Laws Governing Non-Profits Organizations and NGOs

Published On: 1 October, 2023

Authored By: Ronit Raj
New Law College, Bharti Vidyapeeth, Pune

Laws Governing Non-Profits Organizations and NGOs

Introduction:

An NPO is an organization that is set up for the advancement of a weaker section of society. The first NPO in India was set up during the 19th century when several social reform movements were started by individuals and organizations, for improving the living standards of the poor and marginalized sections. NPOs also help build strong communities and promote social justice. They also play an important role in advocacy and policy change.

There is a labyrinth of laws and regulations affecting the governance, funding, and taxation of NPOs in India. All of these laws are unrevealed by the – International Centre for Not-For-Profit Law’s India Philanthropy Law Report 2019, highlighting the recent legal development and analyzing their implications for the better functioning of Indian NPOs. In India, there are approximately 3.3 million registered nonprofits, but this also includes a number of them that are no longer active.

Some of the main laws governing Indian non-profits are — the Trusts Act, 1882; Societies Registration Act, 1860; FCRA, 2010 and PMLA, 2002.

But these laws are complex and ever-changing. It’s important to be aware of the laws that apply to NPOs and NGOs to protect their status and ensure that they continue to operate effectively.

The India Philanthropy Law Report of 2019 highlights 10 of these points: –

1.      NPOs in India are mainly of 3 types —

                                I.      Trusts: these are the oldest and the most common form of NPO in India and are governed under the Indian Trusts Act, of 1882. They are created by a settlor who transfers assets to a trustee, who then manages the benefits generated by those assets.

                             II.      Societies: Societies are governed by the Societies Registration Act of 1860 and are created by a group of 7 or more people who agree to work together for a common purpose.

                          III.       Section 8 of Companies: These are relatively new forms of NPO in India, and are governed by the Companies Act, 2013 & the Income Tax Act, 1961.

2.      Time is taken to register an NPO — In India, it generally takes up to 2 to 3 months to register an NPO but depending on the form of NPO it can vary.

For registering a trust, the period is somewhat between 10 to 15 days, whereas for registering a Society, it is typically between 20 to 30 days, and for a Section 8 Company, it typically takes 10 to 15 days for registration.

The Income Tax Department can take an additional 3 to 6 months to grant tax exemption status to an NPO under Section 12AA of the Income Tax Act, 1961, and to process donors’ tax deductions under Section 80G.

3.      Restriction on NPOs in India — although the definition of “political activities” is ambiguous for nonprofits to perform, NPOs in India are prohibited from performing or engaging in any kind of political activity. However, they can communicate with government or media personnel to indirectly influence the political processes. The Foreign Contribution (Regulations) Act (FCRA) sets the regulations for nonprofits that they must follow while receiving foreign funding. Nonprofits must be registered with the Ministry of Home Affairs (MHA) to receive foreign funding. All MHA guidelines – registration, license, purpose, accountability, and audit must be followed before proceeding with funds. If an NPO generates profitable income of more than 20% of its total income from donations and grants, it may lose its tax exemption status and a maximum marginal tax of 30% will be charged.

4.      Companies (Corporate Social Responsibility Policy Amendments Rule, 2022) to strengthen Corporate Social Responsibility (CSR) Compliance — CSR litigation in India mandates to engage in CSR activities and spend at least 2% of their average net profit from the three fiscal years before the current one on CSR initiatives. The Ministry of Corporate Affairs (MCA) amended the Companies (Corporate Social Responsibility Policy) Rules, 2014 in the year 2022, according to Section 135 and Subsections (1) and (2) of Section 469 of the Companies Act T 2013. (18 of 2013).

The CSR Amendment Rules of 2022, limit the cost of social impact evaluations that can be considered CSR to either 2% of all CSR spending or ₨ 50 lakh, whichever is higher. However, the amendments also authorize higher impact assessment spending for major CSR projects.

The 2022 CSR Amendment lowers the threshold for applicability of the CSR rules from a net worth of Rs 500 crores to Rs 100 crores. It means that, now, more companies will be required to spend on CSR activities.

5.      Cancellation of Income Tax Exemption and Registration — As mentioned earlier, Section 12AA of the Income Tax Act, 1961 grants exemption of tax for nonprofits. However, this section also grants the Principal Commissioner of Income Tax to cancel the registration of NPOs/NGOs if they are found to be engaging in activities that are not listed in their deed, memorandums, and articles of association.

Also, if the nonprofit is found violating any of the FCRA provisions, its registration can be canceled and the organization will be kept under strict scrutiny.

