Philanthropy and Law in India

Philanthropy and Law in India
SANJAY AGARWAL AND NOSHIR DADRAWALA
The Legal Context for Philanthropy and Law in India
Traditionally, the concept of law in India has been inextricably linked with dharm,1 which can loosely be translated as precepts guiding moral duty. These precepts evolved over thousands of years through public consensus and acceptance. Professor Robert Lingat has contrasted this aspect of traditional Indian law with modern civil law, on the basis of internal acceptance for one and external enforcement for the other.2 The law was not framed by the king through fiat. Rather, his role was to ensure that serious departures from the dharm were punished. Conflicting opinions of different sages, and the evolving nature of the law, allowed it to adjust as society changed.3 Historically, Indias nonprofit sector has been vast but has required little regulation. Most charity work was done directly by individuals and was encouraged by varn dharm, or the moral duties of different classes of society. No deductions were given from income tax for charity. Charity was also
1 2 3 This word should not be confused with the English word religion, which can be translated as panth (path) in India. Robert Lingat, The Classical Law of India (New Delhi, Munshiram Manoharlal, 1973). There are nearly 200 codes (smritis) containing the views of different sages. Of these, about 60 are relatively well known and the best-known is Manusmriti. These represent a healthy tradition of dialogue, debate and pluralism.
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not corporatised. Acharya Chanakyas Arthashastra contains reference to some of the problems that may arise in charitable transactions, and how these were to be resolved. For instance, a promise to give was enforceable against the donor. Judges were instructed to treat temples as privileged litigants.4 Village elders were charged with responsibility of looking after temple properties.5 Punishments were prescribed for embezzlement of temple property by trustees.6 Two privileges accorded to temples were that: (i) temple property could not be seized as war booty;7 and (ii) temple bulls could graze freely in any pasture.8 A government department, headed by the Chief Superintendent of Temples, was responsible for temple affairs.9 This law appears to have continued more or less without any change during the period of Muslim rule. However, with the coming of the British Crown after the 1857 war of Independence, the indigenous system of laws and law-enforcement was dismantled gradually and replaced with British civil law. Though the British borrowed heavily from Indian traditions while framing the law, the basic orientation of the law changed. It was no longer rooted in community traditions or evolved from their practices rather it was imposed from above after being framed by a select set of people. One of the first laws passed was the Societies Registration Act, 1860. It provided that all societies, associations, libraries, and reading rooms could be registered with the government. This would give them legal recognition, and perhaps help the government keep a better eye on their activities. The British Crown also introduced income tax in India for the first time in 1893. The earlier system was based on paying tax on the gross produce or transaction value. The new system allowed a deduction for expenses, and taxed net income. Since 1921, the Income Tax Act has recognized that charitable expenditure is also eligible for tax incentives. Almost all the laws existing on the statute books at the time of independence from the British were adopted by the Indian government. After this,
4 5 6 7 8 9 The judges themselves shall look into the affairs of gods [temples] , when [they] do not approach [the court]. The Kautiliya Arthashstra, R.P. Kangle, vol. I/II, 1969, Motilal Banarasi Das, Delhi. (Verse no. 3.20.22). Id., 2.1.27. Id., 4.10.13. Id., 3.16.28. Id., 3.10.24. Id., 5.2.38.
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it set about framing new laws for the nation. Over the next fifty years, nearly 2,500 statutes were passed at the central level, with another 30,000 or so being passed by various states taken together.10 India was now firmly in the grip of civil law. Fortunately, except for one piece of legislation (the Foreign Contribution (Regulation) Act), none of these were related to the nonprofit sector. The first years of the twentieth century saw some of the most unprecedented famines in India, generated by the modified land tax collection procedures introduced in the British period. These attracted international attention and after the Second World War, international charities started looking at India as a worthwhile cause. During the Cold War years that followed, bilateral aid also increased. Some of this foreign money also attracted adverse publicity in the late 1960s, and as a result, in 1976, a law called the Foreign Contribution (Regulation) Act (FCRA) was passed to control and monitor foreign donations to political parties, quasi-political organisations, and charitable organisations.
The Legal Regime
Legislation Governing Nonprofit Organisations in India

India has a statute and case law system with a multiple set of statutory laws governing various types of nonprofit organisations. The most important of these laws include the following: Public Trusts Acts applicable to different states in India (e.g., The Bombay Public Trusts Act, 1950 applicable in the states of Maharashtra and Gujarat; Rajasthan Public Trusts Act, 1959 applicable in the state of Rajasthan; Madhya Pradesh Public Trusts Act, 1951 applicable in the state of Madhya Pradesh; and others);
10 Bibek Debroy, In the Dock Absurdities of Indian Law (Konark, Delhi, 2000).
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Societies Registration Act, 1860 (which is all-India national legislation, a federal/national act with each state adopting certain modifications11); Indian Companies Act, 1956 (which is also national legislation); Income Tax Act, 1961 (also national legislation applicable uniformly in all states of India); Cooperative Societies Act, 1904; Trade Union Act, 1926; Indian Trusts Act, 1882 (essentially applicable to private trusts); Charitable and Religious Trust Act, 1920 (repealed in most states that adopted the Public Trusts Act after Indias independence); and the Foreign Contribution (Regulation) Act, 1976.
There is no single body of law for all of the classes of nonprofit organisations; instead, as specified above there are specific laws and regulations for each major type. In other words, different legal provisions exist at the national and state level.
Constitutional Provisions and the Problem of Individual Constituencies

The right of all citizens to form associations or unions is laid down in article 19(1)(c) of the Constitution of India. Article 26 of the Constitution of India provides every religious denomination or any section thereof (subject to public order, morality and health), the right (a) to establish and maintain institutions for religious and charitable purposes, (b) to manage its own affairs in matters of religion, (c) to own and acquire movable and immovable property and (d) to administer such property in accordance with law. State-made law can regulate the administration of property of a religious endowment, but the law cannot take away the right of administration altogether. Article 30 of the Constitution of India gives all minorities, whether based on religion or language, the right to establish and administer educa11 The original British act has served as a model, rather than a central act. The act has been adopted without amendment by some states, modified by some others, and completely replaced by other states (such as Rajasthan, Manipur, Madhya Pradesh, Chattisgarh, West Bengal, Karnataka, Mehgalaya, Tamilnadu). Also it was never adopted by some states, where the original statutes still apply (Jammu & Kashmir, Telangana region, Travancore region). Full details are available in AccountAble 60, 78-83 at www.AccountAid.net.
tional institutions of their choice. The term minority includes only those groups in a population who possess and wish to preserve stable ethnic, religious or linguistic traditions or characteristics markedly different from those of the rest of the population. In India, religion and state are legally separated. Nonprofit organisations are not permitted to engage in any political activity. Even political education is outside the ambit of charitable purpose as defined in the Bombay Public Trusts Act, for example. However, section 20 of the Societies Registration Act allows registration of a society whose object may be the diffusion of political education. The Constitution of India has established a secular state and has attempted to do away with distinctions of caste, colour and creed. However, it is open to any citizen of India to create a valid trust for the benefit of a particular section of the community. For example, it was held in the Aga Khan Diamond Jubilee Trust case, decided by the Bombay High Court, that a trust for the uplifting of the Khoja community would be a public trust under the Bombay Public Trusts Act, 1950.12 Section 13 clause (a) of sub-section 1 of the Income Tax Act pertains to religious trusts, and clause (b) pertains to charitable trusts. In the case of a trust or institution for charitable purpose, created or established after 4 January 1962, its income would not be exempt under section 11 or 12, if the trust or institution is created or established for the benefit of any particular religious community or caste. Hence, although it is permissible to create a valid trust for the benefit of a particular section of the community, that particular trust would not enjoy tax exemption under section 11 or 12 of the Income Tax Act.
12 Unreported decision of Bombay High Court Appeal No. 50 of 1952 - Original side.
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Types of Organisations (Legal Forms)

Under Indian law, there are five basic types of nonprofit organisations: trusts, societies, companies, cooperatives and trade unions. It is a matter of dispute whether the last two really fall within the ambit of nonprofit organisations. The characteristics common to the first three types are that they exist independently of the state; they are self-governed by a board of trustees or managing committee or governing council which comprises individuals who generally serve in a fiduciary capacity. They all also produce benefits for others, generally outside the membership of the organisation; and are not profit making, in as much as they are prohibited from distributing a monetary residual to their own members. In the discussion that follows, many of the examples are drawn from legislation in force in Bombay. In many cases the principles will be similar in other parts of India, though for legal purposes advice should be sought in the particular jurisdiction concerned.
Trusts
A public charitable trust has an uncertain and fluctuating beneficiary group. In ascertaining whether an organisations purpose is public or private, one must confirm whether the class to be benefited constitutes a substantial body of the public. Hence, trusts which lack the public element, such as trusts for the benefit of workmen or employees of a company, however numerous, have been held not to be public charitable trusts. While there is no central law for public trusts, private trusts are governed by the Indian Trusts Act, 1882. Section 3 of the Indian Trusts Act defines a trust as an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by him for the benefit of another.
It is a clearly established principle of the law of charity that a trust is not charitable unless it is directed to public benefit.13 In the case of trusts for educational purposes, the conditions of public benefit must be satisfied. A trust by a father for the education of his son is not a charity. The public element is not supplied by the fact that from the sons education, all may benefit. But the establishment of a college or a university is, beyond doubt, a charity. A trust is generally irrevocable and once set up, cannot be wound up. If it becomes defunct due to the negligence of the trustees, the charity commissioner14 can take steps to revive it, or in case it becomes difficult to carry out the objects of the trust, the doctrine of cy pres (i.e., changing the objects, while keeping them as close to the original as possible) can be applied. Two or more trusts with similar objects can also be legally amalgamated or merged. Under the Bombay Public Trusts Act, 1950, a public charitable trust may be registered with the office of the charity commissioner for any one or more of the following purposes: 1) relief of poverty or distress, 2) education, 3) medical reliefprovision for facilities for recreation or other leisure time occupation (including assistance for such provision), if the facilities are provided in the interest of social welfare and public benefit, and 4) the advancement of any other object of general public utility, but does not include a purpose which relates exclusively to religious teaching or worship. (Section 9(1) of the Bombay Public Trusts Act, 1950) A trustee of a public charitable trust must not, in any way, make use of the trust property or of his position as trustee for his own interest or private advantage, nor may he enter into engagements in which he has or can have a personal interest which conflicts or may possibly conflict with the interest of those whom he is bound to protect. A trustee may remain trustee for life unless there is a scheme for election in the trust deed.
13 Unreported decision of the Bombay High Court in Appeal No. 5 of 1975. 14 This applies in Maharashtra and Gujarat. For other states, there is no similar officer. The process is undertaken by the civil court on application.
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It is an accepted principle that a trustee of a religious or charitable trust should take proper care of the trust property just as a man of ordinary prudence does, in respect of his personal property.
Societies
Societies are governed by the central Societies Registration Act of 1860, though many states have amended the Act to suit their specific requirements.15 According to section 20 of the Societies Registration Act, the following societies can be registered under the Act: charitable societies, military orphan funds or societies established at the several presidencies of India, societies established for the promotion of science, literature, or the fine arts, for instruction, the diffusion of useful knowledge, the diffusion of political education, the foundation or maintenance of libraries or reading rooms for general use among the members or open to the public, or public museums and galleries of paintings and other works of art, collections of natural history, mechanical and philosophical inventions, instruments or designs. Societies are legal entities and can thus sue and be sued. The liability of their members is limited and their private assets cannot be confiscated to satisfy the societys liabilities. State amendments have broadened the scope of organisations that can be registered under the Act. Notwithstanding variations at the state level, the types of organisations that may generally register as societies include welfare, development and empowerment-oriented nonprofit organisations; clubs; cultural and literary societies; professional associations; educational institutions; and scientific and medical institutions. There are also some government-sponsored nonprofit organisations, such as the National Labour Institute and the National Development Board, that have been registered under the act.
15 The original British act has served as a model, rather than a central act. The act has been adopted without amendment by some states, modified by some others, and completely replaced by other states (such as Rajasthan, Manipur, Madhya Pradesh, Chattisgarh, West Bengal, Karnataka, Mehgalaya, Tamilnadu). Also it was never adopted by some states, where the original statutes still apply (Jammu & Kashmir, Telangana region, Travancore region). Full details are available in AccountAble 60, 78-83 at www.AccountAid.net.
Unlike trusts, societies have a more democratic structure. There is usually a scheme of election for members of the governing council/managing committee. The founders of the society can continue to remain members of the governing council or managing committee, subject to their being elected to the same from time to time. In rare cases, one or two founder members may be permitted to remain permanent/life members on the governing council or managing committee. Members of the general body enjoy voting rights and the right to demand the submission of accounts and the annual report of the society. A society can be wound up by following certain procedures laid down in the law including convening a special general meeting, passing proper resolutions, and transferring all funds and properties of the society to another nonprofit organisation with similar objects and activities.
Companies
Although the Indian Companies Act, 1956 is primarily intended to govern profit-making entities, section 25 of the Act allows for the possibility of obtaining nonprofit status for certain companies. A Section 25 company is a company with limited liability which may be formed for promoting commerce, art, science, religion, charity or any other useful object, provided no profits or other income from promoting the objectives is distributed by way of dividend, etc., to its members. Such a company is not required to suffix the term limited or private limited to its name. A Section 25 company can be wound up by following certain procedures laid out in the law including convening a special general meeting, passing proper resolutions, and transferring all funds and properties of the company to another nonprofit organisation with similar objects and activities.
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In Maharashtra and Gujarat, a Section 25 company enjoys certain advantages over a public charitable trust or society. Being outside the purview of and jurisdiction of the charity commissioner, the company enjoys more operational freedom. For instance, under the Bombay Public Trusts Act, a trust has to obtain prior permission of the charity commissioner to buy property, sell property, file regular change reports and budgets and, in addition to all this, also pay an annual fee (presently 2% of the gross annual income of the trust/society). As a company, the foundation would be free from all these constraints. The Income Tax Act gives equal treatment to trusts, societies and Section 25 companies as far as tax exemptions are concerned. Tax issues are more thoroughly discussed below.
Cooperatives
Although there is no clear legal definition of a cooperative, it is generally defined as an institution that promotes the economic and social betterment of its members, and an enterprise that is based on mutual aid conforming to cooperative principles. All states and union territories have their own laws governing cooperatives, and institutions registered as cooperatives are expected to abide by these laws, which can vary considerably from state to state.
Trade Unions
Trade unions are governed by the Trade Union Act of 1926, which defines a trade union as a temporary or permanent institution formed for regulating the relations between workers and employers, among workers, or among employers. The Trade Union Act also allows for a federation of two or more unions. In contrast to all other forms of nonprofit organisations, trade unions are allowed to use their general fund to remunerate their members and staff; and to fund legal procedures, educational activities and the general welfare of its members. Trade unions are also allowed to have separate funds for promoting civil and political interests of their members.
Required and Prohibited Purposes

