A Comparative Look at India's Regulation Regime for the Voluntary Sector

8/6/2019 A Comparative Look at India's Regulation Regime for the Voluntary Sector

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Review of Legal and Fiscal Regulatory Mechanism of Voluntary Sector: A Seven Country Comparison

VOLUNTARY ACTION NETWORK INDIA (VANI) BB-5, 1st Floor,

Greater Kailash Enclave - II

New Delhi - 110048Tel : +91-11-29226632, 29228127, 41435536

Fax : +91-11-41435535E-mail: [email protected]

Website: www.vaniindia.org


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TABLE OF CONTENTS

Introduction 2 - 4

Section 1: Registration 5 18

Section 2: Taxation 19 31

Section 3: Foreign Funding and Giving 32 38

Conclusion 39 - 41


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INTRODUCTION

In the developing world, voluntary Organisations (VO) have been and continue to be an importantpartner in identifying and meeting the needs of the have-nots, those who, for whatever reason arenot able to adequately address their basic need. VOs come in all shapes and sizes from the largeentities in the developed world extend varying forms of aid to the very small, but equally purposefulmicro entities. Together and separately, these organizations are a part of the tapestry thatprovides assistance to those among us with the greatest need.

By many of the worlds measures there has been little abatement in the needs that exist. In factthe needs are graver in many places. Economic development, the changes in our needs and howthey are met have widened the gap between our richest and poorest people. If the needs are infact greater, then there should be a redoubling of efforts and increased investment of resources.This has not been the case. What we have instead are cuts to programs and legislation that on thesurface appears to restrict VO activity.

In places where the need is greatest such as India, there is forecast of a contraction of thevoluntary sector. The VOs in India are facing difficulties on a number of fronts. In the midst of aglobal recession, VOs are also facing mounting claims of corruption and are being saddled withnew and far-reaching legislation aimed at a course correction. In what was an already chaoticenvironment, the new legislations are a cause for concern.

Voluntary Organisations in India are facing a crisis of confidence. The public as well as thegovernment expresses mistrust of organisations. As recent as August 2010, Consumer Courtreported that there were 29 000 VOs on a blacklist for a variety of improprieties, most frequentoffence being misappropriation of funds1. Transparency International, in its 2010 Global CorruptionBarometer Report noted that Indias public perceives a high frequency of corruption. Seventy-four percent of Indians believed that the level of corruption increased in 20102. While not the seen asthe worst offenders Indian NGOs scored 3.1 on a scale of 1-5 where 5 represented extremecorruption.

The government claims, at least in part, to be responding to the levels of corruption within theVoluntary sector with the latest bevy of legislation. Opponents argue that the new legislation addshurdles to the already difficult terrain that Indian VOs must navigate to bring vitally needed servicesto the most vulnerable among us. The new legislation is viewed as a clawing back of privilegessecured by pioneers of the sector. In addition to addressing corruption, the government also

claims that the new legislations are tools to address issues of National Security. In a post 9-11world however, governments have a compelling ally national security. In the interest of nationasecurity; whether real or perceived, this phrase is driving a wave of legislation that is argued tohave a negative impact on the ability of VOs to deliver on expectations.

1 http://www.consumercourt.in/product-services/25635-blacklisted-ngo.html2 Ibid


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Since the 2001 terrorist attacks in the United States, there has been a serious contraction of thevoluntary sector. All over the world, governments have sought to restrict the scope and reach of voluntary organisations for fear that funds intended to work for the benefit of the poor will financethe subversive activities of radical anarchist organisations. The International Centre for Not-for-profit Law (ICNL) has reported on a disturbingly large number of governments, principally but no

exclusively authoritarian or hybrid regimes working to undermine voluntary organisations.3

Whilewe have grown accustomed to seeing the heavy-handed approach of authoritarian regimes used tomute voluntary organisations around the world. ICNL finds more troubling the creep in otherwisedemocratic societies. To be fair, the nations being identified in the study are by and large former soviet fledgling democracies. There are however alarms being sounded about countries like Argentina, the United States of America and India the focus of this study.

In Argentina, for example, the law permits the termination of an NGO when it isnecessary or in the best interests of the public, while in India, NGOs haveprotested that the proposed Foreign Contribution Management Control Bill(FCMC) would further burden foreign funding. Similarly, in the United States,civil liberties groups have challenged the recent use of secret, unchallenged

evidence to close down charities purportedly associated with terrorists andcriticized amendments to the Foreign Intelligence Surveillance Act whichexpand government authority to monitor private phone calls and emails withoutwarrants if there is reasonable belief that one of the parties is overseas.(INCL &NED 2008)

There has been heightened rhetoric around the regulation of VOs in India over the last few years.The governments decision to reform and update the tax laws and the Foreign ContributionRegulation Act has sparked serious debates, which may have influenced the expression in thequote above. In the face, increasing claims of corruption, of declining confidence in the VOs, andpotential terrorist threats, the Government of India has sought to establish new restrictions in theform of two major bills to the Direct Tax Code and the Foreign Contribution Regulation Act

(FCRA)4.

It is important at the beginning of any discussion to set the parameters of the discussion. Thisdiscussion will examine Indias regulatory regime for the voluntary sector. The dictionary definesregulation as a rule or directive made and maintained by an authority5 To that end the termregulatory regime in the context of this study is two fold. It first refers to the mechanisms in placethat define the parameters in which VOs operate. Secondly, it refers to the ability to monitor,maintain in order to ensure adherence to the rules in place.

This work examines Indias regulatory regime from a comparative perspective. It focuses on theclaims made regarding Indias creep toward constricting the environment in which VOs operate.

The earlier quote specifically identified FCR Bill, 2006, which was passed in the month of August o2010 as the Foreign Contribution Regulation Act, 2010 (FCRA). In addition to looking at theFCRAs impact on VOs, this work will also review the pending Direct Taxes Code Bill, 2010, thepotential impact of both on taxation and the flow of funds into and out of India, as well as its impacton local giving and registration.

3 INCL & NED. Defending volunteer, 2008 p10. 4 The FCRA awaits implementation as of April 20115 Oxford Dictionary


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As stated this work will employ a comparative approach, using a seven-country pool. We oftenlook at countries like the Canada, UK and USA as the standard bearers for all things philanthropic.To be certain these countries have arguably some of the most progressive, permissive andsupportive regulatory regime for VOs in the world. It is with this in mind that we will look at thes

countries, in the hope of deriving a set of best practices for regulating the sector. In addition tothese countries, we have , from Asia, Japan and the Philippines, and from the African continent,South Africa. While we will do a general comparison of the regulatory regimes, special care istaken to address the areas that are highlighted in the Financial Management Service Foundation(FMSF) reviews of the new FCRA regulation and proposed changes in the Direct Taxes Code Bill(DTC).

1. Laying out the Conditions in IndiaPresently, India has one of the fastest growing economies in the world. The Indian economy is oncourse to surpass the United States within the next forty years. In spite of this growth however,India also has more than 300 million people that are food insecure. The world hunger index for

2010 indicated that India was home to 42% of the worlds under weight children. To be fair theindex did record a decline in the number of Indias hungry over time. However, the rate is stillalarmingly high6. According to the 2010 Human Development Index India is ranked as a middlelevel country in the bottom third at 119 of 169 countries on the human development index. Thenumbers are equally alarming when one looks at the numbers of people living in poverty and thosethat are income poor. More than 50% of Indians live in poverty, while better than 42% are incomepoor 7.

