Ecosystem DevelopmentFebruary 29, 2020

Enabling India’s social sector

The legal framework governing civil society is too old and complicated, and it is keeping the sector from reaching its full potential.
2020-03-16 00:00:00 India Development Review Enabling India’s social sector
6 Min read Share

India’s social sector or civil society is integral to its democracy. Despite this, we are a long way from developing an enabling and conducive environment for the organisations that are a part of it.

Of the laws and regulations that determine the logic and identity of Indian civil society, some belong to colonial times while others have internally inconsistent compliance requirements. In all, they do not align with the vision of a vibrant and diverse social sector in India.

Given this, Ashoka University’s Centre for Social Impact and Philanthropy (CSIP), along with Lumen Consulting, conducted a study to examine the legal and regulatory frameworks and government systems for governing and engaging with the social sector.

Through an analysis of existing laws and policies, along with interviews with key stakeholders (sector experts, nonprofit leaders, and NITI Aayog members), they made several recommendations to modernise the current legal and regulatory frameworks. These recommendations were compiled into a report, here are its key highlights:

Related article: The laws that govern India’s nonprofits

Unpacking the legal framework

The Indian constitution allows both the central and states governments to pass laws to regulate nonprofits. As a result, three aspects of every nonprofit—registration, taxation, and regulatory compliances—are governed by a multitude of laws.

Challenges

There are several challenges that the social sector faces in all three aspects listed above, due to the complicated and archaic laws governing it.

1. Registration:

There is no specific legislation that is meant exclusively for the registration of organisations engaged in developmental or charitable activities. This means that there is no difference between a development-focused nonprofit and a recreational club, when it comes to compliance requirements.

There are multiple registration laws for nonprofits like the Companies Act and the Societies Registration Act, without a standard definition or categorisation. This results in confusion, delays, and cumbersome procedures for registering nonprofits and for authorities regulating them. Moreover, most states have separate registration laws that are not uniform across the country, creating additional hurdles for nonprofits which have programmes in multiple states.

2. Taxation:

Different tax laws define ‘charitable purpose’ differently. For instance, the IT Act includes poverty relief, education, medical relief, preservation of the environment, preservation of art or historic places or objects, yoga and the advancement of general public utility; while the GST Act is limited largely to public health, environment protection, education, and religious organisations.

There are differences between central and state laws, and government bodies interpret acts in varied ways as well.

There are also differences between central and state laws, and government bodies interpret acts in varied ways as well. For example, the central Income Tax Act, 1961 allows nonprofits to invest their funds in any mutual fund while the Maharashtra Public Trusts Act allows nonprofits to invest funds only in certain debt-based mutual funds. FCRA-registered organisations, on the other hand, are not allowed investments in any mutual funds,

Another challenge with tax laws is that the compliance and audit requirements are not differentiated according to the size, nature of work, location, and source of funding of nonprofits. This is a problem especially for smaller nonprofits, who might not have the resources to comply with high levels of regulation.

3. Regulatory compliances:

Critical provisions in multiple important laws are not articulated clearly, leading to ambiguity and uncertainty. For example, the FCRA, prohibits nonprofits receiving foreign aid to engage in acts of ‘political nature’, but does not clearly define what that means. It also does not have effective systems of feedback and grievance redressal for nonprofits whose applications for FCRA registrations get rejected.

Moreover, the costs to nonprofits for complying with multiple regulations and reporting to multiple authorities is very high. Most nonprofits need to file at least six returns every year,1 over and above reporting to their donors and compliance requirements under acts like the Provident Fund Act. Some registrations also need to be renewed periodically, such as the FCRA, which adds to the cost borne by nonprofits.

justice scales_social sector law_rawpixel

There is a need for legal frameworks that build trust by maintaining a balance between facilitation of the sector, and increased accountability for misconduct. | Picture courtesy: RawPixel

Recommendations

Given how complex and ambiguous the various laws are, and how costly compliance is, it is critical to simplify this legal and regulatory framework. The report makes recommendations to the government, and other stakeholders, that will help deal with the above challenges, and create an enabling environment for the social sector in India.  Some of these are:

  1. Modernise and streamline the registration process across all laws at the central and state level by developing, among other things, an online registration process, a common definition of ‘charitable purpose’, and a national registration law which co-exists with current state level registration laws. Nonprofits should have the option to register under the new national law or the existing state laws, and an online database of nonprofits registered across all laws should be maintained.
  2. Keep nonprofit registrations active as long as tax returns are filed regularly, instead of mandating periodic renewals.
  3. Promote increased cooperation between tax and other government departments like FCRA, Registrar of Societies, etc. to reduce the need for multiple filings.
  4. Lessen the compliance requirements for nonprofits within a certain budget.
  5. Increase the income level above which nonprofits need to get audited by a chartered accountant. Currently, it is INR 2.5 lakhs, as compared to INR one crore as total sales turnover for businesses and INR 50 lakhs as total gross receipts for individual professionals.
  6. Revise the definition of ‘income’ under the IT Act, and the related tax exemptions, so as to not consider voluntary contributions and donations as income.
  7. Simplify FCRA provisions so that nonprofits can effectively mobilise foreign funds for their work. There should be a focused effort on making this access as frictionless as possible.
  8. Strengthen the grievance redressal system under FCRA with a defined turn-around time and escalation system. There should also be greater transparency, especially in cancellation of FCRA registrations.

Related article: How GST affects nonprofits

Creating an enabling ecosystem for civil society

The National Policy on the Voluntary Sector 2007, developed by the erstwhile Planning Commission, clearly states that creating an enabling environment for the sector as one of its objectives. It says that such an environment would not only stimulate the effectiveness of nonprofits, but also protect their identity and safeguard their autonomy.

What would an enabling ecosystem for the social sector in India look like? The report highlights key aspects:

  1. Increased public trust in nonprofits and high levels of domestic philanthropy.
  2. Legal frameworks that build such trust by maintaining a balance between facilitation of the sector, and increased accountability for misconduct.
  3. Regulations that promote efficiency for nonprofits, and are low on red tape and complex burdensome processes.
  4. Trained administrators who are sensitive and enabling in their approach.

There are several challenges in the social sector currently, that debilitate the creation of an enabling ecosystem.

Collective action across the social sector to adopt certain ethical standards and gain back public trust might help mitigate some of these challenges.

The narrative around social work in India is unflattering. This is due to reports of misuse of funds by some nonprofits, government reports indicating that nonprofits are hindering India’s economic growth, and the lack of state machinery to highlight or reward impactful work done by nonprofits at scale.

This impacts the ability of nonprofits to finance their programmes. Public sector companies generally route their Corporate Social Responsibility (CSR) funds through self-run foundations, instead of nonprofits. Moreover, lack of trust, coupled with a weak and cumbersome laws, discourage private philanthropists from funding these organisations as well.

Collective action across the social sector to adopt certain ethical standards and gain back public trust might help mitigate some of these challenges. But, so far, there not been such an initiative at scale.

To address the challenges highlighted above, the report suggests the following actions for all stakeholders:

  1. Articulate, recognise, and publicise the critical role that the social sector plays in India’s development to improve public perception and encourage domestic philanthropy. This needs to be done both by the sector, and by government bodies.
  2. Require public sector undertakings to use their CSR funds to support nonprofits.
  3. Take a supportive and educative approach to regulating nonprofits, and use punitive measures only as a last resort.
  4. Sensitise both nonprofits and government officials to each other’s challenges through multi-stakeholder engagements.
  5. Encourage and promote sector-led initiatives that meet the needs of the sector, and define standards for it. Provide recognition to umbrella organisations so that nonprofits are encouraged to join and comply with their codes and practices.

The larger aim of the report is to inform government action, drive discussions among sector experts, and strengthen narratives around the social sector in India. The recommendations seek to alter the overarching approach towards the sector to one that is facilitating rather than controlling, so that nonprofits can serve citizens better.

  1. Every registered nonprofit needs to file annual returns with the registering authority, be it the Charity Commissioner, Registrar of Societies or Registrar of Companies. It needs to file annual returns with the IT authorities and quarterly returns under GST with the Ministry of Finance. If it has an FCRA registration, then a return has to be filed with the Ministry of Home Affairs (MHA) as well.

Know more:

  • Take a deep dive into legal and regulatory frameworks for India’s social sector by reading the full report.
  • Read other similar research studies by the Centre for Social Impact and Philanthropy.
  • Explore IDR’s sector on ecosystem development to learn of more ways in which India’s social sector can be made robust.

Do more:

  • Sign up for CSIP’s WhatsApp group for leaders interested in knowing more about India’s nonprofit sector regulatory frameworks; email at cap.csip@ashoka.edu.in with your name, designation, organisation, and WhatsApp number.
  • Connect with CSIP at csip@ashoka.edu.in if you are interested in pursuing research opportunities with them.

 

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