The Income Tax Act, 1961, which is a central act applied uniformly throughout the Republic of India, defines charitable purpose for the purpose of tax exemption as relief to the poor, education, medical relief and the advancement of any other object of general public utility. The qualifying line not involving the carrying on of any activity for profit, was omitted by the Finance Act, 1983 (effective 1 April 1984), because a number of nonprofit organisations were carrying on some activities for profit in order to raise funds for their nonprofit purposes. Promotion of sports and games is also considered to be a charitable purpose within the meaning of section 2(15) of the Income Tax Act. The scope of eligible purposes is reasonably wide as long as the purpose is not for private gain, such as an undertaking for commercial profit, though some commercial activities are permitted in the broader interests of the nonprofit organisations charitable purposes. Chambers of commerce, which were incorporated as companies under section 25 of the Indian Companies Act, 1956 with the object of promoting trade, commerce and industry are considered as established for a charitable purpose. Similarly, a company incorporated without a profit motive, with the object of publishing law reports, maintaining and running a stock exchange, or promoting home industries, arts and crafts; or a society whose object is the general improvement and promotion of agriculture or to effect economic amelioration by imparting technical education, setting up model industries and reducing unemployment would all be deemed to be established for charitable purposes.
Formation Requirements
Nonprofit organisations in India are free to address any public need as
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long as the need is addressed in a lawful manner (i.e., without attempt to promote disharmony or general public disorder) and without any intention of private gain. A public charitable trust is generally floated with some property (movable or immovable) that legally vests in the trustees. A minimum of two trustees is required to start and run a trust. The founders of the trust can remain trustees for life and they need not be elected unless otherwise stipulated in the trust deed. The surviving trustees may appoint new trustees by resolutions passed at board meetings. In a society a minimum of seven individuals is required for registration. Members of the general public may enrol as members of a society by paying the membership fee and agreeing to abide by the rules and regulations of the society. The managing committee may have the right to refuse membership or terminate the membership of a member under specified circumstances. In the case of a Section 25 company, the income and property of the company must be applied solely for the promotion of the objects as set forth in its memorandum of association and no portion thereof can be paid or transferred directly or indirectly, by way of dividend, bonuses or otherwise to the members of the company. The founders of a Section 25 company may continue to remain directors, subject to their being elected to the board of management from time to time. A minimum of seven persons is required to found a Section 25 company. As in the case of a society, the set-up is quite democratic and members enjoy voting and other rights. Ten persons from different families are required to form a cooperative under the Delhi Societies Cooperative Act, 1972. Agricultural cooperatives must reserve half of their membership for scheduled castes (i.e., certain castes in India that are socially and economically marginalised). In cooper-
atives in which the central government shares capital, up to one-third of the managing committee members can be nominated by the government. The minimum membership requirement for trade unions is seven.
Choosing the Type of Nonprofit Organisation in India: Comparing Trusts, Societies, and Nonprofit Companies
The legal framework in India gives nonprofits a choice to register generally either as a trust, society or company. The question is which one? How should a new nonprofit make an enlightened choice? In states where a Public Trusts Act is in force, trusts offer simplicity and ease in registration procedures. Two trustees are required to found a trust or Section 25 company set up as a private limited company, while societies and Section 25 companies set up as public limited companies require a minimum of seven founders. The paperwork to establish a trust is less elaborate and in states where there is no charity commissioner the trust deed can be easily registered with the sub-registrars office. Trusts also offer autonomy in management and administration. An individual may remain a trustee for life and new trustees may be selectively appointed over a period of time. In a society or Section 25 company, there are requirements for a general body of members, periodic elections and annual general meetings. The setup is more democratic, and thus more cumbersome. Generally schools, colleges and hospitals established by wealthy families or corporate houses are founded as trusts. These educational or medical institutions are usually built on private and family lands and from private and family wealth for public good. Trusts offer them greater control and autonomy in management and administration. Members of the family may remain on the board for as long as they may want to. New trustees may be
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selectively appointed from time to time and there is no requirement of a general body of members or annual general meetings. Usually grassroots level organisations, which require greater public participation and involvement by way of membership, are registered as societies. And societies become a natural choice in states where there is no Public Trusts Act in force. Very few opt for the Section 25 company format. Many are not even aware that this choice exists.
Registration Procedures
Registering a Trust
The application for registration of a public charitable trust should be submitted at the office of the charity commissioner having jurisdiction over the region/sub-region of the state in which the trust is seeking to be registered. The application should be made in the prescribed form providing details regarding name of the trust, names and addresses of the trustees, mode of succession, and other key matters defined by law. The trust deed should be executed on non-judicial stamp paper, the value of which would depend on the valuation of the trust property.16 In some states, the trustee applying for registration is also required to submit an affidavit, and all co-trustees are required to sign a consent letter. A nominal registration fee is also charged.
Registering a Society
The application for registration of a society should be made to the registrar of societies having jurisdiction over the region/sub-region of the state in which the society is seeking to be registered. The application should be submitted together with the memorandum of association and rules and regulations. In addition to the above, different states require additional
16 In most states, except Gujarat and Maharashtra, one can simply go to the sub-registrar's office and register a trust deed by paying a nominal fee. The deed has to be executed on stamp paper. The process is very simple and is concluded in 2-3 hours.
documents such as consent letters of all members of the managing committee, affidavit, etc. A registration fee is also charged.
Registering a Company
The first step towards registration of a company (under section 25 of the Indian Companies Act) is the application to the registrar of companies for availability of name which must be made in the prescribed form together with a certain fee. It is advisable to suggest a choice of three other names by which the company may be called, in case the proposed name is not found acceptable by the registrar. Once the availability of name is confirmed, an application should be made in writing to the regional director of the company law board. The application should be accompanied by three printed copies of the memorandum and articles of association of the proposed company, duly signed by all the promoters with full name, address and occupation. The following documents should also be furnished for the purposes of registration: 1. A declaration by an advocate or a chartered accountant that the memorandum and articles of association have been drawn up in conformity with the provisions of the Indian Companies Act and that all the requirements of the act have been duly complied with in regards to registration or matters incidental or supplementary thereto; 2. a list of names, addresses and occupations of the promoters, together with the names of companies, associations and other institutions in which such promoters hold responsible positions, if any, with description of the position so held; 3. a statement of assets (with the estimated values thereof ); 4. an estimate of the future annual income and expenditure of the proposed company, specifying the sources of the income and the objects of the expenditure; 5. a brief description of the work proposed to be done after registration;
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6. a declaration by each of the persons making the application that he/she is of sound mind, not an undischarged insolvent, not convicted by a court for any offence and does not stand disqualified under section 203 of the Companies Act 1956, for appointment as a director. After the application is made to the regional director, an advertisement must be issued, after which the regional director will issue a license under section 25. Upon receipt of the license, the applicant returns to the registrar of companies, which then incorporates the company after following another independent registration process.17
Registering a Cooperative
The application for registration of a cooperative should be made to the registrar of cooperatives having jurisdiction over the region/sub-region of the state in which the cooperative is seeking to be registered. The application should be submitted together with the memorandum and articles of association.
Registering a Trade Union

The application for registration of a trade union should be made to the registrar of trade unions, together with a copy of the rules of the trade union. Any person who has attained the age of 15 years may be a member of a registered trade union. Under the act, seven or more persons can apply for registration of a trade union.
Registration for Tax Exemption

The rationales and legal provisions for tax exemption are discussed in more detail in the following section. Here we provide information specifically on registration issues pertaining to tax exemption. Once the nonprofit organisation is registered as either a trust, society or Section 25 company, the next logical step is to apply for tax exemption with the income tax authorities. In order to qualify for exemption under
17 The full procedure is described in AccountAble 48, available at www.AccountAid.net.
section 11 of the Income Tax Act (i.e., to exempt the income of the organisation from tax) the nonprofit organisation must apply to the commissioner of income tax within one year from the creation date of the nonprofit organisation in the prescribed form. The application must be submitted, together with certified copies of the trust deed or memorandum and articles of association, and certified copies of the registration certificate obtained from the charity commissioners office or the registrar of societies/companies.
80G Certificate under the Income Tax Act

A donor is entitled to a 50% deduction from taxable income for donations made to a nonprofit organisation having an 80G(5) certificate. The application for approval of a nonprofit organisation under section 80G(5) of the Income Tax Act should be made in the prescribed form, together with copies of the registration certificate and the trust deed/memorandum and articles of association.
Approval under Section 35AC of the Income Tax Act

Contribution(s) made to a project/scheme notified as an eligible project or scheme for the purpose of section 35AC of the Income Tax Act, would be eligible for a 100% deduction. Unlike the certificate granted under section 80G (wherein donations made to a qualifying organisation entitles a donor to a 50% deduction), the 35AC certificate is not given to any organisation, but only to eligible and approved projects. Application for approval of an association or institution for the purpose of section 35AC should be forwarded to the secretary of the National Committee for the Promotion of Social and Economic Welfare. The application in the prescribed form should be submitted in two sets written either in English or Hindi and accompanied with details about the name, address and status of the applicant. The National Committee usually recommends a project or scheme to the
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central government for notification as an eligible 35AC project or scheme for an initial period of three financial years.
Approval under Section 35(1)(ii) and (iii) of the Income Tax Act
A 125% deduction is allowed to donors for contributions made to an organisation involved in scientific research [section 35(1) (ii)] or research in social science or statistical research [section 35 (1) (iii)]. The application should be made by the research institution in the prescribed form to the director general of income tax (exemptions) in triplicate, through the commissioner of income tax having jurisdiction over the applicant. Six copies of the application with relevant enclosures should also be sent to the department of scientific and industrial research.
Permanent Account Number