Voluntary organisations have been active partners in the fight to improve the livelihood of Indiaspoor for decades. It has been and continues to be a very difficult task. The numbers quoted show just how large a task it is. There is little dispute that the need in India is great. Instead of an

increase in aid to match the magnitude of the need, what we are seeing is, as stated, a retreat of funding. For a number of reasons the funding available to the voluntary sector is shrinking theworld over. The current global economic environment not withstanding, we are seeing a significantdecline in the foreign sources of funding available to Indias voluntary organisations. This istroubling because we are not seeing a corresponding increase in local giving to fill the void. It is inthis environment of substantial need and retreat of foreign capital that the government of India hasintroduced bills to replace the Income Tax Act, 1961 and the Foreign Contribution Regulation Act,1976, with the Direct Taxes Code Bill, 2010 and the Foreign Contribution Regulation Act, 2010 .The new laws, in the eyes of many experts, tighten the noose around the neck of Indias muchneeded but obviously struggling VOs, more importantly if true it reduces the assistance to thosemost vulnerable and most in need.

2. ObjectivesThis work will assess the environment in which Indias Voluntary organisations operate, highlightingthe difficulties from the perspective of leaders in the sector. The work will examine on Indiasregulatory regime eliciting some best practices through comparing a few regulatory regimes aroundthe world. As stated regulatory regime is defined here as the rules and monitoring for adherence to

6 http://www.ifpri.org/publication/2010-global-hunger-index7 The Real Wealth of Nation: Pathways to Human Development, HDRO-UNDP November 2010


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said rules. The actual rules are numerous and varied; as a result this work will be limited to threeindependent but overlapping areas: registration, taxation (with a special look impact home grownphilanthropy) and the flow of foreign contributions into and out of India.

The paper is divided into three sections comparing all seven countries on the issues of registration,

taxation and the Foreign Contribution Regulation Act. To start, this work will lay out in brief theregistration environment in India et al. That will be followed with a comparative description of thtax and foreign fund environment in all seven countries. There is a review of the New Direct TaxCode and the Foreign Contribution Regulation Act embedded within the respective sections. Bothare examined regarding their prospective impact on Indias civil service sector. Another area of special interest, Indias emerging role as a donor nation is examined in the contesxt of the tax laws.India as a donor is shown to be quite contradictory of its tax policy that all but prohibits use of privately collected Indian resources for charitable purposes outside of India. Each section isfollowed by a brief observation that shapes the argument in a collective, comparative observation.


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SECTION 1

REGISTRATION

1. Registration in IndiaOur examination of the regulatory regime begins with the process of registration. Registration inIndia in the eyes of many has not changed much over time. Two of the three major avenues for registration for public benefit VOs predate Indias 1947 independence. The Societies Registration Act, 1860 and The Indian Trust Act, 1882 are 19th century laws passed while India was under British rule. The single fact that these acts were created to serve the interest of a colonialdependency does not diminish their worth. On the contrary the endurance could be seen to speakvolumes about the soundness of the legislation. Some argue that the antiquated laws are notrobust enough to deal with the needs of the sector today.

It can also be argued that these acts are federal laws, which given the States right to regulate VOswithin their jurisdiction, merely serves as a guideline for a minimum requirement for VOs tooperate. This view is supported by the fact that regulating VOs is a state responsibility. We seealso that many states have started with the federal law and added tweaks to strengthen the laws.The Central government for their part has refrained from modifying

1.1 Registration Laws in IndiaThere are three avenues to establishing a VO in India, they are:

The Societies Registration Act, 1860 The Indian Trusts Act 1882, The Bombay Public Trusts Act, 1950 The Indian Companies Act, 1956 (Section 25)

1.1.1 The Societies Registration Act, 1860

The Societies Registration Act came into force in 1860, two years after the Revolt of 1857 was putdown. After Independence, this Act was adopted as the law in the new nation as a federalprovision. Given that administration of VOs falls under the providence of state governments,States in some instances have set up entirely new registration requirements for societies, using thefederal regulation as a mere guideline. In other cases they add small tweak and in yet other statesthe Act is administered as is.

According to section 20 of the Act, the types of societies that may be registered under the Actinclude, but are not limited to, the following: Charitable societies, Societies established for thepromotion of science, literature, education, or the fine arts; and Public art museums and galleries,and certain other types of museums. Individuals or institutions or both may be members of a

society.

Finally, societies may be dissolved. It should be noted that upon dissolution, and after settlementof all debts and liabilities, the funds and property of the society must be given or transferred tosome other society; there is an expressed preference that the resources go to one with similar objects as the dissolved entity.


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1.1.2 The Indian Trusts Act, 1882 The Indian Trusts Act, 1882, is the federal vehicle for registration of a private trust. The act is atemplate for the country as a whole, except in the States of Jammu and Kashmir and the Andamanand Nicobar Islands. There is also an exception for locations where there are no actual offices of the Charity Commission; in that case entities will register with the Registrar of Societies or other

Nominated authorities. The Indian Trust Act applies only to private trusts. Some states haveseparate acts governing the administration of charitable institutions and endowments. Generally, acharitable trust must register with the office of the Charity commissioner of the state in which thetrustees register the trust in order to be eligible to apply for tax-exemption.

In general, trusts may register for one or more of the following purposes: Relief of poverty or distress; Education; Medical relief; Provision of facilities for recreation or other leisure-timeoccupation (including assistance for such provision), if the facilities are provided in the interest ofsocial welfare and public benefit; and the advancement of any other object of general public utility,excluding purposes which relate exclusively to religious teaching or worship.

Indian public charitable trusts are generally irrevocable. If a trust becomes inactive due to thenegligence of its trustees, the Charity Commissioner may take steps to revive the trust.Furthermore, if it becomes too difficult to carry out the objectives of a trust, the doctrine of cy pres,meaning "as near as possible," may be applied to change the objects of the trust.

1.1.3 The Companies Act, 1956 The Indian Companies Act, 1956, which principally governs for-profit entities, permits certaincompanies to obtain not-for-profit status as "section 25 companies." A section 25 company isformed for "promoting commerce, art, science, religion, charity or any other useful object." Asection 25 company is required to apply its profits, if any, or other income to the promotion of itsobjectives, and should not pay dividend to its members. A minimum of three individuals isnecessary to form a section 25 company. The founders or promoters of a section 25 companymust submit application materials to the Regional Director of the Company Law Board.

The application must include copies of the memorandum and articles of association, as well as anumber of other documents, including a statement of assets and a brief description of theorganisational objectives. The governing structure of a section 25 company is similar to that of asociety. It generally has members and is governed by directors or a managing committee or agoverning council elected by its members.

A section 25 company can be dissolved. Upon dissolution and after settlement of all debts andliabilities, the funds and property of the company may not be distributed among the members of thecompany. Rather, the remaining funds and property must be given or transferred to some other section 25 company, preferably one having similar objects as the dissolved entity.

1.2 Grievance Redress Mechanisms Appeals

1.2.1 Society The Societies Registration Act at the central level and its state level variations do not make anyprovisions for grievance redress or appeals. The only recourse possible is through the civil courts.


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1.2.2 TrustsIf any trustee or beneficiary is dissatisfied and disputes any action of the trustees he can lodge acomplaint with the Charity Commission. In case of disputes related to property the complaint has tobe filed under Sec 18, which is managed by the Deputy Charity Commissioner. If the parties arenot satisfied with his judgment they can appeal to the Charity Commissioner, who gives directions

for removal of cause of complaint. However, if the case is not resolved at this level appeals can bemade to the civil courts.