6.      Provisions of Lokpal and Lok Yukta (Amendment) Act, 2016 — Trustees and officers of nonprofits are considered “public servants”. Earlier, under Section 44 of the act, the public servants must declare their assets and liabilities within 30 days of joining the government services to the Ministry of Home Affairs.

However, the amendment has removed 30 days. The government has amended the rules for assets declaration by trustees and board members of the NGOs. The amendment extended the time for these individuals to declare their assets and those of their spouses. According to the new rules, the NGOs receiving government funds of more than Rs 1 crore or foreign funding of Rs 10 lakh must declare their assets and liabilities in the form and manner prescribed by the government.

7.      Restrictions on International Operations — Indian nonprofits face restrictions on the acceptance of foreign funding even though the money is collected by Indian citizens or in Indian currency. Meaning, that if people of Indian origin or Indians living in foreign countries donate money to an Indian nonprofit, it will be considered as a foreign contribution under FCRA regulations. However, money from expatriate Indians is not considered foreign money, unless the person has acquired the citizenship of any foreign country.

8.      The Ministry of Home Affairs in compliance with the FCRA, has published guidelines against the usage of cash payments and debit-card withdrawals over INR 2,000 by nonprofits with FCRA accounts. Also, nonprofits cannot use more than 50% of funds for administrative expenditures. Expenses related to core activities of the organization such as salaries for researchers, trainers, doctors, and teachers are not considered as administrative and are exempted from these restrictions. Violations of any of these rules are considered a compoundable offense. For almost every offense, FCRA imposes a minimum penalty of INR 100,000.

9.      Donors of Indian nonprofits can deduct contributions from trusts, societies, and Section 8 companies that have been granted charitable status. But if they donate to institutions specifically listed under section 80G of the Income Tax Act, they are entitled to a 100% deduction. This loss contains several government-related funds, such as the PM National Relief Fund and the National Foundation for Communal Harmony.

According to the Foreign Contribution Regulation (Amendment) Act, 2020 US donors cannot claim a tax deduction for donations made to Indian nonprofits. However, there are some provisions under which US donors can support Indian nonprofits and receive tax deductions in the US. They can:

                                I.            Donate to US-based nonprofits that have programs in India

                             II.            Donate to a “friends of” organization that supports an Indian nonprofits

                          III.            Using intermediary grant makers such as CAF America, to direct their charitable funding to Indian NPOs.

10.  Commercial Receipts and Foreign Donations — Under FCRA, Commercial receipts from foreign sources and foreign donations are treated differently. Commercial receipts are payments for goods or services provided by an Indian nonprofit to a foreign source. Whereas, Foreign Donations are contributions of money or other assets made by a foreign source to an Indian nonprofit. These donations are subjected to several restrictions. Foreign Donations are used only for charitable, religious, and cultural purposes.

Characteristic

Commercial Receipts

Foreign Donations

Source

Foreign person or entity

Foreign person or entity

Purpose

Goods or services provided

Charitable purposes

Restrictions

No limit on the amount

Limit on the amount to be used

Registration with MHA

Not required

Required

Conclusion:

Overall, the laws governing non-profit organizations and NGOs play an important role in ensuring that these organizations can operate effectively and efficiently. In addition to the laws, several self-regulatory codes can be adopted by these organizations to further improve accountability and transparency. By protecting the public interest, encouraging good governance and promoting accountability, fostering innovation, the law helps to ensure that non-profit organizations and NGOs can make a positive contribution to society.  

Reference(s):

https://swaritadvisors.com/blog/limitations-to-ngo-activities-dos-and-donts-of-an-fcra-registered-ngo/

https://www.ilo.org/dyn/natlex/docs/ELECTRONIC/113961/143036/F-453166858/BTW113961.pdf

https://www.mca.gov.in/bin/dms/getdocument?mds=1Wt3uUYzV0rGCr2Vxa8ztQ%253D%253D&type=open

https://www.cafamerica.org/giving-to-india-compliance-with-the-newly-amended-fcra/

https://givingcompass.org/article/the-laws-that-govern-indias-nonprofits

https://idronline.org/the-laws-that-govern-indias-nonprofits/

https://indianexpress.com/article/explained/everyday-explainers/what-is-fcra-ngo-funding-mha-explained-8026895/

https://muds.co.in/ngo-rules-and-regulations-in-india/

https://swaritadvisors.com/blog/limitations-to-ngo-activities-dos-and-donts-of-an-fcra-registered-ngo/

https://givingcompass.org/article/the-laws-that-govern-indias-nonprofits

https://www.businesstoday.in/opinion/columns/story/foreign-funding-for-ngos-regulatory-compliances-72012-2017-02-13

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