Every nonprofit organisation that is required to file the return of income under section 139(4A) of the Income Tax Act has to apply for a permanent account number (PAN). The application should be made in the prescribed form (49A) to the income tax officer.
Registration for Seeking Foreign Funds

The Foreign Contribution (Regulation) Act, 1976 and its rationales and enforcement are described in more detail in the following section. Here we focus primarily on registration requirements and issues. All nonprofit organisations in India, whether registered or not, come under the purview of the Foreign Contribution (Regulation) Act. The application for obtaining prior permission of the central government to receive foreign contributions should be made in the prescribed form FC-1A. The application for registration of a nonprofit organisation for acceptance of foreign contributions should be made in the prescribed form FC-8.
Analysis and Recommendations
Legal Status and Registration

The fact that there is a choice of legal status (trust, society, company) which one can exercise at the time of registration is relatively unknown. Most Indian founders and organisations seem to think that a society is the only form in which a nonprofit can or should be registered. Those who are aware often exercise a choice for the wrong reasons. For example, many seem to think that forming a trust in Delhi or a state where there is no charity commissioner is the best way to escape from the clutches of a government regulatory body like the charity commissioner. Diversity in legal status also leads to conflict with regard to uniformity on issues of accountability and governance. The board of a trust does not legally require rotation of its board members whereas the board of a society or company does. In a society or company the liability of the members is limited while in a trust the trustees can be held personally liable. Trusts and societies registered in Maharashtra and Gujarat state have to seek the prior permission of the charity commissioner before taking out loans, or buying or selling immovable property. Nonprofits in other states enjoy more operational freedom. Registration procedures often drag on for months. The Public Trusts Acts applicable in various states lay down the procedure for registration, including a checklist for the registering officer. What it fails to stipulate is the maximum timeframe within which the application for registration should be processed. Under the Foreign Contribution (Regulation) Act (FCRA) an application for prior permission to receive foreign funds should be disposed of within 90 days (but this can be extended to 120 days under law). However there is no timeframe given with regard to registration under the Act. Organisations that are less than three years old are refused FCRA registra-
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tion. Even prior permission to receive foreign funds is often denied without ascribing any reason. While the Foreign Exchange (Regulation) Act (FERA) applicable to commercial organisations has been replaced by a more friendly Foreign Exchange Management Act (FEMA), the Foreign Contribution (Regulation) Act continues to be a thorn in the flesh for most nonprofit organisations. In Maharashtra and Gujarat, societies are also required to register under the Bombay Public Trusts Act, 1950 for regulatory purposes. In other words, in these two states, a society has one registration number under the Societies Act and another under the Trusts Act. The Societies Registration Act as applicable in these two states does not require payment to the Public Trusts Administration Fund. However since societies in these two states are also required to register as trusts, they end up paying a contribution (presently at the rate of two percent of the gross annual income or receipt) that societies in other states do not. In India, while it is permissible to create a valid nonprofit organisation for the exclusive benefit of a particular community or religious denomination, the organisation would not be entitled to the various tax exemptions available to secular nonprofit organisations. While it is quite understandable that the Constitution of India has established a secular state and has attempted to do away with all distinctions of caste, colour and creed, many feel that the tax law is rather unfair with regard to nonprofit organisations seeking to work at a more focussed level. Nonprofit organisations must register with and report to a number of government authorities. At the state level, the organisation has to register either with the office of the charity commissioner or the registrar of societies or the registrar of companies. At the federal level, it has to register with the income tax authorities and, if it receives foreign contributions, then it must also register with the Home Ministry.
Separate returns must be filed annually with all three authorities. There is often a dichotomy between state and federal laws. For example the Income Tax Act, a federal law, allows nonprofits in India to invest their money in all mutual funds, while the charity commissioner in Maharashtra and Gujarat allows trusts and societies to invest only in certain mutual funds. It is recommended that there should be single window clearance with regard to registration of nonprofits, and the system of dual registration for societies in states like Maharastra and Gujarat should be done away with. A suitable timeframe should be legislated for processing applications for registration. The term nonprofit or not-for-profit should be properly defined and incorporated in Indian law books. Even terms like NGO, PVO etc., are used colloquially and not recognized or incorporated in Indian law books. Some in the NGO community have suggested that it may be worth considering the idea of scrapping all the present choices available for legal status (trust, society, or company) and introducing a new, comprehensive, federal Indian Not-for-Profit Act which would be uniformly applicable to all nonprofits throughout India. In recent years, the feasibility of having a single comprehensive central law for nonprofits has been a significant issue in India. The Indian Trusts Act 1882 enacted by the central legislature applies only to private trusts and does not apply to charitable trusts. Parliament is competent to make laws for the whole or any part of the territory of India, with respect to trusts and charities, including religious and charitable endowments and institutions. There is, however, no central law on these subjects. To secure uniformity and to avoid irreconcilable conflict of laws on the subject, many feel it is advisable to have a central law with respect to charities or nonprofits enacted by Parliament for the whole of India or
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any parts thereof. Article 245 of the Constitution of India empowers Parliament to make laws for the whole or any part of the territory of India and the legislature of a state to make laws for the whole or any part of the state. Parliament, alone, is thus competent to make laws applicable to India or one or more states, including union territories. Under Article 246(1), Parliament has exclusive powers to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule to the Constitution (referred to as the Union List). Under Article 246 (3), the legislature of any state has exclusive powers to make laws for that state, or any part thereof, with respect to any of the matters enumerated in List II in the Seventh Schedule (referred to as the State List). Parliament and state legislatures are supreme and sovereign to make laws within their respective spheres. Under Article 246(2), Parliament and the legislature of any state also have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (referred to as the Concurrent List). Both Parliament and state legislatures are thus competent to make laws with respect to any of the matters in the Concurrent List. This is subject to the restriction contained in Article 254(2). Article 254(2) provides that where a state law, with respect to any matter in the Concurrent List, is inconsistent with a union law or an existing law (i.e., the law made by the centre or any province or Indian state before the commencement of the constitution) with respect to that matter, the state law shall prevail in that state, if it is reserved for the consideration of the president and has received his assent. Assent of the president is given only on the advice of the union executive. The article imposes no such restriction on the exercise of power by Parliament in this regard. State law enacted on any matter falling in the Concurrent List is, however, subject to the power of Parliament to enact a law with respect to the same matter, including a law adding to, amending, varying or repealing the said
state law [proviso to Article 254(2)]. This clearly establishes the prevalence of the central law over the state law, with respect to such matters. Entry 10 in the Concurrent List is trusts and trustees. Entry 28 in the list is charities and charitable institutions, charitable and religious endowments and religious institutions. Parliament and state legislatures are thus competent to make laws on these subjects.
Purposes (Required and Limited/Prohibited)

The laws applicable to nonprofits in India only recognize charitable purposes and religious purposes. Charitable purpose as defined under the federal Income Tax Act is fairly comprehensive and covers, besides relief of the poor, education and medical relief, or any other object of general public utility. The law in India adequately enables nonprofits to be registered for charitable purposes and implement welfare and development activities. The terms not-for-profit and nonprofit/s do not exist in Indian statute books. Many voluntary organisations in India feel uncomfortable with the term charity or to be registered for charitable purposes. Perhaps, substituting the term charitable purpose with not-for-profit purpose would be more in keeping with modern international trends in philanthropy. While the legal environment for promoting charitable purposes in India is quite enabling, one often encounters problems in convincing the registering officers whether objects like income generation programs for disadvantaged groups or empowerment of women are charitable. Registering officers are often known to go by the letter and not the spirit of the law. Registering officers should be given clear guidelines by the Ministry of Finance regarding what is a charitable purpose and acquaint all registering officers with some of the new development terminology.
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As long as the nonprofit is not established for or does not carry out any unlawful activity, the law in India provides a fairly conducive environment for the development and growth of all lawful charitable purposes.
Dissolution, Termination and Management Takeover

Since a trust cannot be lawfully dissolved (it can only be declared defunct or moribund or de-registered) trustees are often saddled with the discomfort of managing trusts that have very limited funds. While these trusts are unable to make any substantial difference to society, the trustees are under legal obligation to continue filing annual returns with different government authorities. Involuntary termination of a nonprofit can be ordered by the government only if it can prove beyond reasonable doubt that the trust, society or Section 25 company has been established for or is carrying out an unlawful purpose, such as destabilizing the country; or is promoting terrorism, anti-national propaganda, etc. In case of financial or management irregularities, the registrar of societies or companies or the charity commissioner can intervene as a regulatory authority and take suitable steps to set right the various irregularities. A nonprofit cannot be dissolved or terminated by the government on grounds of fiscal or management irregularities. The right to establish organisations for lawful charitable or religious purposes is guaranteed under the Indian Constitution. And while the government plays a regulatory role through various enactments of law, the government does not interfere with the actual management of nonprofits.
Trusts
Generally, when a public charitable trust is properly and completely constituted, it becomes irrevocable, even though it is voluntary. Accordingly, there is no provision under the various public trusts acts (including the
Bombay Public Trusts Act 1950) to legally terminate or dissolve a valid public charitable trust. In the case of public trusts, there can be no revocation if there has been a complete dedication of the property.18 When a public trust is left with no movable or immovable property and, as a consequence, all charitable activities come to a standstill, the trustees may apply to the charity commissioner to declare the trust as defunct or moribund. Thereafter, annual returns need not be filed with the charity commissioner and other authorities. Two or more not-for-profit organisations of the same type can be merged to form a single amalgamated legal entity. Section 50A(2) of the Bombay Public Trusts Act allows two or more public trusts to be amalgamated or merged into one single legal entity by framing a common scheme of management or administration. The procedure of amalgamation requires a proper application with court fee stamp to be made to the charity commissioner who, in turn, may also require the trustees to publish a notice in this regard in a newspaper. There should be proper justification for the amalgamation and the consent for amalgamation should preferably be unanimous on the part of the trustees of all the trusts to be amalgamated. After the final order is passed by the charity commissioner, those trusts which are amalgamated cease to exist as separate legal entities and instead, a new legal entity in the form of a new amalgamated trust emerges with a new registration number and scheme of management. If trustees of a public charitable trust wish to voluntarily dissolve the trust, they have two options: to transfer, over a period of time, all the movable and immovable property of the trust by way of donation/grant to another charitable trust (preferably with similar objects) and declare the trust as defunct or moribund; or to amalgamate the trust with another trust.
18 Krishna Swami Pillai vs. Kethendrama Naiken (27 Madras. L.J. 582:25 I.C. 426) and Mahadeva Ayyar vs. Sankara Pillai (14 Bombay L.R. 295).
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The charity commissioner (only in the state of Maharashtra) has powers under section 41D of the Bombay Public Trusts Act to suspend, remove or dismiss any trustee of a public trust if there is persistent default in the submission of accounts, report or return; wilful disobedience of any lawful order issued by the department; continuous neglect of duty or breach of trust; misappropriation or improper use of trust property; or if the trustee is convicted of an offence involving moral turpitude. With regard to involuntary termination, a trust may be extinguished or terminated if its purpose becomes unlawful under Section 77 of the Indian Trusts Act 1882.
Societies
A society registered under the Act of 1860 may be dissolved if members (not less than three-fifths of the total membership) so desire provided that whenever any government is a member of, or a contributor to, or otherwise interested in, a society registered under the Act, such society shall not be dissolved without the consent of the government of the state of registration. The procedure for dissolution of a society is laid down under the Act, and usually in the charter (articles or rules and regulations) of most societies.19 Upon the dissolution of any society and after satisfaction of all its debts and liabilities, the immovable and movable property is not to be distributed among members of the society but instead to be given to another society as may be determined by the votes of not less than three-fifths of the members present personally or by proxy at the time of dissolution. The procedure for winding up a Section 25 company is about the same as that of a society.
Foreign Contribution (Regulation) Act