1.2.3 Section 25 Indian Companies Act does not make any provisions for grievance redress or appeals. Theabsents of a grievance mechanism all but ensures that disputes end up winding through the Indiancourt system.

2. Registration in Other Countries

2.1 CanadaThe registration process in Canada is determined by the objectives of the organisation.Organisations established for the benefit of a limited group or its members exclusively are deemedto be regular VO and are subjected to a different set of regulations from organisations developed toservice the society as whole, considered charities.

The primary definition of a non-profit organisation is: "a club, society or association that, in theopinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1). Theterm "club, society or association" includes corporations and trusts. The limiting condition is thatthe VO must not pursue profit. This does not mean that activities generating a profit are forbidden,so long as the motive for the activity is not the generation of profit. Also, because the Income Tax Act does not require registration of VOs; in essence, they self-assess their status.

The Canada Revenue Agency distinguishes between charitable organisations, public foundationsand private foundations based on the entity's structure, source of funding, and mode of operation. As a practical matter, charitable organisations are operational charities, while foundations arealmost always grant makers8.

2.1.a Charitable Organisations A registered charity is designated as a charitable organisation if:

a) it devotes its resources mainly to charitable activities conducted by itself; and b) morethan 50% of its directors/trustees deal with each other at arms length (i.e., individuals notrelated by blood, marriage, common law relationships, or close business ties).

2.1.b Public Foundations A registered charity is a "public foundation" if:

a) it is constituted and operated exclusively for charitable purposes; and b) it is a corporationor a trust. A public foundation must also meet condition b) for charitable organisations. [5]

8 ICNL


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2.1.c Private Foundations A registered charity is a "private foundation" if:

a) it is constituted and operated exclusively for charitable purposes; b) it is a corporation or trust; and c) it is not a charitable organisation or public foundation. A private foundation is one where more than 50% of the board is not at arm's length with

each other.With the exception of federal incorporation, the creation of any organisation is subject to theapplicable provincial law, which varies somewhat, but seldom substantially, from province toprovince. This is a function of federalism where in the state has the constitutional jurisdiction for the regulation of entities operating within its jurisdiction. The federal provisions for the regulation oa charity serve as a guideline except for a charity that operates in multiple provinces where it willsupersedes the provincial regulations.

2.2 MonitoringThe Charities Directorate is responsible for ensuring that charities comply with the Income Tax Act and with the rules that have been established for charities.

All charities must file an annual information return with the Charities Directorate. This form containinformation about what the charity has done in the previous year as well as financial information. Acopy of this return can be made available to any member of the public on request. The charity mustalso include a copy of its full financial statements with its return, but those statements are onlymade available to the public if the charity agrees.

The Charities Directorate conducts between 500 and 600 audits each year. An auditor visits thecharity and reviews its books and records to ensure that the organisation still complies with thelaws and procedures. Some organisations are selected at random for an audit; others are selectedbecause of information the Charities Directorate has received or because it has decided to payparticular attention to a certain type of charity.

Under the law, the Charities Directorate cannot tell anyone other than the charity involved about anaudit. It cannot even confirm whether an audit has taken place. However, if a charitys registrationis revoked, the Directorates letter setting out the reasons for the revocation is publicly available.

2.2.1 SanctionsIf a charity does not comply with the law, the Charities Directorate has only one penalty readilyavailable to it deregistration, removing the organisations status as a registered charity. About2,500 charities are deregistered each year. About 66% of those de-registrations are because thecharity has not filed its annual return with the Charities Directorate. Another 30% are made at thecharitys request because it has decided to stop operating. In the last five years, very few havebeen deregistered for cause for some serious violation of the rules governing charities. It isimportant to note that deregistration has an added disincentive for VOs. Being deregistered willhave a negative impact on the credibility of an organisation and may jeopardize the fund raisingability.


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2.2.2 AppealsIf an organisation feels it has been unfairly denied charitable registration, or had its charitableregistration revoked, it may ask the courts to overturn the decision. In that case, the organisationtakes an appeal to the Federal Court of Appeal. A panel of three judges hears arguments andconsiders the documents and information that the Charities Directorate used in coming to its

decision. Some of this material comes from the application for registration, or from documentsobtained during an audit. The Charities Directorate as a result of its own research gathers other material. This is called an appeal on the record. There is no witness testimony at the appeal.

A further appeal can be taken to the Supreme Court of Canada, if that court grants permission.These appeals help clarify the law about what is charitable in Canada. Since there is no legislateddefinition of charity, it is these court decisions that must be used by the Charities Directorate inconsidering future applications. Over the last 25 years, there has been an average of only onecourt decision on charity law each year. Decisions from provincial courts and courts in other countries can sometimes be helpful, but are not binding on the Charities Directorate.

2.3 Self-regulatory efforts The self-regulatory initiative in Canada has been lead by Code of ethics of Canadian Council for International cooperation (CCIC) The process does have some shortcomings in that theenforcement mechanism relies on self-assessment, and the beneficiary accountability is merelyaspirational. See table three for a side-by-side comparison of the self-regulatory efforts of thecountries in this study.

3. United States of America

The designations in the USA are very similar to that of Canada. American non-profit organisationsfall into two broad groups: charities and other public benefit non-profits and mutual benefit non-

profits. The traditional common law definition of charities as derived from English law, speaks offour charitable purposes:

The relief of poverty; The advancement of religion; The advancement of education; or Other purposes beneficial to the public and analogous (or similar) to purposes,

In the modern era however, the traditional definition in the United States has been largelysuperseded by the tax definition of charity that is, by the definition of an organisation that pays notax on its income and whose donors derive tax benefits as a result of their donations.

This formula simplifies the process for the monitoring and of VOs in the Canada and the USA. Theexplosion in the number of VOs in the USA in particular would make the maintenance aspect of theregulatory mechanism very difficult. According to the International Center for Not-for-Profit Law thnumber of VOs in the USA has grown 20 fold from the 1950s, 50k to well over a million today9.Monitoring of charities in the USA is largely achieved through the use of the tax laws

9 ICNL


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3.1 State LawIn most states, the Attorney General is empowered to supervise and regulate charities.Charities are required to file annual reports regarding their activities and finances to the office of the Attorney General. In most states, the Attorney General has powers to inspect and review acharitys books and records to safeguard the interests in charitable assets. The public also may

inspect any of these reports, which are available on request.The members of the charitys governing body owe a fiduciary duty to the charity. If a director breaches the duty, the state attorney general has powers to compel the director to repair anydamage that the charity suffered as a result. This approach is not novel, organizations cometogether partly to shield individuals from personal liability. This approach pushes back against thatnorm. It also does not specifically target aid funds as a remedy, ultimately ensuring that funds arenot diverted from those for whom it was intended.

3.2 Federal LawThe Internal Revenue Service supervises the operations of charities in three ways:

Through the information provided in the annual returns; Through its power to audit the finances and operations of charities; and Through its power to assess penalties and fines and in extreme cases to revoke a charitys

exempt status for abuses and violations of the law.

3.3 Annual ReturnsPublic charities other than churches, with an annual gross receipt of over $ 25,000 must file anannual information return on IRS Form 990. Private foundations must file Form 990-PF, a longer version of the earlier form. If a charity has unrelated business taxable income it must file Form 990-T and pay tax.

