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 In the spotlight |
Direct Tax Code Bill: A blow for non-profit organisations
The Direct Tax Code, likely to be introduced in Parliament soon, has many provisions that will seriously affect the working of non-profit organisations (NPOs) like NGOs...
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Direct Tax Code Bill: A blow for non-profit organisations
The Direct Tax Code (DTC) Bill, meant to replace the Income Tax (IT) Act 1961, and likely to be introduced in Parliament soon, has many provisions that will seriously affect the working of non-profit organisations (NPOs) like NGOs and other charitable trusts.
Many voluntary organisations have sent memoranda to the Union finance minister against the proposed changes (read a related news item here). Detailed analysis made by Financial Management Services Foundation (FMSF) explains all the controversial provisions and their implications. Here’s a quick summary:
 Changed nomenclature
Under the IT Act, NPOs enjoy some exemptions if they are set up for a ‘charitable purpose’. The DTC Bill replaces this term with ‘permitted welfare activities’. The change marks a shift from intent of the organisation to its actual activity. `Permitted welfare activities’ are defined in the DTC Bill very narrowly. Many activities that NGOs
conduct - such as strengthening panchayats - may not fall under the narrow ambit of `permitted welfare activity’.
Compulsory activity
To be treated as an NPO, the DTC Bill proposes that the organisation must conduct welfare activities every year; if it does not conduct such activity in a particular year, it will not be treated as an NPO that year. This change will severely affect small NGOs that often do not receive grants some years. Further, if such NPO does not have any welfare activity in two out of four preceding years, then its entire net worth shall be taxable @ 30%.
Tax on unspent cash balance
Under the DTC Bill, 100% of income during a year has to be used for permitted welfare activities. This means an NPO will lose the current flexibility to spend 85% of the funds it receives during a year and spend the rest over a period of five years. Any unspent cash balance with an NPO will be subject to tax @ 15%. Even membership fees or life membership fees received during a year will have to be entirely spent that year. This harsh requirement is entirely out of tune with reality. Most NGOs do not spend 100% of the funds they receive in a year in that year itself. It is impractical, and can even be wasteful.
Trust cannot be created from business assets
Under the existing law, a charitable trust can be created out of a corpus of business assets such as a commercial property. The DTC Bill disallows this practice, restricting the scope for setting up viable NPOs.
From exempt to taxable income
Currently NPOs calculate income exempt from tax using a listing provided in Section 11(1) of the IT Act. The DTC Bill proposes that NPOs will compute taxable income under Section 87. In a way, this fundamental shift in emphasis, from exempt to taxable income, brings NPOs on par with any commercial organisation.
Grants to be treated as income
The DTC Bill proposes that all receipts of an NPO except loans and advances will be treated as `income’. Apparently, `restricted funds’ - grants given by donors for specific purposes - will also be treated as income.
Reduced incentives to donors
The existing regime of incentives to donors is proposed to be replaced by a new regime that restricts the institutions to which donors can give grants and claim 100% tax exemption. Donations to most NPOs will probably get only 50% tax exemption benefit.
New concepts of assets
The DTC Bill introduces new concepts of assets such as `financial asset’, `investment asset’ and `business capital asset’. None of these are defined from an NPO perspective.
Confusion over corpus donations
Under the DTC Bill, corpus donations have to be first treated as receipts - as part of gross income - and then as outgoings (deduction). The purpose of this needless rigmarole is not clear.
Depreciation not part of expenditure
Under the DTC Bill, depreciation cannot be claimed as expenditure; only cash expenditures are permissible. The change means that the corpus and net worth of NPOs will erode over time.
Restriction on incidental business activities
Currently, a specified category of NPOs can carry out incidental business activities. The DTC Bill restricts the coverage of incidental business activity; only business activities carried on while actually undertaking welfare activities will be permitted.
Net worth considered income
The DTC Bill proposes that when an NPO ceases to be an NPO - for instance, when it fails to do any welfare activity for two out of four preceding years - then it will be taxed at 30% of its entire net worth accumulated over the years. Apart from treating net worth as income -it is currently treated as wealth in some cases - this provision will be a double blow to NPOs that have not conducted any welfare activity for two out of four preceding years, as they would have already paid tax on their entire income during these years.
All in all, the DTC Bill threatens to severely restrict the scope of NPO activities and introduce many concepts and procedures that can cause much confusion and litigation.
For a detailed analysis of the DTC Bill view the August 2009 issue of FMSF’s newsletter, Standards & Norms.
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| CSO Partners Update |
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Workshops for NGOs
CSO Partners have successfully launched the workshop series titled `Opportunities in Challenging Times’, designed to enable CSOs in identifying opportunities and making the most of them during the current global economic crisis ...
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Workshops for NGOs
CSO Partners have successfully launched the workshop series titled `Opportunities in Challenging Times’, designed to enable CSOs in identifying opportunities and making the most of them during the current global economic crisis.
The second workshop in the series of six was conducted at Grand Solitaire Hotel in Secunderabad on September 14 and 15, 2009. Based on the feedback and learning from the first workshop, a couple of changes were introduced in the format of this workshop.
A detailed preliminary assessment of the participating organisations was conducted through one-on-one interactions. A questionnaire was developed to ascertain their strengths, weaknesses and opportunities for improvement in various functional areas that would contribute to their efficiency and effectiveness.
In keeping with the feedback that more participation is required for panel discussions, the format of the workshop was modified. Participants were divided into four groups with a topic each that was chosen within the overall theme of ‘Opportunities in Challenging Times’. The panellists first held separate discussions with each group, after which a summary of the discussions was shared with all.