The central government (Ministry of Home Affairs) may revoke FCRA registration given to any not-for-profit organisation under the Foreign
19 In some states, societies can be dissolved by the Government or the court. These states are: Andhra, Bihar (cancellation of registration), Madhya Pradesh, Meghalaya, Tamil Nadu, Uttar Pradesh, and West Bengal.
Contributions (Regulation) Act if the organisation fails to file the return in Form FC-3 or gives false information; if funds received by the organisation from foreign source/s are passed on to another not-for-profit which is not registered under FCRA or does not have prior permission to receive foreign funds; or if funds received from funding sources are used for political or anti-national activities. Any organisation aggrieved by such revocation may seek legal redress by filing an appeal in the High Court.
Income Tax
The income tax department may revoke tax exemptions given to any notfor-profit organisation under section 11 if the organisation violates any one or more of the requirements laid down under sections 11, 12 or 13 of the Income Tax Act. Violations include not utilizing the minimum stipulated income of the organisation on the objects; investing funds in forms and modes which are not approved under the act; applying any part of the income or property of the organisation directly or indirectly for the benefit of the founder, trustee, relative of the founder or trustee; or failure to file returns. Appeal for redress may first be made to the Commissioner of Income Tax Appeals (CIT Appeals) and if that fails, then to the tribunal and finally the High Court.
Analysis and Recommendations

The procedure concerning termination or dissolution of not-for-profit organisations in India is fairly simple and easy. A society needs only to convene a special general meeting of its members and pass a resolution for dissolving the organisation by a vote of not less than three-fifths of its members.
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There is no provision in law for winding up a trust. The procedure for declaring a trust as defunct or moribund is not laid down in the law books either. The general procedure followed in Maharashtra and Gujarat requires trustees to file a declaration before the charity commissioner that the trust has no funds or property and therefore should be treated as defunct or moribund. The law in India very clearly stipulates that the funds and properties of the organisation that is dissolved not be distributed among members of the organisation or the board. All the funds and properties must be transferred to another not-for-profit organisation, preferably one having similar objects. This adequately protects the public from fraud and similar abuse. The Income Tax Act lays down a fairly clear, systematic and reasonably speedy procedure for legal redress, in case the assessing officer denies tax exemption to a not-for-profit organisation. On the other hand, if the Home Ministry revokes registration or the prior permission given to a nonprofit under the Foreign Contribution (Regulation) Act, the organisation is left with no option but to make an appeal to the High Court which is a lengthy, costly and time-consuming procedure.
The Fiscal Regime for Philanthropy and Law in India
Tax Exemptions
Taxes in India are imposed at three levels: central, state and local. In some cases, there is an overlap of taxes, such as sales tax. Key taxes imposed by the centre are: income tax, wealth tax, excise duty, service tax, sales tax, customs duty, and road tax. Another tax is the stamp duty, which is akin to court fees.
Most states impose sales tax on the sale of goods, and in some cases on construction contracts also. Two states (Maharashtra and Gujarat) also impose a tax on donations to recover the costs of administering the charity commissioners office. In most states, charities have to pay registration or documentation fees for registering under the identity statute.20 There are also taxes at the local level, such as property tax. In this section, we discuss only the key taxes at the central level which are relevant to activities of nonprofit organisations, and where preferential treatment is provided to nonprofits.
Income Tax
21
Charitable organisations are exempt from income tax, if they fulfil certain criteria. These vary depending on the category of exemption sought. A basic exemption under section 12A is available to all charitable or religious organisations. A charity registering under this undertakes to spend a minimum percentage22 of its income each year on its objects. Charities must ensure that objects are geared to general public welfare, and are not restricted to particular persons; that surplus funds are kept in specified modes of investment or in publicly regulated banks; that charity funds or properties are not misused for personal benefit of key persons, including large donors; and that surplus income (or net assets, on dissolution) is not distributed to its members. The exemption is available on a continuous basis, provided the charity continues to meet exemption requirements. The approval is granted by the Income Tax Department itself upon application. No reference needs to be made to any other government department. No fees are involved. Approval is granted from the financial year in which the application was made. In genuine cases, delay in applying can be pardoned at the discretion of the Department. A time limit of six months has now been imposed for granting or rejecting the approval. In case of rejection, the charity can appeal through a tiered structure start20 The statute under which charities gain legal recognition. 21 Income Tax Act, 1961. 22 Currently this is 85%. Administrative expenditures and expenditures on purchase of fixed assets (including land and building) are also considered application of to income to the charitys objects.
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ing with the Departmental Commissioner of Appeals, through the quasijudicial Income Tax Tribunal, and onwards through the high court and finally the Supreme Court. A special exemption under section 10(23C) is available to charitable or religious organisations that are considered to be of national or regional importance, or that are involved in nonprofit public services related to education or health. The approval is granted for up to three years at a time, after which it has to be renewed. There is no application fee or processing charge, and the process takes at least six to nine months. Approval is applicable with retrospective effect in case of delays, which are frequent. The entire approval process is completed within the Income Tax Department, and the usual appeal channels are available in case of rejection. Until recently there was no minimum spending requirement for charities approved under section 10(23C) for the special exemption. Recent changes have done away with this privilege. Now the approved charity must spend 85% of its income each year on its objects in order to maintain its tax-exempt status. It should also keep its surplus funds in specified investments or publicly regulated banks.23 In certain cases, additional conditions can be specified in the approval letter at the discretion of the government. The approval can be rescinded or withdrawn on violation of these conditions or if the activities of the charity are later found not to be genuine. Before doing this, the government must give the charity a chance to defend its position. The withdrawal is subject to appeal through the normal channels.
Wealth Tax
The wealth tax is a redistributive tax, and attempts to bring about a balance in the personal wealth which people hold. There is a basic exemption limit of Rs. 15 lakhs (approximately US $32,700) Additionally, there are some common exemptions such as a residential house, assets used in pro23 Banks regulated by Reserve Bank of India.
duction of goods or services, and others. Any excess is taxed at rates ranging from 10% to 30%. Nonprofit organisations are automatically exempt from this tax,24 once they are registered under the Income Tax Act. There are some conditions they need to fulfil. These include ensuring that the assets (or income of the trust) are not used for personal purposes of the key persons,25 and that the funds are invested in specified ways.26 If the nonprofit organisation is running a business, then different conditions apply. First, it must maintain a separate set of account books for the business part of its work. Secondly, the business must fall into one of the following categories: (a) it consists of printing or publication of religious materials for public religious purposes; (b) its business is of a kind notified by the government as exempt; (c) it is carried on for charitable purposes, and the beneficiaries are mainly responsible for the work; or (d) the organisation is exempt under clauses 23B27 or 23C28 of section 10 of the Income Tax Act.
Value-added Taxes
There are two types of value-added taxes in India: one is excise duty on the manufacture of goods, and the second is service tax on provision of professional or other notified services. For applicability of excise duty, the threshold limit is Rs. 1 crore (Rs. 10,000,000) (approximately US $218,000). Furthermore, many of the items produced by charities are totally exempt from excise duty (e.g. printed books, handicrafts, etc.). As a result, no charities in India are paying excise duty as of now. So far as the law is concerned, there is no special exemption for charitable organisations. Service tax is a relatively new concept in India. There is no threshold limit, but it applies only to specified services, such as accounting, consulting, insurance, and telecommunications. At this time charities are not generally engaged in these services, although some do provide consulting services.
24 25 26 27 28 Sec. 5(i) and Sec. 45 of the Wealth Tax Act, 1957. Trustees, managers, large donors, their relatives, etc. See sec. 13(3). As mentioned in section 13(1)(d) of the Income Tax Act, 1961. Available to Khadi (handmade cotton cloth) or village industries. Available to various named funds, charitable hospitals, educational institutions, important nonprofit organisations, etc. India 145
However, there is no provision in the law for exempting charities from this tax.
Sales Tax
Tax on the sale of goods is a major source of revenue for the government. State sales tax is applicable on sales within a state each state writes its own law in this regard. Central sales tax is applicable when the transaction involves the inter-state movement of goods. Rates of sales tax depend on the product and the state, usually ranging from 4% to 12%. Some products are not taxable. There is also a threshold limit of Rs. 4 lakhs (Rs. 400,000) (approximately US $8,700). Sales tax applies to a trader29 only when annual transactions cross this limit. Sale transactions of most NGOs are generally below this limit. Other, larger NGOs are entitled to exemption from sales tax even if their products are in the taxable category. The procedure for exemption requires production of records and proving the bona-fides of the charity. The procedure is daunting, to say the least, and varies from state to state.
Customs Duty
Customs duty is applicable on import of specified goods into India. The rates vary for different classes of goods and from time to time. Currently, the lowest average effective rate for goods subject to duty is 39%. Exemption from customs duty is provided to goods imported for certain charitable purposes. This is done through general exemption notifications issued from time to time under section 25(1) of the Customs Act, 1962. Examples of such exemptions are goods imported for blind or deaf persons; for relief of people affected by the Gujarat earthquake of January 2001; and for goods imported by Ford Foundation, Delhi.
29 This limit is Rs. 2 lakhs (Rs. 200,000) for manufacturers.
Analysis
Historically, the nonprofit sector in India has been highly diffused. By one estimate, there may be as many as 40 lakh (4 million) nonprofit organisations in India this includes religious trusts, educational institutions, as well as charitable or development organisations. Most of these have traditionally been very small, with limited income, serving just the local village or community. Many of these are neither registered under the Income Tax Act nor do they maintain formal accounts. The regulatory issues associated with these kinds of organisations have also not been significant. This situation is also reflected in the structure of Income Tax Act, which does not deal with grants made by donor agencies at all. The objective of the Act at that time was to make sure that business groups should not be able to disguise their commercial activities using the cover of charity. In the last 30 years, the shape of the nonprofit sector began to change, with the emergence of development NGOs and transnational agencies. These organisations handle large amounts of money, have a wider reach and are often working in areas far away from their donors and/or supporters. As a result, the income tax provisions designed for an earlier era are not really suitable for these organisations or times. Changes in the Income Tax Act have been mainly reactive, based on requests from the nonprofit organisations or on reports of committees set up mainly to streamline provisions that were being misused. These reviews do not appear to have considered changes in the structure and complexity of the nonprofit sector. For instance, in 2001, the government reduced the accumulation period of funds for a specific program from 10 years to 5 years. In 2002, the minimum expenditure requirement was enhanced to 85%. Also, disbursements made to other charities would not be recognised as expenditures, if these were made out of accumulated funds. These amendments came among widespread fears that non-donating charities30 might lose their income tax
30 The Parthasarthy Committee Report suggested that charities which received more than 90% of their income from donations would be treated as donative charities. Specific-purpose grants were excluded from the definition of donations.
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exemption altogether. The actual changes, therefore, were greeted with a sense of relief. Over the last decade, several suggestions have been made by tax committees and working groups to effectively withdraw or curtail the income tax exemption presently enjoyed by charities. Strangely enough, there also appears to be some public support for this31 among business executives. A possible reason for this could be a perceived lack of public accountability on part of charities. Another reason for this could be that over the years, a number of schools and hospitals that are being run on commercial lines, have acquired taxexempt status. This allows these organisations to claim expenditures on capital assets as a deduction.32 These organisations run a nominal charitable program in order to project an image of nonprofit work. The Income Tax Act was amended in recent years asking such organisations also to file an income tax return, if their gross receipts exceeded Rs. 1 crore (Rs. 10,000,000) (approximately US $218,000).33 The late 2002 report by the Kelkar Task Force on Direct Taxes also made suggestions for the withdrawal of some income tax exemptions to nonprofit organisations. Overall, the trend appears to be one of a narrowing window of tax exemptions for nonprofits in India. This is contrary to the sectors expanding role and diversification into non-traditional methods of fundraising such as microcredit and income-generation.
Recommendations
Certain information should be made public in order to enhance the accountability of the nonprofit sector. The following information can be made public by the Income Tax Department, through an amendment in
31 See AccountAid Capsule 61, (www.accountaid.net) based on an Economic Times internet poll of 8 January 2002. 93% of the participants voted for withdrawal of income tax exemption to charities. Most of the participants are likely to have a business background--it is not known how many votes were polled. 32 Commercial organisations are allowed to charge only depreciation over the life of the asset. For land, no depreciation is allowed. This increases their taxable income. 33 This provision was later dropped on representations made by some nonprofit bodies such as AICC (All India Christian Council).
the Income Tax Act, 1961: (1) the name, address, and other relevant particulars of charities granted tax-exempt status under sections 10(23C) and 12A of the Income Tax Act, 1961; and (2) an annual statistical report on the total number of exempt charities, returns filed, income and funds. In addition, exempted charities should be directed to fulfil public requests for financial information, such as audited accounts. The following recommendations would also assist in the development of the Indian nonprofit sector: Allow grantmaking agencies to make tax-deductible grants to other charities from accumulated funds; Revamp the structure of the Income Tax Act so far as it deals with nonprofit organisations, recognising the changes in the structure of the sector over the last three decades; Establish clearer tests for distinguishing between public-benefit organisations and commercial organisations using a nonprofit shell or associate as a cover; Exempt charities from collecting and paying service tax; and Simplify procedures relating to sales tax exemption for charities.
Tax Deductibility and Credits for Contributors