Form 990 and its variations require detailed information about many aspects of a charitys financesand operations, including:

Revenues and expenses for the year covered by the return, by specific categories; Compensation (both current and deferred) and benefits provided to directors, officers, key

employees and the five most highly paid employees and independent contractors of thecharity. Compensation paid to these people through related organisations (both for profitand not for profit) must also be reported.

Financial transactions that involve insiders either directly or indirectly, focusing on Section4841s self dealing role for private foundations and on section 4958s excess benefit banfor public charities but not limited to transactions that fall within the scope of these statutes.

A schedule of grants and other charitable distribution, including any relationship betweenthe grantee and an insider in the charity

Deals of any loans between the charity and its officers, directors, trustees, and keyemployees.

Fundraising expenses, accounting fees, legal fees, and similar payments to outsideprofessionals.

Information on taxable subsidiaries and transactions with related organisations. Description of charitys major programme areas.

3.4 IRS Audits


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Federal tax law gives the IRS the authority to audit the books and records of charities and other non-profit organisations, subject to procedural protections designed to prevent government abuses. An audit may be triggered by information provided in form 990, by information from a disgruntledemployee or former supporter, or by the press coverage of the apparent abuses by a charity or itsmanagers. From time to time the IRS decides that it must audit a particular segment of the non-

profit sector because of widespread concern about legal compliance. In recent years, the IRS hasfocused on audit of hospitals and health care systems and on large colleges and universities.

An organisation under audit has an opportunity to confer with the IRS auditor to provide informationto support its position and to appeal the auditors conclusions. If the auditor concludes that thecharity has complied with the applicable laws, the IRS confirms the fact in a no change letter.However, if the audit discloses problems the IRS assesses applicable taxes and penalties. If thecharity pays a fine it has to be reported on Form 990 of the year in which the fine was paid.

3.5 Fines and PenaltiesThe ultimate penalty is the revocation of an organisations tax-exempt status. However, thissanction is rarely applied. More often the charity agrees to correct the problem and pay a fine.Section 4958s ban on excess benefit transaction of public charities, which is enforced by penaltiesimposed on the wrongdoer rather than the charity itself, gives the IRS an effective weapon againstabuses. The objective being to insulate the charity from potential damaging public perceptions, thereal winners are the intended beneficiaries who wont bare the costs of the abuse.

3.6 Mechanisms for AppealIn the United States, all applications to the Internal Revenue Service for tax-exempt status arehandled centrally. An organisation that receives an initial adverse determination of tax-exemption(or a letter proposing to revoke an existing exemption) may seek recourse from a separate branchof the Internal Revenue Service (the Appeals Office), by filing a protest within 30 days. The protestletter must include details such as the aspects of the original decision the organisation disagreeswith, the facts supporting its position, and the law or authority on which it is relying. If requested, aconference can be held, but otherwise the procedure can be conducted by correspondence or telephone. Appeals Office staff can only determine cases according to established precedents andpolicy. Where there are no established precedents and policy, the matter is referred to head officein Washington.

The organisation also has the option of having the file referred directly to Washington. In addition,organisations can go directly to court, rather than using the Appeals Office, or they can go to courtif they disagree with the decision of either the Appeals Office or head office. If the court finds theorganisation to be the prevailing party, it can recover its administrative and litigation costs.

3.7 Mechanisms for Public Accountability A charity is obliged by law to provide a copy of its tax-exempt application and its three most recenttax returns, together with all attachments except the donor list to anyone requesting them,immediately if the request is made in person and within 30 days if the request is made in writing.

The organisational test of Section 501 (C) (3) requires a charity to state, in its governing document,that its assets are irrevocably dedicated to charitable purposes and that if the charity ceases toexist, its remaining assets (after payment of its debts) will be distributed for charitable purposes. In


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practice, the responsibility for ensuring that the charitable assets remain devoted to charitablepurposes when a charity ceases to exist, its future rests with the states, specifically with the officeof the Attorney General.

3.8 Self-regulatory efforts

There are several self-regulatory initiatives at work in the USA. Three of the four listed in this workhave all the criteria of an effective effort10, in that they have in place three criteria deemed essentialto an effective regulatory mechanism. The odd institution, Independent Sector Statement of Values and Code of Ethics for Non-Profit Org, does not meet any of the criteria save having a codeof conduct. .

4. England and Wales (UK)

The registration requirements in the UK also run along similar lines as the previous countries. It is

important to note that reference to the United Kingdom in this work is limited to England andWales. Both share a single approach to NGO regulation, while Scotland and Northern Irelandemploy different schemes. As is the case with Canada and the USA, VOs organized for the benefitof its members are not required to register. A key difference is that in the UK such VOs do notreceive the benefit of a tax exemption granted to its counterparts in the Canada and the USA.

The charities in UK are registered, monitored, and facilitated through a Charity Commission. TheCharity Commission has been established by law as the regulator and registrar for charities inEngland and Wales. The Charities Commission aims to provide the best possible regulation of charities, in order to increase their efficiency, effectiveness and public confidence and trust incharities.

The Charity Commission has the following roles: To secure compliance with charity law, and deal with abuse and poor practice; To enable charities to work better within an effective legal, accounting and governance

framework, keeping pace with developments in society, the economy and the law; and To promote sound governance and accountability

All charities in England and Wales, which are not specifically exempt or excepted from registration,are required to register with the Charity Commission. Exempt charities are charities that Parliamenthas specifically decided do not need to be supervised by the Charity Commission, typicallybecause other arrangements already exist to supervise and regulate them.

An excepted charity is a charity which is exempted from the duty to register either by Regulationsmade by Ministers or by an Order made by the Commissioners. A charity is also exempted fromregistration if it has neither:

any permanent endowment; nor the use or occupation of any land (including buildings); nor an annual income from all sources of more than 1,000.

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The Charity Commission is required to register any institution, which is a charity (unless isexempted). The procedure for applying for registration as a charity, the gateway procedure for registration, requires applicants to provide, in addition to their constitutional documents, a range ofinformation about their actual or proposed activities, plans for funding and trading, and trustees.

The gateway process was developed in response to suggestions from the Public AccountsCommittee that greater scrutiny of charities was required at the time of registration. However, thisprocess has been criticized by charities for taking into account the viability of an organisation whendeciding whether or not to register it. The critics argue that the Commission is not legally entitled todo this; and applies an activities test by looking at an applicants actual or proposed activities asan aid to interpreting the purposes stated in the applicants constitution.

Some critics are of the view that this process is making it more difficult for charities to register; infact this procedure is onerous for very small organisations.

Registration means that while the organisation remains on the Public Register of Charities it will be

legally presumed to be a charity and must be accepted as a charity by other bodies such as theInland Revenue. Although registration does not necessarily indicate approval of the managementof the charity, it does mean that it is subject to supervision by the charity commission and thatinformation about it, including its governing document and accounts, is open to examination by thepublic. Once a charity is registered, the trustees must inform the charity commission about anychange to the charitys registered details. The organisations have to submit their annual accountsto the charity commission and may be asked periodically to complete a return or supply additionalinformation.

4.1 Annual Monitoring of CharitiesStatutory power to monitor charities, through a compulsory annual return, was given to the CharityCommission in 1996, when the relevant Charities Act 1993 provision came into force. The annualmonitoring system makes greater demands on charities, and subjects them to greater scrutiny, astheir size, and the risk of harm that could result from their failure, increases. Around 50,000charities those with an income or expenditure over 10,000 are monitored annually. Thestatutory accounting, reporting and auditing requirements are similarly graduated.

