Updated: June 9, 2020 7:42:32 pm
Written by Noshir H Dadrawala
India’s voluntary sector, noted for its vibrancy, innovation and research-based advocacy, is an important nation-building partner for our government. During the COVID-19 pandemic, the social impact work of our NGOs has become even more visibly vital — not just in providing relief, food, clothing and shelter to those affected by the coronavirus and lockdown, but also creating a sustainable ecosystem for long-term rehabilitation of vulnerable communities.
It is rather unfortunate, therefore, that the government seems to perceive the corporate sector as enhancing the country’s economic growth and the voluntary sector as fomenting dissent and thwarting development. This erroneous perspective does not reflect the facts — voluntary organisations (VOs) contribute enormously to India’s GDP and provide livelihood to millions. Yet, as described by two new research studies from Ashoka University’s Centre for Social Impact and Philanthropy in partnership with NITI Aayog, the rigours of legal compliance that VOs must currently go through in comparison to businesses create unnecessary hurdles to progress.
These reports — “A Study on the Legal, Regulatory, and Grants-in-Aid Systems for India’s Voluntary Sector” and “Regulatory Frameworks for India’s Voluntary Sector” — provide valuable insights based on the months leading up to our current time of crisis. Now, COVID-19 has provided an opportunity for VOs to further demonstrate the scope of their work and worth. Will India’s government take notice?
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Instead of treating the voluntary sector with mistrust, the government should seek to empower it to promote public welfare by establishing mechanisms to consult, fund and collaborate with VOs — starting with a more enabling legal environment to enhance effectiveness.
While corporate laws have seen significant reform aimed at simplification, improving transparency and governance in sync with global trends in recent years, the voluntary sector has not seen any similar movement. India’s business startups get a number of benefits; VO startups face numerous obstacles under FCRA and CSR regulations. While the national mantra is “ease of doing business”, the government does not seem to recognise the importance of “ease of doing good”.
Instead, VOs are overregulated, facing compliance requirements so complex and multi-layered as to confound do-gooders entirely. At the state level, the regulator is the Charity Commissioner (for trusts) or Registrar of Societies (for societies) or Registrar of Companies (for Section 8 companies). At the Central level, the Income Tax Authority determines if an organisation exists for charitable purpose or not, and accordingly grants registration under section 12AA (for tax exemption) and section 80G for tax deduction (enabling a donor to enjoy 50 percent tax deduction). Additionally, the Ministry of Home Affairs is the central regulator granting registration or prior permission to any VO wanting to receive funds from any “foreign source” for a “definite cultural, economic, educational, religious or social programme”. Depending on the size, nature of work and scope of activities of the VO (e.g., the Shops and Establishments Act, GST, POSH), additional regulators have additional requirements.
All the registration and processing time to obtain tax exemptions and deductions can take up to a year. Moving processes online has helped simplify some of this work while dramatically reducing opportunities for corruption, but procedural delays remain rampant.
At the state level, India’s lack of uniformity and standardisation becomes even more confusing. Some states have excessive regulations; others have virtually none at all. For example, in the states of Maharashtra and Gujarat the charity commissioner requires regular “change reports” to be filed and prior permission for buying and selling of immovable property. In contrast, the National Capital Region (Delhi) does not have a charity commissioner, nor do several other states. Therefore, it is no surprise that many new nonprofits attempt to seek registration in New Delhi or such territories, as an effort to bypass at least one regulatory authority on the list.
A trust can be registered within a matter of a few days in Delhi or Karnataka. However, in Maharashtra or Gujarat, the process could take months. Trusts registered in states other than Maharashtra, Gujarat, Madhya Pradesh and Rajasthan can legally bypass at least one regulating authority because most other states including the National Capital Region does not have a Public Trusts Act (a state legislation) nor the office of the charity commissioner. And societies, registered under the Societies Registration Act 1860 in Maharashtra and Gujarat, are by default required to also register as trusts under the Trusts Act.
Companies seeking registration under the Indian Companies Act are required to go through a name approval process. This process ensures that there is no other company registered in India under a similar name. However, there is no such process or procedure laid down at the state level for trusts or societies. As a result, there are instances of several trusts and societies registered under the same or similar name.
Financial Year 2020-21 and beyond will be very challenging for VOs. Most public and private funding will go towards COVID-19 relief and rehabilitation; most CSR funding has been committed to the newly established PM-CARES fund. Companies or individuals opting for lower tax rates will not be able to enjoy tax deductions offered by VOs under section 80G.
Under such circumstances, should VOs consider strategies for generating income through fees for services, rather than depending solely on grants and donations? Current tax regulations, however, discourage any such efforts to pursue more sustainable funding mechanisms.
Two suggestions for the government to consider:
One, Finance Act 2020 will require every organisation registered u/s 12AA (tax exemption) and u/s 80G (tax deduction) to apply to income tax between October 1 and December 31, 2020 to revalidate existing registrations; such revalidation shall be valid for a period of five years. Considering current pressures on all sectors — government, corporate and voluntary — it would be best if the government would drop this idea, saving both voluntary organisations and the income tax authorities this unnecessary exercise.
Two, under the draft Companies (CSR Policy) Rules 2020, the Ministry of Corporate Affairs has proposed that companies may carry out CSR activities through their own foundation or implementing agencies. In either case, however, the entity should be a company registered u/s 8 of the Indian Companies Act 2013. If this proposal is notified and comes into force, it will effectively eliminate the role of public charitable trusts and societies registered under the Act of 1860 in implementing CSR projects, programmes and activities on behalf of companies. Some of the oldest and the most well-known corporate foundations are registered as trusts, not as nonprofit companies. In fact, the bulk of voluntary organisations in India are registered as trusts and societies. Considering the stellar role being played by hundreds of trusts and societies across India even right now towards COVID-19 relief and rehabilitation, the government should not consider implementing this proposal.
India’s voluntary sector does much more than just fill gaps in the government’s service delivery system, and deserves to be recognised and treated with respect. By all means, the government has the right to regulate voluntary organisations. However, the regulatory laws should be uniform and enabling. A stronger voluntary sector strengthens India.
(The writer is CEO, Centre for Advancement of Philanthropy)
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