All individuals above a certain limit of taxable income (currently Rs. 50,000 annually) (approximately US$1,000) have to pay income tax. The tax rate increases progressively from 10% to 30%. The net income is calculated after giving various deductions and tax incentives. Other assessees such as companies and firms also have to pay tax on their income, though the calculations vary according to the category of assessee. Non-individuals are taxed at flat rates instead of progressive rates. Any of these assessees can claim a deduction from their income for
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amounts donated to approved charities. This may range from a deduction of 50% of the amount donated, to 125% of the amount donated.34 This reduces the amount of taxable income and in turn the amount of tax. At present there are four tax slabs (sometimes also called brackets in other countries): Nil up to Rs. 50,000; 10% for Rs. 50,000-60,000; 20% for Rs. 60,000150,000; and 30% for Rs. 150,000 and above. The actual benefit for a donation depends on the slab occupied by the assessee. All donations must be itemised in the return, and proof of donation (receipt or certificate) must be attached. Only money donations (not inkind donations) are eligible for deduction. The various deductions are summarised below:
50% Deduction under Section 80-G of the Income Tax Act

Deduction under section 80G of the Income Tax Act may be 100% or 50%. The higher deduction of 100% is given for donations to government-defined high priority activities (such as family planning, armed forces, and disaster relief ) that are mostly under government control. Most non-government charities are entitled to seek approval only for 50% deductibility under this section. Almost any non-religious charity can be approved under section 80G(2)(iv) for 50% deductibility. Approval is given for a maximum of five years at a time. Important conditions for approval include: (1) the NGOs income should be exempt from income tax; (2) its income and assets are used for charitable purposes only, and the benefit should not be limited to a religious community or caste; (3) the organisation should maintain proper accounts; (4) the organisation should be a public trust, registered society, nonprofit company, or fund; (5) if the NGO is running a business, then it should keep separate books for the business, and donations should not be used for business purposes; (6) the charity should not apply more than five percent of its income for religious purposes;35 and (7) the Commissioner of Income Tax (CIT) must approve the NGO for this purpose.
34 India does not have a system of tax credits for donations. References to tax-deductibility should be understood as deduction of the donated amount from taxable income. 35 Sec. 80G(5B).
Donations collected under section 80G can be applied for any charitable purpose by the charity. The donor can claim 50% of the amount donated as a deduction. If the total of donations under section 80G is more than 10% of the total income of the assessee, then the excess is ignored.36 The same deduction rules apply for donations made by corporate donors or business donors.
100% Deduction under Section 35AC of the Income Tax Act

Nonprofit organisations approved under section 80G mostly are entitled to offer 50% tax deductibility to their donors. However, nonprofits approved under section 35AC can offer 100% tax-deductibility to donors. The limitation of 10% for 80G donations also does not apply here. This 100% deductibility approval is not given to the nonprofit as a whole it applies only to a specific project. (For-profit organisations can also take up such projects directly, as part of their social responsibility efforts.) Approval is given only to priority projects selected by the government, normally run by an NGO. For this, the NGO has to write a project proposal with a budget. The application is sent to a national committee drawn from various sectors including the nonprofit sector that sits at Delhi. Approval is normally given within six months, and generally for two to three years at a time. In order to claim this deduction, the donor needs a certificate in the appropriate form issued by the recipient NGO.
125% Deduction under Section 35(1)(ii) or (iii) of the Income Tax Act
Under this section, the deduction exceeds the donation: it is equal to 125% of the amount donated by business or professional firms or individuals. Assessees who do not have business or professional income get only a 100% deduction.37 There is no upper limit on the proportion of donors income that can be donated. The donation must be made to an institution approved under section 35(1) clause (ii) to do scientific research or under clause (iii) to do research in social sciences or statistical research. The donation must be used for these purposes only.
36 Some of the priority donations under section 80G are not included while calculating the total donations for this purpose. 37 Section 80GGA of the Income Tax Act.
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Approval under this section is given by the Central Board of Direct Taxes, and the application goes through the local commissioner of income tax. Approval is not given for more than three years at a time, and may be renewed. The NGO should maintain separate accounts for funds received in this way. An annual return (with audit certificate, income and expenditure account and balance sheet) should also be filed. The donor has to itemise and prove the donation to the Income Tax Department. For this a certificate or a receipt from the NGO is needed. The certificate or receipt should mention the date and number of notification under section 35.
Analysis
According to estimates from a government-appointed committee,38 the Government of India lost Rs. 1,100 (approximately US $240 million) crores in taxes during financial year 1999-2000 due to deductions offered to taxpayers for charitable donations. If extrapolated, this would mean that annual donations claimed by Indian taxpayers came to about Rs. 6,000 crores (approximately US $1.3 billion). On the other hand, a survey39 by Sampraadan (Indian Centre for Philanthropy) pegged total donations at Rs. 811 crores (approximately US $177 million) for the same period. Which of these figures is likely to be more reliable? Probably neither one. Some taxpayers lodge false claims for deductions by using inflated or false receipts. Paper charities are set up for this purpose, and they also obtain income tax registration and tax-deductible status. Donations are given by cheque, with about 85-95% of the amount returned in cash to the donor. This is particularly common in metropolitan areas. Very little visible effort is made by the government to curb this. This also gives a bad name to charities, and thus even genuine charities are sometimes viewed with suspicion by the public and regulatory authorities.
38 Parthasarthy Shome Committee Report, p. 114 (Final Report of the Advisory Group on Tax Policy and Tax Administration for the Tenth Plan, May 2001). 39 Sampradaan--Indian Centre for Philanthropy, Giving and Fund Raising in India (New Delhi, 2000).
At the same time, other taxpayers donate large amounts in cash or in kind at shrines, and do not claim any tax deduction at all. Donations to religious charities are not eligible for deduction, except a limited purpose deduction for renowned religious places under section 80G(2)(b) of the Income Tax Act. One of the most famous temples in India (Shri Thirupathi Devasthanam Trust) receives around Rs. 188 crores (approximately US $41 million) annually in cash donations. In addition to this, pilgrims donate gold, jewelry and other valuables. The sale value of hair donated by pilgrims comes to an additional Rs. 20 crores (approximately US $4.36 million) annually. Mata Vaishno Devi Shrine in Jammu has an annual income of Rs. 75 crores (approximately US $16 million), mainly from offerings by devotees. There are thousands of other temples, gurudwaras, dargahs (Muslim shrines), churches and other institutions across India that receive significant donations. How important are tax benefits for encouraging giving? Religious giving does not appear to be prompted by the motive of monetary rewards such as tax benefits. Still, denial of tax-deductible status for donations to religious charities is a thorny issue. Such denial is contrary to current international practice,40 and is a major disability for Indian religious sects. This approach, perhaps based on a misconceived understanding of secularism,41 fails to recognize the philanthropic power of religious charity. It fuels public sentiment against sects that do not depend on Indian charity and thus enjoy better financial clout. It also creates an underground economy in religious charity, as both the donor and the charity account for the donations outside account books. Often it forces religious sects to set up shadow organisations for carrying out philanthropic work, resulting in reduced accountability and increased complexity of accounting controls. Indians are traditionally used to giving in kind, particularly in rural areas where money plays a smaller role. However, most of the rural population does not pay income tax, as they are taxed through land revenue. Land revenue is collected as a fixed sum per acre of land. Urban people are also
40 In both the U.K. and the U.S., religious organisations are also eligible for raising tax-deductible donations. In several European countries, the government collects funds (as taxes) on behalf of approved religious denominations. Russia amended its tax code in May 2002 to allow tax-deductions for donations to religious organisations. 41 Secularism, which essentially means separation of church and state, does not have an exact equivalent word in Indian languages. It is, therefore, often translated loosely as dharm nirpekshta, meaning neutrality towards alternative religions.
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rediscovering giving in kind a significant emerging mechanism is the donation of corporate shares to NGOs. Another traditional form of giving has been the donation of land. However, neither the Income Tax Act nor the Land Revenue Act (which varies from state to state) currently recognizes giving in kind. Trusts also face a peculiar problem. Income tax deductions become available only when a trust has been formed and then approved. This means that the initial contribution is not tax-deductible, as it occurs at the time of formation, when the trust has not yet been approved. Most people, therefore, form a trust with a nominal corpus and supplement it later when the trust is approved. The Indian tax system is also geared for an economy where current incomes are higher than accumulated disposable wealth. As a result, deductible donations are limited to current taxable income, and carrying forward is not allowed. This situation is changing disposable wealth now often exceeds current taxable income, particularly among middleincome groups. At the same time, the size of the family is being reduced. Soon a situation will emerge where a wealthy person dies without eligible heirs. In such a situation, it may be necessary to recognize the fact that some peoples annual giving may exceed their current income. The present system also encourages more giving at higher levels of income. A person giving Rs. 1,000 at a slab (bracket) of 10% under section 80GGA may get a tax benefit of Rs. 100. The same amount, when donated by a richer taxpayer (occupying the 30% slab) would increase the tax benefit to Rs. 300. For other deductions, there has been a gradual movement to change these to deductions from tax (at a standard rate) rather than deductions from income. So far this treatment has not been applied to donations, and with good reason. Giving, in absolute terms, increases at higher levels of income. This is also in line with the concept that an individual is a trustee for the wealth he or she holds, and should use it wisely, for the benefit of the larger society.42
42 See Pravir Malik, The Flowering of Management (Sri Aurobindo Institute of Research in Social Sciences, Pondicherry, 1999). The concept is deeply embedded in the Indian social and religious practices whereby Vaishya community (producers of wealth through agriculture, cattle and trade) was traditionally expected to practise daan regularly.
Donations by business groups or corporate houses under section 80G are deductible in the same way as a donation by an individual donor (50% in most cases). This means that most businesses would prefer to show donations as a business expense and get a 100% benefit instead of claiming a deduction and getting only 50%. In order to qualify it as a business expense, often the corporation projects donations as a corporate image building exercise, instead of pure philanthropy. There is a view that, in the long run, this may distort corporate philanthropy, bringing it closer to a business transaction rather than to charity.
Recommendations
The Indian tax system is by and large fairly generous, balanced, and well designed when it comes to deductions for donations. Still, some of the changes that may be considered are: Reinforcing provisions related to the claiming of false donations. These would apply only to charities that obtain approval for taxdeductible donations. Steps may include (1) public notification of charities approved under section 80G; (2) public reporting of funds raised by each approved charity, including the duty to provide information requested by prospective individual donors; (3) special audits of charities approved for tax-deductible donations on a random basis; (4) stipulation that donations above Rs. 10,000 be given only by account payee cheque or bank draft; and (5) closer scrutiny of charities when applying for approval for tax-deductible donations. Imposing higher penalties for taxpayers who claim false donations; Recognising religious charity on the same footing as social charity; Introducing a mechanism for allowing deductions for giving in kind, where the donation can be valued and title transferred (motor vehicles, land, shares, etc.); Removing provisions which limit deductible giving to a percentage of taxable income; Allowing carry-forward of donations not covered by the current years income.
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Resource Mobilization and Capital Formation Issues (including Funding)
Capital Formation
There are no minimum capital norms for forming or running a nonprofit organisation in India. Capital formation is enabled through a mechanism called corpus donations from external sources. These donations are exempt from the minimum expenditure norms specified in the Income Tax Act for tax exemption. Funds can also be set aside for specific purposes or programs for up to a maximum of five years. Surplus can also be ploughed back as corpus, provided the minimum expenditure norms, currently 85% of total income, are met. Effectively, this means that a nonprofit cannot set aside its own surpluses in excess of 15% as corpus. The Income Tax Act also places limits on the mode of investing surplus or idle funds. Funds can be kept in scheduled banks, or invested in fixed assets or equipment. Funds can also be invested in specified securities (mostly government bonds), mutual funds and other approved bonds. In general, funds cannot be invested in the private sector or in the stock market. The objective of this provision appears to be two-fold: to prevent the formation of shadow charities by corporate groups which are really designed for investment in their own businesses; and to protect charities from losing money in the stock market. Additional limits also apply in Gujarat and Maharashtra under the Bombay Public Trusts Act, 1950. While the overall thrust of the law is the same, the list of approved securities differs somewhat. The provisions of Bombay Public Trusts Act apply only to trusts and societies based in these states.
Resource Mobilization
There are no constraints on domestic fundraising anywhere in India, except in Maharashtra and Gujarat, where a fee must be paid to the
Charity Commissioner on funds raised by trusts and societies based in these states. The fee goes towards meeting the administrative costs of the Charity Commissioners office, and ranges from zero percent some years to a maximum of five percent under the Act. In practice, however, it generally amounts to two percent of the amount raised. Some exemptions and deductions (i.e., for education) are also available under this scheme. Nonprofit organisations raising or receiving funds regularly (in currency, in kind or as securities) from foreign sources43 must register themselves under the Foreign Contribution (Regulation) Act, 1976. Registration takes up to nine months, once the organisation has established itself and has a track record of at least three years. Once registered, no quantitative limits or program constraints apply except for the following: FCRA-registered organisations may not get involved in electoral politics, publish a newspaper containing public news, or pass on funds to other nonprofit organisations unless they also have FCRA registration. Apart from this, there are some procedural restrictions, such as the requirement of a separate bank account, separate account books, and an annual financial report with audited accounts. The act also provides powers to the government to suspend or cancel FCRA registration,44 levy penalties for violation of these conditions and undertake inspections. There is a right of appeal against such government decisions. Once granted, registration is rarely revoked. Most of the revocations take place when an NGO becomes dormant and stops filing the annual return of foreign contribution.45 Currently, there are around 25,000 organisations that have FCRA registration. Out of these, only about 70% file the return regularly. Nonprofit organisations that do not intend to receive funds regularly from abroad can seek specific permission (termed prior permission) when they want to receive funds. Processing of this form of approval generally takes three or four months. In order to obtain this permission, NGOs have to submit a form FC-1A, along with a copy of the donors approval, a copy of the donor-approved project proposal, and copies of financial statements
43 United Nations and related organisations are not treated as a foreign source for this purpose. 44 As distinct from the basic or income tax registration. 45 So far only 10 NGOs have had their FCRA registration cancelled for other, more serious reasons.
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for the previous three years. To minimize delays in processing, the rules provide that a decision must be taken on an application within 90-120 days. The permission is specific as to recipient, source, amount and program activities. This means that the permission is non-transferable, and has to be revalidated if the source or program objectives change. There is no limit on the number of approvals that can be granted concurrently to an organisation. Also, in theory, there is no limit on the value of contribution that may be allowed under a specific permission. In practice, however, most of the permissions tend to be below Rs. 10 lakhs (approx. US $21,000), though there are cases where an NGO has been granted permission to receive Rs. 2 crores also (approx. US $ 435,000). The prior permission route appears to be used as a pressure release mechanism, and even serves as a confidence-building measure between the FCRA department and a particular NGO. However, it is also a major handicap for the smaller NGOs who find the process mysterious and uncertain. Also, it makes it difficult for such NGOs to raise smaller donations from individuals. NGOs that are politically active or are connected with political parties cannot get FCRA registration. They can only receive funds with specific prior permission, by applying in form FC-1A. FCRA provisions do not allow the transfer of funds by the recipient NGO to another NGO, unless the other NGO also has FCRA registration or prior permission. The objective of this provision is obvious: to ensure that the ultimate user of funds is approved by the government. While this is a fairly strict provision, in practice, many NGOs pass on funds to others, either deliberately or out of ignorance. In most of these cases, the FCRA Department lets them off with a warning, although in theory, this can lead to cancellation of FCRA registration and imprisonment. NGOs receiving foreign funds also have to file an annual financial return with the Ministry of Home Affairs, giving details of the funds or other
contributions they have received and spent in a financial year. The report is required to be audited by a public accountant. The ministry also receives information from the Reserve Bank of India regarding the flow of funds into various registered bank accounts. This information is used to cross check the filed reports in sensitive cases. These annual returns are also used to compile a report giving an overview of the funds received in a year by the NGO sector. The report is tabled in Parliament and is a public document. It does not give detailed information of the receipts of each NGO, but provides fairly useful information on overall flows. Curiously, this is the only reliable statistical report on the flow of funds to Indian NGOs. The Ministry of Home Affairs has also started providing some of this information on its website, http://www.mha.nic.in. It has also recently put up a complete list of the approximately 24,000 NGOs permitted to receive foreign contributions, along with their addresses. Such sharing of information can be very helpful in developing statistical information on the NGO sector in India. The FCRA Department has a fairly limited infrastructure and resources under its direct control, with a staff of only around thirty. However, it works in close cooperation with the other intelligence agencies, and appears to be highly effective in its information gathering and analysis.
Analysis
The minimum expenditure requirements under the Income Tax Act were enhanced from 75% to 85% in 2002. Some restrictions were also placed on deductibility of grants (for income tax calculations) made out of funds brought forward. This provision appears to be making financial management extremely difficult for emerging grantmaking NGOs in India.
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The Foreign Contribution (Regulation) Act (FCRA) was originally designed in the mid-seventies to restrict foreign interference in Indias elections, and is similar in intent to legislation existing in many other countries.46 The initial requirement from nonprofits was for reporting only, but this was extended to include registration after the Kudal Commission was set up by the government in 1982, based on the view that political parties may set up shadow nonprofit organisations to channel foreign funds. Over the years, as the voluntary sector in India has grown, the act has acquired a larger-than-life image. As of November 2001, 24,204 organisations were registered under the FCRA. This includes universities, religious organisations, donor agencies, and development-oriented nonprofit organisations. In some ways, the FCRA has distorted the growth of nonprofits in India. Many nonprofit organisations are almost totally dependent on foreign aid for their work. Difficulty in getting FCRA registration has resulted in a situation where most of the funds only reach a limited number of established organisations. Foreign funds are also comparatively easier to raise than domestic funds, and this has also stunted the growth of domestic philanthropy to some extent. In recent years, there has been some criticism over the dependence of the Indian voluntary sector on foreign donations. Some of this is related to the perceived involvement of some missionary and religious organisations in proselytisation, which is sometimes seen as giving rise to conflict within communities. The government has also indicated that it is planning to bring in new legislation47 to respond to the changing profile of the voluntary sector. The draft legislation is not public yet, but it is expected to impose stricter accounting and record-keeping norms, involve state-level officials in screening NGOs more closely, and place some further restrictions on quasi-political or proselytisation activities. The likelihood of stricter legislation has increased with greater international attention on the perceived use of shell charities for laundering terror funds.48
46 They include Albania, Algeria, Brazil, Canada (partial ban), Egypt, France, Germany (partial ban), Israel (partial ban), Japan, Jordan, Malaysia, Moldova, Poland, Romania, Russia, Spain, Taiwan, Turkey, Ukraine, United Kingdom, United States, and Yemen. 47 Expected to be called the Foreign Contribution Management Act (FCMA). 48 Combating the Abuse of Nonprofit Organisations is available at www1.oecd.org/fatf. See also the FATF Report on Money Laundering Typologies 2000-01 (February 2001), available at the same site, and AccountAid Capsules 54, 66, 126, 127, 129, www.AccountAid.net.
However, as the Indian economy grows stronger, the dependence of nonprofits on foreign funds is also likely to be reduced. A richer India would mean that international donors would not need to raise funds abroad and bring these into India. Already several international organisations have started raising funds within India. These trends may mean that over the next couple of decades, foreign contribution flows may become relatively less significant. A practical problem which many nonprofits in India face is due to the FCRA provisions that require only one bank account to be used for FCRA funds. In real life, this makes it difficult for nonprofits to transfer funds to the field level or to their branch offices, after receiving the funds in the main FCRA bank account.
Recommendations
Nonprofits should be allowed to build up capital through ploughing back of their own surpluses to a greater extent. Nonprofits should be allowed to transfer FCRA funds to subsidiary accounts after the funds are credited to the main FCRA-registered account.
Governance and Accountability
Statutory (Legally Mandated) Governance