A charity, which is not a company, must have its accounts for a particular financial year professionally audited (i.e. audited by a person registered as an auditor under the Companies Act1989) if either:

Its gross income or total expenditure exceeded 250,000 in that financial year; or Its gross income or total expenditure exceeded 250,000 in either of the two years

preceding that financial year.

A charity, which is a company, must have its accounts for a particular financial year professionallyaudited if its gross income is over 250,000 in that year.


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Experts feel that these rules are unnecessarily complicated and impose a professional auditrequirement at too low a level. The charity threshold should be raised to 1 million. Below that level(down to an income threshold of 10,000) charities should continue to be required to have their accounts examined by a competent independent person.

4.1.1 Assistance on Legal, Governance and Administrative IssuesThis function, which the Charity Commission calls Charity Support, consists of modernizing thpurposes, governance and administrative arrangements in charities constitutions, advising on legaland regulatory requirements, and authorizing actions and transactions which charities would nototherwise have the legal power to carry out.

The Commissions primary function is a regulatory one and the bulk of its resources are rightlydedicated to this function. However, it is also part of the Commissions function to give charitytrustees information and advice on any matter affecting the charity. This clearly allows theCommission not only to tell charities what their legal obligations are, but also to adopt a wider advisory role on good practice. The Commission on the Future of the Voluntary Sector, anindependent review, examined the tensions that have sometimes arisen out of this dual role of regulator and adviser.

4.2 Self-regulatory efforts The UK does not have an active self-regulatory initiative at work at this time.

5. Philippines

In the Philippines there are legal and operational distinctions made between registration andaccreditation. Registration is an official legal recognition issued to a person, corporation, entity or

organisation after having met certain basic requirements under Philippines law. As is the case withthe western democracies above registration is not a requirement for existence of a voluntaryassociation. It is however a requirement for the attainment of a legal personality.

To qualify for accreditation, a non-stock, non-profit corporation must be organized for one or moreof the following purposes: religious; charitable; scientific; athletic; cultural; rehabilitation of veteransor social welfare. (Section 1(a), Revenue Regulation No. 13-98).

Further, no part of the net income or assets of the accredited organisation may belong to or inureto the benefit of any member, organizer, officer, or specific person (Tax Code sec 30 (E), Section1(a), Revenue Regulation No. 13-98).

To qualify for accreditation as a voluntary organisation, a VO must be organized and operatedexclusively for one or more of the following purposes: scientific; research; educational; character-building; youth and sports development; health; social welfare; cultural; or charitable purposes.(Section 34(H)(2)(c)(1), Tax Code) Further, no part of the net income may inure to the benefit of any private individual (Section 34(H)(2)(c)(1)), Tax Code and Section (1)(b), Revenue RegulationNo. 13-98). Accredited VOs are also subject to other requirements, including restrictions on theamount of administrative expenses that can be incurred (limited to 30% of total expenses) and


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limitations on the distribution of assets upon the organisations dissolution (Section 1(b), RevenueRegulation No. 13-98).

5.1 Annual Monitoring of Charities

NGOs are required to regularly report and disclose information in relation to their operations. For each donation received, a certificate of donation must be submitted to the donor, and the Bureau of Internal Revenue. In addition, and the Securities Exchange Commission (SEC) requires thatorganisations annually submit audited financial statements as well as a general statement of activities. Organisations must also submit a General Information Sheet that includes the specificpresent address of the NPO, telephone and contact numbers, names of officers, trustees andmembers, their addresses and contributions and number of staff.

The self-regulatory effort in the Philippines is well developed and often cited as a success story.The Philippines Council for NGO Certification (PCNC), the leading self-regulatory agency in thePhilippines is effectively a conglomerate of six NGOs. An ambitious attempt at self-regulation, thePCNC entered a partnership with the Department of Finance in 1998. In January 1998 PCNCentered into an agreement with the department of Finance, officially recognizing the PCNC as theofficial vehicle for registration and monitoring of the VOs, wishing to qualify as a doneeorganization11. While there is still room for improvement we see that the PCNC is headed in theright direction with an enforcement mechanism and sanctions in place. The beneficiaryaccountability is however merely aspirational.

6. Japan

In Japan registration for a VO can be done in one of five legal forms. There are some recent

changes to the Japanese regulatory machinery. In December 2008, a set of laws was enactedushered in significant changes for Japanese VOs. New laws include the Association andFoundation Law, that Law on Recognizing Organisations as Public Interest, and the Law toConsolidate Relevant Laws. Under the Association and Foundation Law, citizens can form anassociation or foundation even if the organisation's activities are not in the public interest.

6.1 Associations and Foundations of Public InterestThe Law on Recognizing Organisations as Public Interest delineates a range of requirements for associations and foundations to be recognized as those of public interest. The Committee for Public Interest Organisations, which is comprised of experts from various fields, screensapplications from organisations and authorizes or rejects the public interest status of each. The

committee seeks to determine if an organisation satisfies the requirements of the new law,including:

1. The organisation's public purpose activities shall fall under the categories specified by the law;2. The operation of the organisation shall be focused mainly on the pursuit of public purpose

activities;3. The organisation shall be capable of undertaking proper accounting and managing its projects;

11 NPO Sector Assessment Philippine Report 2008


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4. Revenues earned from its public purpose activities shall not exceed the expenses for theseactivities;

5. The expenses for public purpose activities shall be more than half of its total expenses for overall activities;

6. The balance of the organisation shall be expected not to exceed the designated amount;

7.

Less than a third of the board members or auditors shall come from a given family or a givencompany;8. The honorarium for the board members shall not be unfoundedly expensive;9. The organisation does not possess financial resources that would allow the organisation to

influence over other entities.

A committee summoned by the national government will screen organisations operating on anationwide scope while committees established by prefectural governments will revieworganisations whose activities take place in given prefectures.

6.2 Special Non-profit Corporations (SNCs)This not-for-profit organisational form was created under the Law to Promote Specified Non-profit Activities (SNC Law), which went into effect in 1998 and was last amended in 2003. The purposeof the law was to alleviate the legal hurdles of creating Public Interest Legal Persons or PILPsunder Article 34 of Japan's Civil Code. The Japanese government initially envisioned that SNCswould be covered by the recently enacted laws, but abandoned the idea in the face of oppositionfrom SNCs12.

The purpose of an SNC, or tokutei hieiri katsudo hojin, cannot be the generation of profits, and itcannot propagate religious teachings, perform religious ceremonies, or educate or foster religiousbelievers (SNC Law, Article 2). It must have at least 10 members, and its "provisions regardingacquisition and loss of qualifications for membership [must not be] unreasonable" (SNC Law, Articles 2, 10, 28). A SNC must have at least three directors and at least one auditor as an officer (SNC Law, Article 15). It may engage only in those activities (as its primary non-profit activitiesspecified in the Schedule to Article 2 of the law (SNC Law, Article 2). The enumerated activitiesinclude health care, environmental work, disaster relief, youth activities, and internationalcooperation (the full list appears in Section III-B, below).

