Securities Market Code, 2025
The enactment of the Companies Act, 2013 marked a paradigm shift in Indian corporate governance, making India the first country to legally mandate Corporate Social Responsibility (CSR). Prior to this, CSR was a philanthropic activity, voluntary in nature. The introduction of Section 135 institutionalized the concept of “giving back,” moving from a voluntary ‘participatory’ model to a ‘statutory obligation.’ While the legislative intent was to integrate social development with corporate growth, the practical implementation has revealed significant structural rigidities. This note analyses the transition of CSR from a “comply or explain” regime to a “comply or penalize” framework and highlights the critical challenges regarding geographic disparity and tax treatment.
The Legal Framework: Mandate And Applicability.
The Companies Act of 2013 has a rule under Section 135(1) that says companies must do Corporate Social Responsibility or CSR for short if they meet one of the following three limits, during the last financial year. These companies have to follow the CSR mandate. The CSR mandate applies to any company that meets one of these limits.
- Net Worth of ₹500 crore or more;
- Turnover of ₹1,000 crore or more; or
- Net Profit of ₹5 crore or more.
Businesses that fit these requirements are required to form a CSR Committee with a minimum of three directors, including one independent director. Section 135(5) of the Act’s core financial obligation mandates that these businesses allocate a minimum of 2% of their average net profits from the three most recent fiscal years to initiatives listed in Schedule VII (e.g., eradicating hunger, promoting education, environmental sustainability).
From “Comply Or Explain” To “Comply Or Penalize.”
Initially, the 2013 Act operated on a “comply or explain” basis. If a company failed to spend the mandated amount, it simply had to disclose the reasons in its Board Report. However, the Companies (Amendment) Act, 2019 and the Companies (CSR Policy) Amendment Rules, 2021 fundamentally altered this nature, making spending mandatory and non-compliance a penal offense.
A. Treatment of Unspent Amounts.
The 2021 amendments brought in a system for money that was not spent. This system made a difference between money for projects and money, for other things. The 2021 amendments did this by creating rules that applied to projects and rules that applied to other cases. The main idea of the 2021 amendments was to deal with funds in a better way.
- Ongoing Projects: When we have money left over from a project that takes years to finish we have to move this unspent amount to a special account called the “Unspent CSR Account” within thirty days of the financial year ending. We have to use these funds within three years. If we do not use the money from the Unspent CSR Account then we have to move it to a Schedule VII fund.
- No Ongoing Projects: If the unspent amount does not relate to an ongoing project, the company must transfer the funds to a government-notified fund (such as the Prime Minister’s National Relief Fund or Clean Ganga Fund) within six months of the end of the financial year.
B. Penalties.
The shift to a penal regime is cemented by Section 135(7). Non-compliance now attracts specific monetary penalties rather than general fines. The company is liable for a penalty of twice the unspent amount required to be transferred (capped at ₹1 crore), and every officer in default is liable for 1/10th of the amount (capped at ₹2 lakh). This strict liability suggests that CSR is no longer a “soft law” obligation but a “hard law” tax-like mandate.
Critical Analysis: Structural And Implementation Challenges.
While the regulatory framework is robust, it suffers from inherent contradictions that undermine the equitable distribution of resources.
A. The “Local Area” Trap.
Section 135(5) directs companies to give preference to the “local area” around their operations. While well-intentioned, this has led to a massive concentration of CSR funds in industrialized states. Data indicates that states like Maharashtra, Gujarat, Karnataka, and Tamil Nadu receive a disproportionate share (approx. 60%) of total CSR spending, while underdeveloped states like Bihar, Jharkhand, and Uttar Pradesh, which have the highest developmental needs, receive a fraction of the funds. This exacerbates regional inequality rather than mitigating it, as corporate capital flows back into already developed industrial hubs.
B. The Taxation Paradox.
A critical friction point is the tax treatment of CSR expenditure. Explanation 2 to Section 37(1) of the Income Tax Act, 1961, explicitly states that CSR expenditure is not a deductible business expense. The logic is that CSR is an application of income, not an expenditure incurred for the purpose of business.
- The Conflict: The government mandates CSR as a statutory obligation (like a tax) but refuses to treat it as a tax-deductible business expense. This results in an effective tax rate higher than the statutory corporate tax rate for compliant companies.
- The Exception: Interestingly, contributions to the Prime Minister’s National Relief Fund (PMNRF) are deductible under Section 80G of the Income Tax Act. This creates a perverse incentive for companies to simply write a check to government funds to save tax, rather than engaging in groundwork or setting up their own projects, defeating the purpose of corporate engagement in social causes.
The CSR regime under the Companies Act, 2013, has successfully mobilized billions of rupees for social development, but its transition to a rigid, penal framework has raised valid concerns. The current structure risks reducing CSR to a “tick-box” compliance exercise driven by fear of penalties rather than genuine social intent. To align the law with its spirit, policymakers must address the geographic imbalance by incentivizing spending in aspirational districts and resolving the tax asymmetry by allowing CSR expenses as a valid business deduction.
See Also
CSR Obligations Under The Companies Act 2013 A Critical Analysis
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Assistant Director, Legallands
Global Trade & Investment Expert
Nicke Tuli is an Assistant Director at Legallands, specializing in international business setup, global trade laws, and cross-border investments. With extensive expertise in Comprehensive Economic Partnership Agreements (CEPA) and foreign dispute resolution, she provides strategic guidance to Indian investors expanding into international markets, particularly in the UAE and GCC region.
Her recent works include analytical pieces on:
Dispute Resolution and Recovery Mechanisms for Indian Investors in the UAE
Economic Impact of Relaxed Export Rules on Indian E-Commerce and MSMEs
Nicke is passionate about simplifying global business frameworks and helping Indian entrepreneurs navigate international legal ecosystems with confidence.