The following reflect general statutory (legally-mandated) governance aspects of trusts, societies and other nonprofit organisations. Specific statutory features may differ in specific states; this overview is intended to
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provide a general picture of the situation.
Trusts
The law is silent with regard to the minimum number of trustees required to establish and manage a trust. It is argued that a trust can be settled by just one settlor who may in turn be the sole trustee. However, it is generally considered desirable by various registering authorities for two or more trustees to manage a trust. The charter or trust deed generally specifies the minimum and maximum number of trustees the trust may have. Unless specified in the trust deed, the trustees may remain trustees for life. Trusts generally do not have a general body of members and as such, there is no statutory necessity for annual general meetings or annual reports for members or periodic elections. Trustees may leave office by merely submitting a resignation letter to the board. The surviving trustees may appoint new trustees by invitation. The management of a trust or, rather, who manages the trust (i.e., members of one particular family) does not determine the public nature of a trust. What is essential is whether it inures to the benefit of the public, not who controls it. All the properties (movable and immovable) of the trust legally vest in the trustees, and all trustees are jointly and severally responsible. The board of trustees generally meets as often as required. Ideally, the board may meet four to six times a year. However, this is not statutorily required and may vary. Often, procedures for calling and conducting meetings are laid down in the trust deed. Fifteen days prior notice is generally adequate. The chairman presides over all meetings of the board and usually may vote. A trustee must not, in any way, make use of the trust property or of his position as a trustee for his own interest or private advantage, nor may he
enter into engagements in which he has or can have a personal interest which conflicts or possibly may conflict with the interest of those whom he is bound to protect. A trustee may not delegate any of his duties, functions and powers to a cotrustee or any other person though as a general rule, executive acts may be delegated. However, where a trustee has to exercise discretion, he must exercise the discretion personally and cannot delegate it. In principle, a trustee cannot buy the property of the trust himself and he cannot sell any of his properties to the trust either the mischief in both the cases being the likelihood of a conflict between his interest and his duties as a trustee. Trustees as a general rule, must administer the trust gratuitously voluntary service being the foundation underlying all trusteeship.
Societies
Seven or more members of the managing committee or governing council may manage a society. A society is structurally more democratic than a trust in as much as a society must have a general body of members with the power to vote at general body meetings, elect members of the managing committee or remove them if their performance is unsatisfactory, call for special meetings, and demand examination of accounts and other records. Members of the managing committee may hold office for such period of time as may be specified under the by-laws of the society. They may also stand for reelection. Members of the managing committee may meet as often as required and they must call a general body meeting once a year. Procedures regarding meetings are generally specified in the societys by-laws. Members of the managing committee generally serve in a fiduciary capaci-
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ty and usually appoint among themselves a president, secretary and treasurer. The by-laws of a society may be amended from time to time by the members of the general body.
Companies
Two (private companies) or seven (public companies) or more directors may manage a Section 25 company. The internal governance of a Section 25 company is more or less similar to that of a society.
Cooperatives
The general body of members of a cooperative has the ultimate authority with respect to the management of the institution, and the law requires regular election of committees. Further legal requirements include stipulations regarding general meetings, annual audits and accounting procedures. Cooperative societies are allowed to transfer liabilities and assets to other such societies or to split themselves into two or more societies. The registrar of societies and a majority (generally two-thirds or three-fifths) of the members, however, must approve such a decision. The registrar also has powers to direct amalgamation, division, or reorganisation of a cooperative in the public interest. The registrar also has the right to supersede elected committees, order new elections, and appoint one or more administrators who must be remunerated from the funds of the committee. The act limits annual net profit to 5% which, in addition, must be used for the cooperatives educational purposes. Finally, the act prohibits a cooperative from providing loans to persons other than its members.
Trade Unions
Under their bylaws, trade unions maintain a list of members of the trade union and facilities for the inspection thereof by all members. All members generally pay a membership fee and there are periodic elections of office-bearers. If a trade union has more than 500 members, its annual accounts must be audited by a chartered accountant.
Personal Benefit Restrictions