6.3 Organisations Established Under Special Laws Arising Under Civil Code Article 34The following are among the principal subtypes of Organisations Established under Special Laws Arising under Civil Code Article 34. These organisations are subject to different rules regardingoperations and tax treatment from those governing associations, foundations, and SNCs.Specifically:Social Welfare Organisations provide services for social advancement, includingservices for the elderly, children, and the handicapped, among other activities.EducationalOrganisations (Private School Corporations) operate private schools.Religious Corporationsengage in religious or evangelical activities.Medical Corporations establish hospitals and clinicsin which doctors or dentists provide regular services, or facilities for the health and welfare of theelderly. Under Japanese law, only not-for- profit entities are permitted to provide medical treatment,creating a prominent role in this field for not-for-profit organisations. However, except for the smalcategory of Special Medical Corporations, most Medical Corporations are not accorded the same

12 ICNL


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treatment as PILPs. This is reflected, for example, in tax treatment: Medical Corporations are taxedin the same manner as ordinary corporations.Relief and Rehabilitation Enterprises (sometimescalled "Regeneration and Protection Corporations") assist those who are imprisoned to rehabilitateand integrate them back into society.

6.4 Public Interest Legal Persons or PILPs (Tokurei Houjin) As a direct result of the 2008 changes to the legal framework as it relates to VOs, the PILP becamea transitional organisational form in Japan. The new laws effectively abolished Article 34 of Japan'sCivil Code, and all PILPs established there under can maintain their legal status for 5 years, after which time their legal status will be automatically cancelled. These organisations are expected tochange their status by becoming an association or foundation (Ippan Shadan or Zaidan), an SNC,an organisation authorized by special laws arising under civil code article 34, or a profit-seekingentity. Alternatively, a PILP may seek to obtain public interest status or dissolve. Existing PILPsadvance the public interest through "rites, religion, charity, academic activities, arts and crafts, or [an objective] otherwise relating to the public interest and not having for its object acquisition ofprofit."

6.5 Self-regulatory efforts Japan does not have an active self-regulatory initiative at work at this time.

7. South Africa

Voluntary Organisations in South Africa are registered under three legal forms:

Voluntary Associations

Non-Profit Trusts Section 21 Companies.

7.1 Voluntary AssociationsThe voluntary association is the most common legal form for not-for-profit organisations in South Africa. No office of registry exists for voluntary associations. Forming a voluntary associationrequires only that three or more people agree to achieve a common objective, primarily other thanmaking profits. The agreement may be oral or written, though it is customary for the agreement totake the form of a written constitution. Voluntary associations are a product of the common law andare not regulated by statute. This can be confusing, because the common law is not easilyaccessible and sometimes is conflicting. Voluntary associations may be classified as follows:

Corporate bodies under the common law, known as universitas; Bodies that remains unincorporated at common law, known as "non-corporate associations."

When deciding classification of a voluntary association, the court will consider the organisation'sconstitution as well as its nature, objectives, and activities. There are three requirements in order tobe classified auniversitas:


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i. The entity is structured to continue as an entity notwithstanding a change in membership;ii. It must be able to hold property distinct from its members;iii. Members have no rights, based on membership, to the property of the association.

If all of these requirements are met, the organisation will be deemed auniversitas with legal

personality. Otherwise it is a non-corporate association without a legal personality.7.2 Non-Profit TrustsTrusts in South Africa are governed under The Trust Properties Control Act. A trust can beestablished for private benefit or for a charitable purpose. In order to determine whether a trustqualifies as a charitable trust under South African law, a grant-maker must look to the trust deed.

A trust is created when property is transferred by a trust deed; the trustee then manages theproperty for the benefit of others or for the achievement of a particular goal. The property can onlybe transferred by written agreement, testamentary writing, or court order. The person whoadministers the trust property is called a trustee13. A court official, called a Master of the HighCourt, has jurisdiction over a trust if the majority of the trust property is situated in his or her jurisdiction14. The Master holds the trust instruments, oversees the appointment of trustees, andpolices the trustees' performance with respect to the trust property15. A trust does not haveseparate legal personality, but trustees still enjoy limited liability. All rights and responsibilities vestcollectively in the Trustees.

7.3 Section 21 CompaniesThe South African Companies Act provides for an association not for gain in terms of Section2116. Such an organisation, commonly called a Section 21 Company, must have at least sevenmembers, each of whom makes a guaranteed commitment in the event of the institution's financialfailure (although such commitment may be purely nominal). The primary purpose of a Section 21Company must be to promote religion, the arts, science, education, charity, recreation, any other cultural or social activity, or communal or group interests17. A Section 21 Company must register with the Registrar of Companies18. The records of the Registrar are open to the public. Section 21Companies have legal personality and therefore offer limited liability to their members anddirectors. They can enter into contracts and sue and be sued in their own name. Branches of foreign not-for-profits in South Africa can be registered under Section 21A of the Companies Act.

7.4 Annual Monitoring of Charities

The monitoring of public benefit organisations in the South Africa is carried out by multipleagencies. There are four state agencies, the NPO Directorate Department of SocialDevelopment; Tax exemption Unit South African Revenue Services; Companies Registrar Department of Trade and Industry; District Master of Court Office Department of Justice.

13 [TPCA 1]14 [TPCA 3]15 [TPCA 4; 6-7; 16-20]16 [Companies Act 21]17 [Companies Act 21(1)(b)]18 [Companies Act 63(1)]


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The requirements for compliance are much the same, in that organisations are required to makeregular reports regarding the disposition of finances moving through the respective reportingagency.

The Non-Profit Organisations Act requires organisations registered with the NPO Directorate

submit annual accounts and narrative reports. Accounts have to be approved by an AccountingOfficer regardless of the size of the VO. These annual reports and accounts must be filed withinnine months of the end of the financial year. Failure to do this will result in deregistration. Section21 Companies are required to submit accounts and reports to the Companies Registrar. PublicBenefit Organisations are required to submit accounts and reports to the revenue department for tax exemption purposes.

7.5 Self-regulatory Efforts There is also an attempt at self-regulation afoot in South Africa, the most prominent South AfricanNGO Coalition (SANGOCO), has developed a code of ethics, which function as a guide for member organizations. There are however, no enforcement mechanisms or sanctions in place to

encourage compliance. On the positive side there are some standards for beneficiaryaccountability.

8. Observations

There is not much that distinguishes the registration process across the countries within this study.There are differences in the number of categories and labels and categories employed distinguishamong voluntary organisations. However, at the core there are three fundamental designations.Non-profits serving the interest of its members, Non profits/public benefit organisations/charitiesserving the interest of the society at large and not for profit companies which are essentially

companies that return the proceeds to the further the objective of the organization, e.g. hospitals or cooperatives.

A look at the countries within the study reveals that despite the differences in categories therequirements for registering VOs are very similar. The variations in rules of operation for charitabledoers versus charitable donors transcend labels. For example, a charitable trust in India is similar to a public or private foundation under Canadian labeling. The differences as they exist regardingthe governing structures are inconsequential to the functions of the organisations.

One problem that has been highlighted here in India related to registration is the variations in rulesacross states. The Argument is that the rules for registration of a society may be different in Delhi

than it is in Rajasthan and still different that what exist in Tamil Nadu. A look at other federaliststates reveals similar pattern. This is a feature of federalism and is not as many have argued aflaw exclusive to India. As insightful is the fact that the remedy for multi-state VOs here in India ithe same as a multi state VOs in Canada or the USA. Federal registration supersedes stateregistration and allows the organisation to operate in all regions. By registering federally, multistate VOs will standardize the requirements for registration regardless of how many states theychoose to operate. This feature of federalism is argued to be beneficial, because it allows for


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experimentation at the state level, the development best practices from lessons learned, andultimately a stronger more sound central policy.

