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
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.
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.
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:
Related article: How GST affects nonprofits
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:
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:
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.
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