A trustee, member of the managing committee, or director of a nonprofit organisation in India must not, in any way, make use of the property of the organisation or of his position for his own interest or private advantage; nor may he enter into engagements in which he has or can have a personal interest which conflicts or possibly may conflict with the interests of those whom he is bound to protect. It is a general rule of equity that a trustee should administer the trust gratuitously, and this rule applies even though the completion of his undertaking involves considerable loss of time and much personal inconvenience. Even a solicitor-trustee is not entitled to charge for non-contentious business, except costs out of pocket. Voluntary service is the foundation underlying all trusteeship, and the law precludes a trustee from making a profit or acquiring a benefit from his office as trustee. In case a trustee desires to be remunerated for contribution of his time, energy, experience and skill, it would be advisable for him to first resign as a trustee/member of the managing committee and, if the remaining members of the board so desire, he may be appointed to the post of chief executive, programme director or executive secretary and receive a regular salary or honorarium, with or without other allowances and benefits.
Obligations to the Public

All registered nonprofit organisations must file their annual returns a) at the state level to the charity commissioner/registrar of societies/registrar of companies, b) at the federal level to the income tax commissioner and c) the Ministry for Home Affairs (only if the organisation is registered under the Foreign Contribution (Regulation) Act). Nonprofit organisations (except trusts) must call general body meetings once a year, hold periodic elections and circulate annual report and
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accounts among members. Any change in address, management board, etc., should be reported within the stipulated time to the registering authority. Prior permission of the charity commissioner is required for buying or selling immovable property of the trust or when seeking loans. As far as property (movable and immovable) of any nonprofit organisation is concerned, it is the duty of a trustee to take such care as an ordinary, prudent man would take if he were to manage his own property.
Other Funding Restrictions

Organisations which are registered under either the Trusts Act, the Societies Act or the Companies Act need not seek any special permission to raise funds, provided the manner in which funds are raised is lawful. It is also important for such organisations to be registered with the income tax authorities in order that the funds raised and forming part of the income of the organisation may be exempt from tax. Having an 80G certificate or exemption under certain subsections of section 35 also provides an incentive (tax rebate) to donors. All nonprofit organisations who receive foreign contributions or even donations in Indian currency in India from a foreign source must register under the Foreign Contribution (Regulation) Act or seek prior permission under the act to receive funds (as discussed above). Funds received from a foreign source must be deposited only in an exclusive and specified bank account and a separate set of accounts and records must be maintained exclusively for foreign contributions received and utilised. A return should be filed with the Ministry of Home Affairs within 120 days of the closure of the financial year.
Accountability
Accountability is currently viewed by the nonprofit sector as a multifaceted concept. We discuss here only the generally accepted view of accountability, in terms of reporting to regulatory authorities and to the general public. All nonprofit organisations exempt from income tax, and with gross receipts of over Rs. 50,000 (approximately US $1,000) are required to file an income tax return annually with the Income Tax Department. Along with this, income and expenditure accounts and a balance sheet are required, as well as a report in form 10B from the auditor. Form 10B includes information on payments to and transactions with trustees or key persons, use of trust property for personal purpose, investment of funds in associated concerns, and related issues. The Income Tax Department then reviews the information and passes an assessment order. It is estimated that only about 10-20% of nonprofit organisations are registered with the Income Tax Department and file their return of income annually. The accounts and information provided to the Income Tax Department are not open to the public. Organisations which receive foreign assistance are required under Rule 8 of the Foreign Contribution (Regulation) Rules, 1976 to file an annual return called FC-3 with the Ministry of Home Affairs by July 31 of each year (covering the April to March period). This return contains information on foreign assistance received and used during the year, as well as the balance in hand at the end of the year. An audit report is also required; along with audited receipts, payments, and balance sheets for foreign contributions. The return is reviewed by the FCRA section in the Ministry of Home Affairs to ensure that funds are not used for political or anti-national activities. The accounts and the return are not open to the public, though the ministry tables a report containing some statistics related to foreign contribution annually in Parliament.
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Finally there are requirements to file audited accounts with the government registrar or commissioner under the registering statute. The law governing nonprofit companies is a central law all nonprofit companies are required to file income and expenditure accounts and their balance sheet, along with an annual return, with the Registrar of Companies in the home state. In the case of public companies, all three are open to public for inspection on payment of a nominal fee. In the case of private companies, only the annual return and balance sheet are open to the public. In the case of public trusts and societies, filing requirements depend on the provisions of the governing statute and vary from state to state. This is shown in the table below.
State Andhra Pradesh Telangana Area Andhra/ Rayalaseema Region Arunanchal Pradesh Assam
Trust
No requirement No requirement No requirement No requirement
Society
No requirement No requirement No requirement Balance sheet49 and audit report to be filed Audited figures of receipts and expenditure and annual activity report Audited balance sheet, income & expenditure report, audit report and report on financial activities to be filed No requirement
Bihar
No requirement
Chhattisgarh
No requirement
Delhi
No requirement
49 Income and expenditure account not to be filed.
State Gujarat
Trust Audited accounts and audit report to be filed

No requirement No requirement No requirement No requirement No requirement
Goa, Daman and Diu Haryana Himachal Pradesh Jammu & Kashmir Jharkhand
Karnataka
No requirement
Society Audited accounts to be filed along with audit report Audit report to be filed No requirement No requirement No requirement Audited figures of receipts and expenditure and annual activity report Audited accounts and audit report to be filed
No requirement Audited accounts to be filed Audited balance sheet, income & expenditure report, audit report and report on financial activities to be filed Audited balance sheet, income & expenditure report, audit report to be filed Not known Balance Sheet, financial report and audit report to be filed
Kerala Malabar Region Rest of Kerala Madhya Pradesh
No requirement No requirement No requirement
Maharashtra
Audited accounts and audit report to be filed
Manipur Meghalaya
No requirement No requirement
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State Mizoram Nagaland Orissa Pondicherry
Trust No requirement No requirement No requirement No requirement
Punjab Rajasthan Sikkim Tamil Nadu
Tripura Uttar Pradesh Uttaranchal West Bengal
Society No requirement No requirement No requirement Audited balance sheet and receipts & expenditure statement to be filed No requirement No requirement No requirement Audited balance sheet, receipts & expenditure statement and audit report to be filed No requirement Balance sheet to be filed Balance sheet to be filed Balance sheet and audit report to be filed
Accounts, where filed with the registrars, are generally open to public inspection on payment of a nominal fee. However, this is often quite difficult in practice due to poor filing facilities at the registrars office. Currently, there is no requirement for publishing accounts or for providing copies of accounts to the public on request. However, some nonprofit organisations voluntarily include either full financial statements or extracts from these in their annual reports. These are circulated among donors and other interested people.
Analysis
Concerns about accountability and transparency of the nonprofit sector have increased over the years, as the sector has corporatised and grown in size and complexity. The current transnational presence of many organisations, and the sectors interest in sensitive issues such as human rights and advocacy has also generated fears about national security and interference in internal affairs. In some cases, nonprofit organisations have been implicated in financial scandals or have faced charges of misuse of funds. In response to this, many countries have evolved mechanisms to enforce accountability. For instance, in the United States, all nonprofit organisations (except churches, temples, mosques, and other religious institutions) are required to make their income tax return public. This happened after a series of high-profile scandals involving several nonprofits became public in the early 1990s. Fortunately, Indian nonprofits have not had to go through such trauma so far. While there have been isolated cases of misuse of funds, these have not attracted much public attention. Yet the need to prevent something like the American experience remains urgent. Over the last two decades, there have been sporadic attempts in India to make the nonprofit sector more transparent in terms of financial affairs. Several organisations are encouraging this on a voluntary basis. There has also been some discussion about enforcing this through legislative changes. This has also raised some concerns among development organisations that fear that this may be used by the government to persecute selected organisations. In 2001, a proposal was made to amend the Income Tax Act, requiring nonprofits (with annual receipts exceeding Rs. 1,000,000) to publish their accounts in a local newspaper. The cut-off limit was later enhanced to Rs. 10,000,000 in view of concerns expressed by some organisations regarding
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expenditures on advertising. In 2002, the provision was withdrawn altogether, as some organisations expressed the apprehension that publishing such information may lead to their receiving extortion demands. In private discussions, many organisations feel reasonably comfortable with publishing accounts or making them available to the public. However, there is also the feeling that there is no need to do so unless mandated by law. While the above may give an impression that Indian NGOs are not very serious about accountability, this is not quite correct. Perhaps here we need to distinguish between accountability and public disclosure. Nonprofits feel naturally accountable to their donors, whether these are institutional donors or individuals. But the sense of accountability to the general public is not an automatic response. From this perspective, Indian NGOs are offering a high degree of accountability to the donor agencies from which they receive funds. Organisations that have started raising funds from the Indian public also clearly see the need to disclose financial information and to be seen as accountable. The enthusiastic response of NGOs to the initiative of the Credibility Alliance (set up recently) is a clear indication that Indian NGOs will become more open on the question of public disclosure, as they become more serious about raising funds from within the country. The situation varies in the filing of accounts with regulatory authorities, depending on the type of organisation. Public company accounting is relatively opaque. Accounting by nonprofit companies is the most transparent. In the case of societies, it varies from state to state: about half the states do not ask societies to file any accounts at all. Filing of accounts with the Income Tax Department is also limited only to 10-20% of charities, and these are not open to public inspection. Considering the fact that public charities are essentially dealing with public funds, this is not a healthy situation.
A related question is that of accounting standards and disclosure. The Institute of Chartered Accountants of India (ICAI) is the standard-setting and regulatory body for the public accounting profession in India. While it has issued standards for commercial organisations, none have been formulated or issued for the nonprofit sector. Even the general accounting standards issued for commercial and other organisations do not apply to nonprofit sector (unless the charity is engaged in any income-generating activity). This has resulted in a general lack of uniformity and comparability of information in financial statements in the nonprofit sector. This situation has been partly remedied by the ICAIs release of the Technical Guide on Accounting and Auditing in Not-for-Profit Organisations in February 2003. Most of the guide addresses the issue of applying existing accounting and auditing standards designed for the forprofit sector to the not-for-profit sector. The guide also provides some useful materials on other accounting issues facing NGOs. Because the institute is a highly regarded professional body, a guide issued under its signature will help settle many controversies. The guide has already started a serious debate on the issue of nonprofit accounting and auditing standards in the voluntary sector and professional circles. There is also an expectation that this debate could eventually lead to the development of standards designed specifically for Indian NGOs. However, presently, the overall situation is one in which there is relatively little public oversight of the nonprofit sector in India. Increased public scrutiny and access to information can be expected to strengthen the sector by increasing public trust and enhancing fiscal responsibility.
Recommendations
In order to enhance transparency and accountability, the following information should be made public by the Income Tax Department through an amendment in the Income Tax Act, 1961: (1) the name, address, and
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other relevant particulars of charities approved for tax-deductibility under Sections 80G, 35AC, or 35(1)(iii) of the Income Tax Act, 1961; and (2) the amount of funds reported as raised annually by each of these organisations under the relevant tax-deductibility provisions. In addition, the Income Tax Act should be amended so that charities offering tax-deductibility to donors and raising funds from the public will be required to publish summary accounts on the internet or in newspapers, and also provide copies of full audited accounting statements on request. Rules and procedures should be framed under the FCRA to make public brief information regarding foreign contributions received and utilised by each organisation registered under the FCRA. The Companies Act, 1956 should be amended to allow public access to complete audited accounting statements and annual returns of private companies given nonprofit licenses. The Societies Registration Act, 1860 and its equivalents in various states should be amended to require registered societies to file audited financial statements (balance sheet, receipts & payments account, and income & expenditure account, along with an audit report) with the registrar. The application of the Indian Trusts Act, 1882 should be extended to public charitable trusts, and the act should provide for filing of annual audited financial statements with the Registrar of Societies. Alternatively, the application of Societies Registration Act, 1860 and its equivalents in different states should be extended to bring public charitable trusts within its purview. The Preface to the Statements of Accounting Standards issued by the Institute of Chartered Accountants of India should be revised to extend the application of these standards to the nonprofit sector as well.
Self-Regulation
A self-regulating framework built by the nonprofit sector (from within the sector) that allows for the establishment of norms; their promotion and adoption; and, more importantly, the certification or validation that the nonprofit organisation concerned meets these norms; can go a long way to restoring confidence among all stakeholders. In recent years, a number of self-regulation experiments and initiatives have emerged in India, one of the most active areas in Asia for these kinds of processes.50 The Credibility Alliance is such a voluntary initiative (so far it is not a formal registered body) with representatives from various national nonprofits which has recommended minimum norms for enhancing the credibility of the voluntary sector. The minimum norms cover three areas: identity (the organisation should exist and be registered); vision and impact (the organisation should state what it aims to do and state achievements related to its aims); and governance (the organisation should be committed to and practice good governance especially because voluntary organisations draw upon public funds). Some organisations have already begun to implement these norms and guidelines, though compliance is strictly voluntary. Recently the Ministry of Health and Family Welfare, Government of India requested that the Society for Services to Voluntary Agencies (SOSVA) carry out a feasibility study for creating a National Evaluation and Monitoring Agency (NEMA) for the voluntary sector. It is proposed that NEMA would evaluate nonprofits with the object of certifying the genuineness of the organisation based on certain minimum norms. NEMA will essentially focus on validation rather than ratings. In like manner, the Charities Aid Foundation (CAF) India together with the Planning Commission has undertaken efforts toward validation of voluntary organisations, including a large national project. IndianNGOs.com has also begun a similar exercise.
50 For further information on self-regulation initiatives and experiments in India, see also Mark Sidel, Trends in Nonprofit Self-regulation in the Asia-Pacific Region: Initial Data on Initiatives, Experiments and Models in Seventeen Countries (Paper prepared for the Asia Pacific Philanthropy Consortium, August 2003, available at www.asianphilanthropy.org/staging/about/NonprofitSelfRegulation.pdf).
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One of the strongest arguments in favour of good self-governance is enhanced public credibility. And this confidence usually translates into greater public support, both moral and financial. The greater the transparency and accountability; the greater the general public visibility, confidence and support. There are several issues concerning self-regulation in India. Conflict of interest, remuneration to board members, and frequency of meetings and their quality and content are among the key issues. Conflict of interest refers to the large numbers of nonprofits in India that are controlled by members of the same family. The remuneration issue arises because the Income Tax Act allows reasonable remuneration to board members without defining the term reasonable. Board members of a large number of nonprofits in India work on a remunerative basis. These are areas that would certainly benefit from greater self-regulation in the Indian nonprofit sector.
Self-Regulation and Boards