All things considered the processes for registration are very similar in structure and guidelines for operation. Given the democratic principles that recognize freedom of association regulation of

voluntary organizations can be very tricky. There are limits to the kind of enforcement measuresthat are available to the state. The registration process is first step. A regulating authority is thencharged with monitoring to ensure adherence. Here to we see some significant differences andsimilarities. There are four common models for regulating VOs (1) State model-multiple/singleagency; (2) Certification model; (3) Courts based model; and (4) tax based model.

As often happens there is significant over lap that may show some aspects of one or more of thesemodels present in any country. Most specifically though we would argue that countries in thisstudy fall into the categories as follows. The Tax model is applied most clearly in Canada and theUSA; the court-based model is employed in the England and Wales (UK for the purpose of thiswork). The certification model is used In the Philippines, while the rest of the countries within the

study fall into the first model of state multi or single agency regulation19

.The examination shows that the countries within the study are pretty consistent, be it governmentor sector initiatives. When it comes to the monitoring, some differences start to emerge. On paper governments furnish clear requirements and penalties for failures to meet them. It is not clear however that the government regulators are actively monitoring and administering penalties wherenecessary. Table 2 shows that in Canada there are between 500 and 600 audits conducted eachyear. In the USA the audits are targeted, triggered by complaints. At the time of writing the datafrom other countries was not complete. This is an area where extensive research is necessary.Follow-up is strongly recommended.

Anecdotal evidence of Indias efforts at monitoring reveals that monitoring is especiallyproblematic. One needs only to look to the fact that all of the registrants under the Societies Act of 1860 are still deemed registered despite failure to comply with requirements, which have as apenalty de-registration. The Indian government in parliamentary debate cited the fact thatorganisations that have never filed a tax return were still receiving foreign funds, that despite thefact that failure to file timely returns is listed as a reason for revocation of charitable status20. It isargued later in this work that instead of monitoring and administering laws in place, theGovernment of India opts for crafting duplicate legislation.

The assessment of the capacity of the state to monitor is an extremely completed exercise. Thiswork does not adequately address the issue of monitoring because it requires more resources anda more lengthy engagement that the current time permits. In the area of self-regulation, regulatorybodies are in a bind because, as Lloyd point out his article, they must find a balance; the must beincentives to comply but not so costly as to deter membership. The risks are great here becausewithout high standards the entities that would drag down he imitative will be admitted, whileextremely high standards may prevent widespread acceptance21.

19 see appendix 1 for a description of the various models.20 Rajya Sabha 2010 FCRA debate21 Ensuring Credibility and Effectiveness Robert Lloyd et al (2010)


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The models not withstanding, filing of tax returns is the most popular instrument for monitoringVOs. The fact that most governments use tax benefits as an incentive to encourage registration,restricting or otherwise changing that relationship has emerged as an effective regulatory tool. Inmost instances failure to comply is met with some form of suspension of tax privileges or a fine.Misuse of funds and other forms of VOs misconduct might attract a suspension or deregistration on

paper. In reality there are either precious few violations or poor monitoring and enforcement. Theprevailing public and government sentiment would lend credence to the latter. That condition andstepped up government efforts to regulate the sector has given rise to a number of self-regulatoryefforts.

According to the One World Trust, there are over 350 self-regulatory initiatives at various stage of existence around the world22. Voluntary organizations are becoming pro-active in trying to shapethe image of the sector, and preempt governments, set on introducing their own regulatorymeasures. The literature has laid out some basic standards for establishing an effective self-regulatory scheme. Lloyd et al (2010) argue that self-regulatory efforts need to address the issueof optional membership, and ensuring compliance with set standards.

The most basic standard that or having some set of principles around which organizations shouldoperate, a code of conduct if you will is largely met. Lloyd notes that todays self-regulatory effortsfall into one of here categories. a. aspirational codes of principles/ethics that signatories strive toachieve; b. codes of conduct in which more defined standards are set; c. certification schemeswhere compliance with clear standards are verified by a third party23. To really be effective a self-regulatory mechanism must also include some form of enforcements. Lloyd and Casas argue too often organizations underestimate or give too little thought to, what is needed to comply withthe code. without an enforcement mechanism compliance may occur only among those mostcommitted to the code.

Of the seven countries in this study, five have self-regulatory initiatives in place24. The oddcountries out are Japan and the United Kingdom. Among the countries with initiatives, India andSouth Africa are the ones without sanctions, though South Africa gets an edge because they havesome standards for beneficiary accountability where there is none in India. There are multipleefforts in the Philippines (2) and the USA (4) with one effort in both countries that has no sanctionsassociated with an initiative. In all but one of the countries self-regulation is a private initiative withlittle teeth.

Presently, self-regulatory measures have fall woefully short of what is necessary to adequatelyregulate the Voluntary sector. Lloydet al argue that only 47% of todays volunteer organizationshave in place a compliance system. They found further, that where the regulatory systemmechanism was a stated code of conduct less, 27% have and associated compliancemechanism25. There is not a lot available in the toolkit of the would-be monitoring and complianceinitiative. In most instances the each tool comes with its own set of pros and cons. To getorganizations to become members, often standards are watered down, and sanctions either eliminated or not enforced.

22 Ensuring Credibility and Effectiveness Robert Lloyd et al (2010)23 Lloyd, Robert; de las Casas, Lucy NGO self-regulation: enforcing and balancing accountability24 See table 325 ibid


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The organisation must keep a basic record (name, address and telephone number) of all donors. According to section 115BBC, introduced with the Finance Act, 2006, allanonymous donations to charitable organisations are taxable at the maximummarginal rate of 30%. Finance (No. 2) Act, 2009, however, carves out the followingexception: anonymous donations aggregating up to 5% of the total income of the

organisation or a sum of Rs.100,000, whichever is higher, will not be taxed. Additionally, religious organisations (temples, churches, mosques) are exempt fromthe provisions of this section.

1.1 Capital ContributionsCapital contributions or donations to an endowment should not be included when computing thetotal income of the organisation.

1.2 Business IncomeUnder amendments to Section 11(4A) of the Income Tax Act 1961, a not-for-profit organisation isnot taxed on income from a business that it operates that is incidental to the attainment of the

objects of the not-for-profit organisation, provided the entity maintains separate books andaccounts with respect to the business. Furthermore, certain activities resulting in profit, such asrenting out auditoriums, are not treated as income from a business.

1.3 Tax Exemption in IndiaThe income of certain VOs carrying out specific types of activities is exempt from corporate incometax, with the caveat that unrelated business income is subject to tax under certain circumstances.Currently there are no restrictions on an Indian VO's business/commercial/economic activitiesprovided the VO is established for and primarily runs programs for relief of poverty or distress,education, or medical relief 27. However, profits must be applied fully towards charitable objects. If this is not done, then the VO will lose its income tax exemption and its income will be liable to taxat the maximum marginal rate (30%). Further the VO must maintain separate books of account for the business/commercial/economic activities. [Income Tax Act, 1961 (seventh provision to section10(23C); section 11, subsection 4 and 4A)]

This situation will change if the proposed Direct Tax Code Bill makes it through the legislativeprocess in the current form.

