Corporate Social Responsibility: Exploring the Legal Aspects of CSR, Sustainable Practices, and Ethical Standards in Business Operations

1. Introduction

In India, Corporate Social responsibility (CSR) has become a key element of business in India. Companies Act, 2013 has made provisions for specific businesses to designate a specific portion of their profit to fulfil their obligation towards CSR. This helps to enhance the positive influence of these businesses on the environment and society. In this article, we will discuss the different aspects of CSR, CSR and its relation to environmental sustainability, and the co-relation of CSR and ethical business practices. We will also discuss the regulatory frameworks for CSR Activities in India.

2. Different Aspects of CSR

Corporate Social Responsibility (CSR) constitutes a holistic approach encompassing several components, including support for environmental sustainability, adherence to ethical business practices, and contributions to the development of local communities. Each of these elements serves as the cornerstone of CSR, collectively working towards a positive societal and environmental impact.

2.1 Environmental Sustainability

One of the most important facets of CSR is Environmental Sustainability. This keeps a record of a company’s environmental footprint. Under this sect of CSR, companies are obliged to adopt energy resources that are renewable. Moreover, they are obliged to minimize the waste generation and natural resources are to be conserved. Let’s assume a business deal in delivering electronic products, so such a business can switch to recyclable material to pack their products for delivery. This will reduce their carbon footprints. Companies like BlinkIt, Zepto, etc have already adopted and delivered their products without using plastic bags and have ensured minimal usage of practice while delivering their products.

2.2 Ethical Business Practices

The most interesting area of CSR is the requirement of ethical business practices. For example, conducting integrity-oriented and transparent operations. The basic code that a company must implement is to ensure that it is not being involved in anti-corruption activities. A company must advocate for fair implementation of labour codes. There must be no discrimination among the employees and rather diversity must be embraced. There is a framework known as the United Nations Global Compact. There are comprehensive guidelines in this framework that help a company to implement ethical business practices. Guidelines such as, protecting human rights, implementing labour practices that are ethical, corruption must be avoided etc are a few examples.

2.3 Community Development

Another important aspect of CSR is to involve corporations in growing the local communities with their resources. These corporates can help a local community in various aspects such as making arrangements for healthcare initiatives and education programs. Some specific areas in which corporates usually spend their resources are, infrastructure development of some local schools, skill-based training for the local youth, and donations to local hospitals for the necessary resources. There are companies where programs where staff are enabled to provide assistance in building homes for the people who are homeless or even organize basic necessities such as food. Programs like this not only help the local communities but also develop a character in the employees of such companies which ultimately helps them in return.

3. What are the Regulatory Frameworks for CSR Activities in India?

3.1 CSR Framework and Reporting Requirements

Section 135 of the Companies Act, 2013 is a primary provision along with the Companies (CSR Policy) Rules 2014 and Schedule VII of the Companies Act. These are the three major pieces that provide the CSR framework in India. Companies meeting specific financial criteria are legally obligated to allocate at least 2% of their average net profit from the preceding three years to CSR activities outlined in Schedule VII.

These companies must establish a Corporate Social Responsibility Committee of the Board, comprising a minimum of three directors, including at least one independent director. The committee is responsible for formulating and recommending a CSR Policy, specifying activities and expenditure, and monitoring CSR implementation. Companies can implement CSR activities through various modes, including direct implementation, eligible implementing agencies, or collaboration with other companies.

Starting from April 1st, 2021, entities engaged in CSR projects must register with the Central Government by filing Form CSR-1 electronically. Additionally, companies with a CSR spending obligation of Rs. 10 crore or more must conduct an impact assessment of their CSR projects, and the Board must disclose CSR policy details on their website to ensure public accessibility.

3.2 GST and CSR Activities

The Finance Bill 2023 has amended the CGST Act to state that businesses cannot claim input tax credit (ITC) for goods or services used in CSR-related activities. This means that businesses cannot get a refund of the GST they paid on these goods and services.

Additionally, while charitable trusts or NGOs registered under Section 12AA of the Income-tax Act, 1961, are exempt from GST for certain activities, specific services provided by them remain taxable.

3.3 Understanding Income Tax Implications for CSR Activities

Under Indian law, companies are required to spend a certain amount of money on corporate social responsibility (CSR) activities. However, these expenses cannot be deducted from the company's taxable income. This means that companies have to pay income tax on the full amount of their profits, even if they have spent some of that money on CSR initiatives.

Additionally, companies are not required to deduct tax at source (TDS) on CSR funds that are given to eligible implementing agencies, such as NGOs registered under Section 12AA. This means that companies can simply transfer the CSR funds to the implementing agency without having to deduct any tax.

3.4 FCRA Compliance Requirements for Corporates Involved in CSR Programs

Companies, especially those with over 50% foreign investment, must ensure that any NGO or organization receiving CSR funds is FCRA compliant, as per the Foreign Contribution (Regulation) Act (FCRA) Regulations Act 2010. This includes Indian companies with significant foreign investment, and compliance is legally mandated.

4. Conclusion

Ultimately, it can be concluded that in India, CSR is an integral part of the domain of doing business in India. Companies with the help of the regulatory framework are aware of the social impact they have on the community at large. Noble ideas such as ensuring a sustainable environment, ethical business practices and community development have created a positive impact on the community at large. If one wants to identify the regulatory framework that governs CSR in India then the combined reading of the Companies Act, 2013 and the Companies (CSR Policy) Rules, 2014 would give an ample amount of idea. Ultimately, CSR fosters a positive impact on society and the environment, aligning businesses with sustainable and ethical practices.

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