Contrary to popular opinion and belief in India the role of a board of trustees or directors is complex and demanding. Some of the legal requirements as well as the rights and duties of a board in India are: the funds, properties and assets of the organisation legally vest in the board of trustees; the board should be acquainted with and endeavour to advance the aims and objects of the organisation; the board should operate the organisation within the framework of the organisations own charter and the statutes governing the organisation; board members should not derive any personal benefit from the organisation; the board is jointly and severally responsible; the board should oversee administration and accounts;
and it should set policy through process of periodic meetings and resolutions.
More generally, the major stakeholders, who include donors and beneficiaries, expect boards to provide leadership and vision; give the organisation a sense of direction; set policy; take responsibility; hold the organisation together; motivate staff; mobilize resources; build and nurture an ethical, sensitive, and motivated and responsible team; and discourage exaggerated or misleading claims. The statutes do not lay down the minimum number of times board members must meet. It would be beneficial if nonprofits laid down guidelines or bylaws for the organisation in terms of the minimum number of meetings. Nor does the law provide the qualifications required of a board member. The law in India is not even clear as to whether a foreigner can serve on the board of a nonprofit. Under company law a person is restricted in joining as a director of only a specified number of companies. There is no restriction with regard to nonprofits and it is not difficult to find individuals who simultaneously serve on the board of fifty trusts. Whether the individual is simply lending his or her name to the organisation without any substantial contribution or aspiring to earn name and fame with such a boast is debatable. But some restriction in this regard is necessary, and if statutory law will not provide this then perhaps self-regulation can play a useful role.
Conclusions and Recommendations
Legal Status, Registration and Purposes

Registration procedures often drag on for months. The Public Trusts Acts applicable in various states lay down the procedures for registration, including a checklist for the registering officer. What it fails to stipulate is
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the maximum timeframe within which the application for registration should be disposed, and the law should mandate this. Under the Foreign Contribution (Regulation) Act (FCRA) an application for prior permission to receive foreign funds should be disposed of within 90 days. However there is no timeframe given with regard to registration under the act. Organisations that are less than three years old are refused FCRA registration. Even prior permission to receive foreign funds is often denied without reason. In India, while it is permissible to create a valid nonprofit organisation for the exclusive benefit of a particular community or religious denomination, the organisation would not be entitled to the various tax exemptions available to secular nonprofit organisations. While it is quite understandable that the Constitution of India has established a secular state and has attempted to do away with all distinctions of caste, colour and creed, many feel that the tax law is rather unfair with regard to nonprofit organisations seeking to work at a more focussed level. It is recommended that there should be single window clearance with regard to registration of nonprofits. The system of dual registration for societies in states like Maharastra and Gujarat should be done away with. A suitable timeframe should be legislated for processing applications for registration. The term nonprofit or not-for-profit should be properly defined and incorporated in Indian law books. Even terms like NGO, PVO etc., are used colloquially and not recognized or incorporated in Indian law books. Registering officers should be given clear guidelines by the Ministry of Finance regarding the definition of charitable purpose, and acquaint all registering officers with some of the new development terminology. Central law should prevail over state laws, with respect to such matters. Perhaps, it may be worth considering the idea of scrapping all the present
choices available for legal status (trust, society, company) and introducing a single, new, comprehensive, federal Indian Not-for-Profit Act which would be uniformly applicable to all nonprofits throughout India. To secure uniformity and to avoid irreconcilable conflict of laws on the subject, many feel it is advisable to have a central law with respect to charities or nonprofits enacted by Parliament for the whole of India or any parts thereof. Article 245 of the Constitution of India empowers Parliament to make laws for the whole or any part of the territory of India and the legislature of a state to make laws for the whole or any part of the state. Parliament, alone, is thus competent to make laws applicable to India or one or more states, including Union territories.
The Fiscal Regime: Tax Exemptions and Deductibility

Certain information should be made public by statutory mandate in order to enhance the accountability of the nonprofit sector. This includes (1) The name, address, and other relevant particulars of charities granted tax-exempt status under sections 10(23C) and 12A of the Income Tax Act, 1961; and (2) an annual statistical report on the total number of exempt charities, returns filed, income and funds. In addition, exempted charities should be directed to fulfil public requests for financial information, such as audited accounts. Grantmaking agencies should be permitted to make tax-deductible grants to other charities from accumulated funds. The structure of the Income Tax Act should be revamped so far as it deals with nonprofit organisations, recognising the changes in the structure of the sector over the last three decades. Clearer tests should be established for distinguishing between publicbenefit organisations and commercial organisations using a nonprofit shell or associate as a cover. Charities should be exempted from collecting and paying service tax. Procedures relating to sales tax exemption for charities should be simplified.
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Provisions to combat the claiming of false donations and deductions should be strengthened. These would apply only to charities that obtain approval for tax-deductible donations. Steps may include (1) public notification of charities approved under section 80G; (2) public reporting of funds raised by each approved charity, including the duty to provide information requested by prospective individual donors; (3) special audits of charities approved for tax-deductible donations on a random basis; (4) stipulation that donations above Rs. 10,000 are to be given only by account payee cheque or bank draft; and (5) closer scrutiny of charities when applying for approval for tax-deductible donations Higher penalties should be imposed on taxpayers found claiming false donations. Religious charities should be recognized on the same footing as social charities. A mechanism should be introduced to allow deductions for giving in kind, where the donation can be valued and title transferred (motor vehicles, land, shares, etc.). Provisions limiting deductible giving to a percentage of taxable income should be removed. Carry-forward of donations not covered by current years income should be allowed. Nonprofits should be allowed to build up capital through ploughing back of their own surpluses to a greater extent. Nonprofits should be allowed to transfer FCRA funds to subsidiary accounts after the funds are credited to the main FCRA-registered account.
Governance, Accountability and Self-Regulation

In order to enhance transparency and accountability, the following information should be made public by the Income Tax Department through an amendment in the Income Tax Act, 1961: (1) the name,
address, and other relevant particulars of charities approved for taxdeductibility under Sections 80G, 35AC, or 35(1)(iii) of the Income Tax Act, 1961; and (2) the amount of funds reported as raised annually by each of these organisations under the relevant tax-deductibility provisions. In addition, the Income Tax Act should be amended so that charities offering tax-deductibility to donors and raising funds from the public will be required to publish summary accounts on the internet or in newspapers, and also provide copies of full audited accounting statements on request. Rules and procedures should be framed under the FCRA to make public brief information regarding foreign contribution received and utilised by each organisation registered under the FCRA. The Companies Act, 1956 should be amended to allow public access to complete audited accounting statements and annual return of private companies given nonprofit licenses. The Societies Registration Act, 1860 and its equivalents in various states should be amended to require registered societies to file audited financial statements (balance sheet, receipts and payments account and income and expenditure account, along with audit report) with the registrar. The application of the Indian Trusts Act, 1882 should be extended to public charitable trusts, and the act should provide for filing of annual audited financial statements with the Registrar of Societies. Alternatively, the application of Societies Registration Act, 1860 and its equivalents in different states should be extended to bring public charitable trusts within its purview. The Preface to the Statements of Accounting Standards issued by the Institute of Chartered Accountants of India should be revised to extend the application of these standards to the nonprofit sector as well.
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Philanthropy and Law in India

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Philanthropy and Law in India

SANJAY AGARWAL AND NOSHIR DADRAWALA

The Legal Context for Philanthropy and Law in India

116 Philanthropy and Law in South Asia

The Legal Regime

Legislation Governing Nonprofit Organisations in India

Constitutional Provisions and the Problem of Individual Constituencies

118 Philanthropy and Law in South Asia

Types of Organisations (Legal Forms)

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122 Philanthropy and Law in South Asia

124 Philanthropy and Law in South Asia

Required and Prohibited Purposes

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128 Philanthropy and Law in South Asia

Registering a Trade Union

Registration for Tax Exemption

130 Philanthropy and Law in South Asia

80G Certificate under the Income Tax Act

Approval under Section 35AC of the Income Tax Act

Permanent Account Number

Registration for Seeking Foreign Funds

132 Philanthropy and Law in South Asia

Analysis and Recommendations

Legal Status and Registration

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136 Philanthropy and Law in South Asia

Purposes (Required and Limited/Prohibited)

Dissolution, Termination and Management Takeover

138 Philanthropy and Law in South Asia

Foreign Contribution (Regulation) Act

140 Philanthropy and Law in South Asia

Analysis and Recommendations

The Fiscal Regime for Philanthropy and Law in India

142 Philanthropy and Law in South Asia

144 Philanthropy and Law in South Asia

29 This limit is Rs. 2 lakhs (Rs. 200,000) for manufacturers.

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148 Philanthropy and Law in South Asia

Tax Deductibility and Credits for Contributors

50% Deduction under Section 80-G of the Income Tax Act

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100% Deduction under Section 35AC of the Income Tax Act

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154 Philanthropy and Law in South Asia

Resource Mobilization and Capital Formation Issues (including Funding)

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158 Philanthropy and Law in South Asia

160 Philanthropy and Law in South Asia

Governance and Accountability

Statutory (Legally Mandated) Governance

provide a general picture of the situation.

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164 Philanthropy and Law in South Asia

Personal Benefit Restrictions

Obligations to the Public

Other Funding Restrictions

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49 Income and expenditure account not to be filed.

168 Philanthropy and Law in South Asia

Trust Audited accounts and audit report to be filed

Kerala Malabar Region Rest of Kerala Madhya Pradesh

No requirement No requirement No requirement