The Regulatory Regime Debilitating India’s Nonprofit Sector

Original article here.

India’s nonprofit sector has long played a critical role in serving vulnerable populations. Throughout the COVID pandemic, the sector filled crucial gaps by providing essential social services and humanitarian relief. And yet, nonprofits have been targeted by the government with onerous requirements at every turn, greatly hampering their work.

The nonprofit sector has never witnessed as many regulatory changes as it did in 2020 and 2021. COVID and the subsequent lockdown threw the country into an unprecedented state of disquiet, resulting in a flurry of new regulations purportedly aimed at protecting public health. However, rather than relaxing compliance requirements to simplify essential relief work, India’s government throttled the sector by tightening virtually every key regulation governing nonprofits. Measures such as the draconian 2020 Amendments to India’s Foreign Contribution (Regulation) Act (FCRA) weakened the sector and obstructed the humanitarian response to the disastrous spring 2021 wave of COVID. Even now, the government is suspending or canceling the foreign funding permissions of thousands of nonprofit organizations and drawing resources away from civil society.

Crowded street in old Nizam City (Photo: Tejj/ Unsplash)

Written by Noshir Dadrawala

Mr. Noshir Dadrawala is the CEO of the Mumbai-based ‘Centre for Advancement of Philanthropy,’ specializing in the areas of nonprofit law and CSR compliance for companies. He is the author of several books on nonprofit law and management and conducts seminars and workshops for nonprofits across India.

This analysis focuses on five regulatory developments that have undermined the nonprofit sector:

  1. Changes in the Tax Regime
  2. Foreign Contribution (Regulation) Act Amendments
  3. The Companies (CSR Policy) Amendment Rules 2021
  4. Reserve Bank of India directive prohibiting recurring payments for various services
  5. The PM Cares Fund.

While some measures seem innocuous, they have collectively drained the sector’s lifeblood, resulting in a ‘death by a thousand cuts.’ The extent to which survival and recovery are possible for India’s dynamic civil society – and in what form – remains to be seen.

1. CHANGES IN THE TAX REGIME

In February 2020, Finance Minister Nirmala Sitharaman declared during her Union Budget speech that all charitable trusts and institutions enjoying tax exemptions or deductions must revalidate their registrations with the Income Tax Department. One would have thought that the government would withdraw this onerous proposal with the pandemic and pursuant lockdown. Instead, they simply extended the deadline, adding to the stress nonprofits were already facing.

In April 2021, during the height of India’s second COVID wave, the Income Tax Department’s online portal finally opened for applications to revalidate 12AA (tax exemption) and 80G (tax deduction) certificates that were due to expire within three months. However, the revalidated certificates would only be valid for five years, creating another substantial administrative burden.

Furthermore, in early June, the government decided to revamp the online portal just weeks before the application deadline. The new portal had numerous glitches, making it difficult to submit applications. An extension was finally granted just a few days before the deadline. While this provided temporary relief, the continual uncertainty and wasted time navigating a malfunctioning system took its toll. Decreased capacity and increased compliance costs diverted critical resources at a time when organizations were undertaking the herculean effort of providing COVID relief, supporting migrant workers, and filling service gaps left by the government response.

The compliance hurdles are likely to continue, as the tax regime has also placed the onus on nonprofits to report all donations received during the fiscal year and donor details on the portal. This requirement may prove challenging, especially for organizations raising funds through crowdfunding platforms.

Complicating matters further, the Goods & Services Tax (GST) subjects certain goods and services, including those supplied by nonprofits, to an average of 18% GST. While GST is an indirect tax paid by the consumer, not the organization, it represents an additional compliance burden for the supplier, whether for-profit or nonprofit.

In November 2021, the Maharashtra Authority for Advance Ruling (AAR) ruled that grants to nonprofits are also subject to GST, raising concerns that nonprofits would be required to register under the GST. This would constitute yet another compliance challenge for the sector while potentially forcing donors to pay GST at 18% for services provided by their grantees. Grants are a ‘gift;’ therefore, the nonprofit should not be mistaken for a “vendor of commercial services.”[1]

2. FCRA AMENDMENTS

In September 2020, the Ministry of Home Affairs (MHA) made major amendments to the Foreign Contribution (Regulation) Act (FCRA) 2010. Changes included a prohibition on sub-granting, a 20% cap on administrative expenses drawn from foreign funds, and a requirement to open a bank account at a specific branch of the State Bank of India (SBI) to receive foreign funds, among other burdensome provisions.

MHA initially gave nonprofits until the end of March 2021 to open their accounts; however, the SBI New Delhi Main Branch was overwhelmed by the influx of paperwork and processing, necessitating an extension until June 2021. However, nonprofits could not file their annual FCRA returns for the fiscal year 2019-2020 until they opened their SBI accounts. The delay led to hefty penalties for those unable to open their accounts and file their returns on time.

The complete prohibition on sub-granting of FCRA funds—even to other nonprofits that had FCRA registration—was another major blow to the sector. Many grassroots-level organizations traditionally relied heavily on resources from larger nonprofits that brought in foreign funding. This effectively suspended their funding, which was a death blow to many grassroots organizations.

The reduction in the cap on administrative expenses from 50% to 20% was another major setback. Administrative expenses are critical to an organization’s function, covering staff salaries, accounting, compliance, advocacy, research programming, and other vital areas. Since private sector donations typically allow only 5%-7% of the budget to overhead costs, funding for organizational needs comes primarily from foreign sources.

