications of the ministry’s decision.

Clarifications on excess expenditure?

The ministry recently clarified that the companies have to spend an amount equal to two per cent of the average profit of last three years every year on the activities of the development of the society. The ministry further added that any excess expenditure more than the required two per cent can be used against mandatory CSR expenditure in the next three fiscals.

However, the most important part of this is that any excess expenditure prior to the financial year 21 will not be considered for the subsequent fiscal years in the future. Previously the government said that the donations made to the PM Care fund on March 31, 2020, can be used to set off future CSR expenditure requirements for the financial year 2021. However, now with clarifications being given by the Ministry of Corporate Affairs, things have become more clear about the future payments for the CSR activities and all related queries for the same.

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On the PM Cares fund scheme, reports have said that this could be seen as a special treatment being given to this scheme and moreover, it will act as a preference. The reports further said that the government should allow excess expenditure on any government permitted CSR activity to set off payment of financial year 21. This, according to the reports will promote equality and no preferential treatment would be given to any government policy. This would further help those firms which have had done excess expenditure on CSR activities in the previous year and are not able to manage to spend on CSR this year, as we all know how hard the economy got hit by the global pandemic.

Another report suggested that the circular was issued by the government for the sole purpose of attracting funds to fight the existing crisis that our country was witnessing during the pandemic. Now, let us talk about some other key clarifications that the ministry has given recently.

What are other key clarifications?

To ensure that the funds are being properly used and are not getting wasted, the ministry clarified that it is the sole responsibility of the businesses to ensure that the funds transferred by them to implementing agencies are used properly towards the development of society and are not getting waste or are used in any other project.

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The process of simply transferring money to the implementing agencies is not enough. No matter how small or big the amount is, it becomes the responsibility of the firm to ensure that the money so transferred is being used efficiently and towards the development of society. Previous incidents have happened when the money was transferred by the firms and their negligence of them led to misuse of money. Therefore, the need to keep a view on the money becomes necessary.

The ministry also clarified that funding the government schemes cannot be considered CSR. The donations so given are the voluntary choice of the firms and are not towards the development of the society. The ministry said that CSR is not a source of funding for the resource gaps in the policy of the government and should not be seen as so. It is done to help to develop the society and not to fund the government policies. Therefore, no expenditure done on any government policy will be considered as a part of the CSR expenditure.

However, there is one drawback of this. Reports suggest that this clarification would directly impact the donations given by firms to the state governments. Why? Well, the donations are done for the sole purpose of maintaining good relations with the government and to reduce the additional incentive pressure by allowing this donation under the CSR expenditure. However, with this clarification been given, none of the donations will be counted as a part of the expenditure for CSR activities and therefore the donations to the state governments will definitely witness a shake.

What about the unspent CSR amount?

According to the clarifications given by the ministry, any amount of the CSR which remains unspent has to be transferred by the company to a separate bank account, that account that is not used for a business transaction. The amount thus transferred under the law can not be used by the company for business purposes.

With the growing pace of development in the country, the need to pay back to society also rises as a firm uses the resources of the society and therefore it becomes the firm’s moral responsibility. The responsibility of the firm towards the society will also help in reducing the rising poverty and will facilitate the better provision of services to the people who need them the most.

Edited by Sanjana Simlai.

Simerleen Kaur

Talk to me about economics, trade, and all things India.

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