In The Name Of Charity

As soon as the Modi government assumed office this year, notices were sent to over 400 non-governmental organisations (NGO) and non-profit organisations (NPO)over their alleged involvement in the diversion of foreign funds to promote activities that were allegedly against India’s national interest. In response to the uproar that followed, an official explanation stated that the notices were based on prima facie evidence and were not final.

While the jury is still out, the larger question that cropped up at the time was why NGOs and NPOs were targeted for alleged diversion of money, which in other words meant a safe parking haven for black money.

While a conclusive answer could be difficult, the fact is that NGOs and NPOs remain prime destinations for black money because of the several fiscal and regulatory privileges they continue to enjoy under different laws and regulations of the country.

Their income, subject to various conditions, is treated differently for taxation purposes from that of privately owned profit-oriented concerns. Many believe that this creates incentives for potential evaders to camouflage their entities as non-profitable, charitable, or cooperative in nature.

What weakens the defence for the NGOs or NPOs is that, at present, there is no government agency that has a complete database. On their part, they argue that  ‘not for profit’ is a generalisation used to define charitable institutes, trusts, religious organisations and even development organisations.

It is important to distinguish between the types of organisations that can receive unaccounted funds, say sector experts. “Any development organisation receiving foreign funds needs to be registered under FCRA (Foreign Contribution Regulation Act) with the home ministry, which enables the government to monitor all grants and money coming into the country,” explains Rajesh Tandon, founding president of PRIA, a Delhi-based organisation promoting participatory democracy. There are close to 43,000 NGOs registered under FCRA as of July 2014. Under the Act, NGOs need to declare the name of the donor and the amount of money every time they receive any, which makes it next to impossible for unaccounted funds to come into the market, adds Tandon.

However, a senior tax analyst from EY, on condition of anonymity, says, “There may be some cases where organisations are used to convert black to white or circulate unaccounted wealth through legal channels.”

Nitin Potdar, partner at law firm J. Sagar Associates, says consistent amendments to the income tax laws —  seeking information about the source of funds/ donations and disallowance of donation — have already put such NGOs under pressure. “More of such strict action can certainly impact the NGOs. Today, there are thousands of NGOs receiving crores of rupees as donations, which are used for activities like food, housing, education, medical, infrastructure buildings, and so on. Hence, it is humanly impossible to track the use of funds. But certainly, large transactions can be put under the scanner for better control of unaccounted money,” he adds.

Incidentally, a 2012 report from the finance ministry on black money acknowledges the fact that flow of unaccounted money into the NGO sector can only be dealt with by using a multi-pronged strategy of reducing the privileges available to them and subjecting them to a stricter regulatory regime.

The report also cautions that given the role of genuine NPOs in the welfare of the downtrodden and the broader government policy to support such endeavours, reducing the privileges available to them may easily evoke strong emotional responses and hence can be implemented only after a larger consensus is reached within society.

The suggested solutions given in the report include the strengthening of regulations and enforcement of KYC norms in the cooperative sector, besides fixing responsibility for any lapses. In fact, a beginning has been made in the Finance Bill 2014. It talks about tax exemption for NGOs, trusts and charitable institutions and gives sweeping powers to the government to withdraw tax benefits or cancel registrations in case of misuse.

(This story was published in BW | Businessworld Issue Dated 01-12-2014)