Feedback on this workshop is currently being reviewed.
Flood rehabilitation
The flood rehabilitation programme in Orissa, Bihar and West Bengal is proceeding as per plans submitted by the participating NGOs. Updates on the programme have been shared with 60,000 contributors.
Looking ahead
Partnership development
One of the main strategic priorities of CSO Partners is building a strong network of partners. In the space of volunteering, retail donations, and governance, CSO Partners has been in discussion with various organisations. We hope to soon formalise a few partnerships.
NGO Market Place
This is an online portal that provides networking opportunities for the social sector in India. The beta launch took place at the Secunderabad workshop and participating NGOs were introduced to it. It was also presented to delegates of CSR-CSO Bridge 2009 organised by the Confederation of Indian Industries (CII). Feedback on the portal has been very encouraging.
Advisory services for NGOs
We aim to set up advisory services for NGOs where experts in various functional areas can interact and provide their services on a voluntary basis.
Fellowship programme
CSO Partners will provide strategic support to ICICI Foundation on its fellowship programme, which will be a unique leadership programme that will attract India's top emerging talent. Apprentices will be placed at a credible CSO, and will receive leadership and management skills training through dedicated coaching and mentoring. This will be a two-year intensive programme.
Annual Report Award
CSO Partners’ Outstanding Annual Report Awards constituted to promote transparency and accountability among CSOs is scheduled to take place on March 5, 2010 at India Habitat Centre, Delhi.
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| Partner Profile |
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FMSF: Promoting better accountability in development
CSO Partners’ strategic partner, Financial Management Service Foundation (FMSF), is a development resource organisation specialising in financial management, monitoring, and capacity building of development and voluntary organisations...
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FMSF: Promoting better accountability in development
CSO Partners’ strategic partner, Financial Management Service Foundation (FMSF), is a development resource organisation specialising in financial management, monitoring, and capacity building of development and voluntary organisations.
Guided by core values of accountability, transparency, and humanity, FMSF’s vision is to promote better accountability among all constituencies in development. Its key areas of work are monitoring and capacity building. It is also involved in the areas of research, information dissemination, networking and providing consultancy.
FMSF is as an offshoot of Financial Management Service (FMS), a unit of the German donor agency, Evangelischer Entwicklungsdientst or EED (formerly known as Evangelischer Zentralstelle fur Entwicklungsdienst or EZE). FMS was set up in 1995 in India to ensure that NGO partners in India, Bangladesh and Nepal were able to fulfil their obligations to EED, and to enhance their financial management reporting systems. From an EED unit, FMS became FMSF in 2000.
Financial monitoring
The monitoring function performed by FMSF includes projects supported by EED, Germany, and Bread for the World (BftW), Germany. The partner network of FMSF is spread across India, Nepal, Sri Lanka, Pakistan, and Bangladesh.
Capacity building
Through capacity building programmes, FMSF has tried to build the skills and capacities of various individuals and organisations in the areas of financial management, accountability and governance.
The capacity building initiative initially focused on providing training, as per EED requirements, to the partner network. The focus has now shifted to the broader areas of financial management, governance and social accountability issues.
A new dimension was given to the capacity building initiative of FMSF with the launch of an online Diploma in Financial Management & Accountability (DFMA), a training programme on financial management of NGOs. The programme is a joint initiative with the Tata Institute of Social Sciences (TISS), one of the premier social work institutes in the country.
DFMA has received a very encouraging response from voluntary organisations and FMSF is planning to launch similar online training programmes on NGO governance and other related areas.
Research and information dissemination
FMSF has conducted extensive studies in various financial management, social auditing, legal and governance issues relevant to the voluntary sector.
The organisation’s work in social accountability standards is very significant. Realising the need for a guiding framework for NGOs, FMSF initiated a study on developing standards for NGOs. The book, Social Accountability Standards for Voluntary Organizations, published in 2007, not only explores conceptual aspects of social accountability standards, but also provides useful and concrete tools for implementing the same.
FMSF has published several books on financial management of NGOs. Of these, Manual of Financial Management and Legal Regulations and Legal and Finance Handbook for Voluntary Organizations, published in 2001, are widely used and appreciated.
Some of the other well-known publications of FMSF are Handbook on Financial Audit and Reporting, Handbook on Bombay Public Trust Act, Handbook on Social Audit in NGOs and Social Accountability Standards for Voluntary Organizations.
FMSF brings out a six-monthly journal, INTERface, on legal and financial issues pertaining to the voluntary sector. Similarly, Standards & Norms, an e-communiqué examines legal and financial management issues related to the voluntary sector in India.
FMSF hosts a number of websites that provide vital information on legal issues, income tax and on the Foreign Contribution and Regulation Act.
Networking
In the area of networking, FMSF has been able to develop a panel of consultants comprising eminent chartered accountants and finance consultants associated with the sector. This forum, called the Forum for Ethics, Accountability and Transparency (FEAT), has now about 30-35 consultants from the Indian sub-continent.
In 2005, FMSF initiated a forum of accountants working in NGOs called NGO Accountants Network (NAN), which served as a platform for accountants to share their experiences working in the sector.
Recognition
The Institute of Chartered Accountants of India (ICAI)’s Award for Excellence in Financial Reporting has been awarded to FMSF three times in the past five years. The award is meant to promote better standards in the presentation of information in financial reports, and is awarded each year at an annual competition by ICAI. FMSF has received the award in the category of not-for-profit organisations.
For more information about FMSF, please visit, www.fmsfindia.org
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