Lastly, FCRA registration for most organizations expired at the end of September 2021. The Ministry of Home Affairs (MHA) extended these registrations through December 2021. However, MHA processed applications sluggishly, leaving thousands of organizations anxiously awaiting renewal. The MHA extended the deadline again to the end of March 2022 for organizations that had already submitted applications. However, the MHA shows 5,789 organizations had lapsed FCRA registration due to their failure to apply for renewal before the December 2021 deadline. Additionally, many other organizations had their FCRA registrations denied, including Oxfam India and Missionaries of Charity (although the latter’s FCRA was subsequently reinstated, following a backlash).

3. CSR POLICY AMENDMENTS

India’s Corporate Social Responsibility (CSR) regime requires companies to spend 2% of their pre-tax profits on CSR activities. The Companies (CSR Policy) Amendment Rules 2021 have made compliance extremely stringent, impacting CSR-implementing nonprofits. Previously, the Ministry of Corporate Affairs (MCA) focused on companies spending 2% of their pre-tax profits on approved CSR Activities. The focus has now shifted from ‘spending’ to ‘utilization.’ As a result, some companies are now putting unrealistic pressure on organizations to utilize funds before the fiscal year closes. Unless funding happens to be for an ongoing project (lasting up to three years), the nonprofit must return unused funds. The company is required to give the returned money to government funds such as the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES) or the Prime Minister’s National Relief Fund (PMNRF).[2] Nonprofits must also register on the MCA portal and obtain a unique identification number, adding yet another administrative burden.

The new CSR rules complicate project implementation, increase compliance costs, and lead to the transfer of resources from civil society to government institutions.

4. RESERVE BANK OF INDIA DIRECTIVE ON RECURRING PAYMENTS

In October 2021, a new directive by the Reserve Bank of India (RBI), India’s central bank and regulatory body, came into force. Intended to protect consumers, the directive prohibited automatic recurring payments for various services without authentication by the customer. Unfortunately, for some organizations relying on membership-based recurring donations, this resulted in a sudden and substantial loss in funds. For instance, digital rights advocacy group Internet Freedom Foundation (IFF) witnessed a 70% drop in donors since the RBI’s regulation, resulting from a lack of technical capabilities on the banks’ end. As a result, groups like IFF have had to pivot away from important rights protection programs to fundraising to avoid cutting staff and programming.

While likely not intentionally aimed at the nonprofit sector, the directive introduced another hardship for many organizations struggling to survive.

5. PM CARES FUND

In March 2020, the government established the PM CARES Fund, with PM Narendra Modi as its chairman, to channel COVID-19 relief funds. These funds are exempt from FCRA requirements and not subject to disclosure or transparency rules. Moreover, donations are 100% tax-deductible and fulfill companies’ CSR requirements, even as nonprofits’ compliance requirements for tax benefits and receipt of CSR funds have become increasingly strict and limited. Such government funds have thus diverted money away from the sector, further limiting access to resources.[3]

THE WAY FORWARD

India’s national slogan is “ease of doing business,” but no one seems to be talking about the “ease of doing good.” Corporate laws have seen significant reform aimed at improving transparency and governance and bringing laws in sync with global trends. However, nonprofit laws have seen the opposite, suffering from a ‘death by a thousand cuts.’

The government should strive to enable nonprofits to promote the welfare of India’s people and establish mechanisms to consult, fund, and collaborate with the sector. There is a need for a National Commission to serve as a bridge between nonprofits and the government. Currently, Niti Aayog, the government’s public policy think tank, is the only link. It has not been effective in encouraging communication and understanding between the government and India’s so-called ‘third sector.’ Both government and nonprofit organizations urgently need to work together to build institutional relationships based on mutual trust and a shared vision.

Furthermore, there is a need to ensure that nonprofit laws encourage the same kind of growth as corporate law. Business startups receive several legal benefits, while nonprofit startups face increasing obstacles under the FCRA and CSR law. To ease these burdens, the Ministry of Home Affairs should consider constituting an appellate authority (like the Income Tax Appellate Tribunal) to address FCRA-related grievances.

Rather than debilitating nonprofits and preventing them from providing the services, advocacy, education, and awareness-raising critical in an open and democratic society, the government should play the role of an enabler, cultivating an environment that empowers civil society to carry out its vital function.

[1] Furthermore, a grant is a non-commercial agreement between the giver and recipient. The NPO carries out activities (mistaken for “services”) as per its charitable objects. The donor too sets terms and conditions (timelines, goals, objects, deliverables) but as a donor. Hopefully a higher judicial forum will understand the finer nuances of this matter and set aside this ambiguity.

[2] For instance, suppose 2% pf a company’s pre-tax average profits over the last three years is US$100,000. During the fiscal year (1 April to 31 March), the company must ensure that the $100,000 is fully utilized on specified CSR Activities either undertaken on its own or through NPOs as “CSR implementing Agencies.” Now suppose that out of $100,000, the company gives NPO ABC $50,000 for a CSR project; however, the NPO is only able to utilize $40,000 by 31 March; therefore, it must return $10,000 to the company, which the company must contribute to a GOI fund (e.g. PMCARES). However, if the funds are designated for an “ongoing” project (maximum duration 3 years not including the year in which the grant is given) the un-utilized $10,000 can be carried forward but must be deposited by the company in an “unspent CSR Account” at a scheduled bank in escrow.

[3] ICNL is currently commissioning a report on government-run national relief funds like PM-CARES, to provide additional empirical context around such funds and their impact on the non-profit sector. Please check our website or email asia@icnl.org for updates on the report.

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