1.4 Disqualification from ExemptionThe following groups are ineligible for tax exemption: all private religious trusts; and charitabletrusts or organisations created after April 1, 1962; and charitable trusts established for the benefitof any particular religious community or caste. Note, however, that a trust or organisationestablished for the benefit of "Scheduled Castes, backward classes, Scheduled Tribes or womenand children" is an exception; such a trust or organisation is not disqualified, and its income isexempt from taxation

2. Tax Systems and Exemptions Elsewhere

27 It should be noted that if the Direct Tax Code receives assent in its current form then this will change and all incidental businessactivity will be subject to a tax. The only exemption is for business activity that is a component of the charitable exercise.


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In the majority of western democracies, there is a general practice of extending income taxexemption to registered VOs. As was done in the previous section, a comparative outline of thetax regimes will be presented for the pool of countries. The segment is then tied together withobservations. The British, Canadians and Americans are very supportive of their voluntary sector,in that they permit exemptions on - most forms, (in the case of England) and all forms (in the case

of Canada and the USA) of direct income. In England, charities are exempted from taxes onincome received from foreign sources. As stated earlier, references to UK will be a reference toEngland and Wales exclusively, as Scotland and Northern Ireland have separate legal and taxsystems and have in place different rules for VOs operating in those regions.

2.1 United KingdomWithin England and Wales there are four forms for VOs. They are namelyCompanies Limited byGuarantee, Unincorporated Associations, Trusts and Industrial and Provident Societies;Charitable Incorporated Organisations is a new category that was added at the end of 2010. AVO from any of these categories can qualify as a charity, while the new category will be exclusivelycharitable organisations. As stated the scope of the study has been limited to exclude ChurchesPolitical Parties and Trade Unions. In the case of Britain also exempted is the Community InterestCompany28 (CIC). Only registered charities receive income tax exemptions. In Addition, grants anddonations, regardless of the source are exempted. Membership subscriptions29 that are not ineffect donations attract a tax.

2.2 CanadaCanadians are very supportive of their voluntary sector. With the mentioned exceptions, churches,political parties and trade unions, not with standing, there are three legal forms for VOs in Canada.They are namelyNon-share, Trusts and Unincorporated organisations or Associations .Entities from any of the groups may register as a charity if the meet the requirements. Whilecharities are granted additional tax benefits the basic benefit of income tax exemption is availableto all legitimate VOs on direct income from any source.

2.3 United States of AmericaThe Americans dispense with the multiple categories and have two general classifications, 501(c)(3) or 509 (a). In the US all tax exempted VOs are501 (c)(3). A 501(c)(3) is considered a"private foundation". In addition to the 501 (c)(3) the Internal Revenue Service (IRS) alsorecognizes the509 (a) by virtue of their qualification under rules of the IRS as a public charity. It isimportant to note that some public charities are grant makers. In the USA, whether 501 (c)(3) or 509 (a), there is not complete exemption from income taxes regardless of the source of theincome. Charities are required to pay federal taxes on income that is not related to their exemptedpurpose30.

2.4 PhilippinesThe Tax exemptions in the Philippines with some notable exceptions are similar to that of thewestern democracies examined. Within the three broad classification of VOs:Non StockCorporations, Accredited Non-stock Non profit corporations and Accredited NGOs only

28 CIC is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or inthe community, rather than being driven by the need to maximize profit for shareholders and owners.29 Subscriptions that entitle the giver to services or other benefits, it is considered a trade and is taxable.30 Special rules for unrelated business incomeTax"http://www.irs.gov/charities/article/0id=96106,00.html


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organisations involved in specified activities are provided tax relief. The government of thePhilippines offers tax exemptions only those VOs involved in Charitable, scientific, athletic, culturaveterans rehabilitation, promotion of social welfare and non-profit education (Section 30 (e) (g) (h)Tax code).

Even then the exemptions are only extended for income that comes by way of grants or contributions, irrespective of whether the source is foreign or domestic. There is no relief for income generated from for profit activities, like investments or bake sale, irrespective of how theproceeds are spent (Section 30 Tax code)31. In this regard the Philippines while not explicitlyprohibiting for profit activities by volunteer organisations limits their reach by redirecting funds tothe government coffers.

2.5 South AfricaIn South Africa there are three legal forms under which associations of individuals seeking to berecognized as a VO qualifies, they are as aVoluntary Association, a Non-profit Trust and aSection 21 company Ltd. VOs however, will only secure tax exemptions if they qualify as aPublic Benefit Organisations (PBO)32. To secure PBO status, an entity must apply to the tax-exempt unit or the South African Revenue service (SARS). The SARS also maintains asupervisory role to ensure continued compliance by PBOs.

In addition to qualifying as a PBO entity, the organisations founding document must indicate thatthree unrelated individuals hold fiduciary responsibility. Decision making power cant reside with asingle individual (ITA 30(3)(b)(i)). Once PBO status is secured the VO qualifies for what mayinclude exemptions from Capital gains and donation tax, in addition to Estate and transfer duty(Tax Exemption guide for PBOs in South Africa). It should be noted that South African laws limitthe tax exemption surrounding for profit activities (ITA 10(1)(cN))33.

2.6 JapanJapan has a very intricate scheme of taxation for its legal forms of VOs. In Japan there are fivelegal forms under which VOs are permitted to operate. They areFoundation & Associations , Associations & Foundations of Public Interest , Special Non Profit Corporations (SNCs) , Organisations Established Under Special Laws Arising Under Civil Code Article 34 andPublic Interest Legal Persons (PILPs) . There is also a super VO status known as aSpecialPublic Interest Promoting Corporation (SPIPCs) . To qualify as a SPIPC, the aspiring entitymust already be a Public Interest Association and Foundation; Private Schools and Social WelfareCorporations that already qualify as Organisations Authorized by Special laws Arising under CivilCode Article 34, are also eligible for SPIPC status.

31 A complication a rises with regard to non-stock, nonprofit educational institutions. Under the Constitution, all revenues and assetsof such entities used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties (PhilippineConstitution 1987, Article XIV, Se ction 4). Privately owned educational institutions are allotted similar exemptions, though limited byrestrictions on dividends and reinvestment. Notwithstanding the constitutional provision, however, Se ction 30(f) of the Tax ReformAct of 1997 imposes tax on the income of non-stock educational institutions derived from any of their properties (real or personal)or their e conomic ac tivities. The constitutional dilemma cre ated by this provision has yet to be resolved, and the provision in the taxcode is still enforced by the Bureau of Internal Revenue.32 PBO is defined under ITA 30(1) and includes activities such as: Welfare and Humanitarian; Health care; Land & Housing;Education & Development; Religion, Beliefs or Philosophy; cultural; conservation, Environment & Animal Welfare; Research &Consumer rights; Sports; Providing of Funds, Assets or other Resources; General. The Ministry of Finance reserves power to addmore activities as necessary.33 The activity does not result in unfair competition to for profit entities. Or is of an occasional nature and performed by volunteers.


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In JapanPublic interest Associations and Foundations and Associations and Foundations must pay corporate income tax on earnings from activities that are not of public interest. Annualincome that is less that 8 million Yens is taxed at a rate of 22%, while annual income greater than8million Yen is taxed at a rate of 30% (Articles 4-7 corporate tax law).SNCs and PILPs are bothrequired to pay corporate income tax on income generated from 33 specified for profit activities.

The tax rate on these activities stands at 22% for PILPs, whileSNCs are subjected to a split rate of 22% for the first 8 million yens earned and 30% for income in excess of the 8 million Yens. VOsfrom both groupings are permitted to deduct 20% of their income from profit making activities if thaincome is used to further their primary public interest activity.

Social Welfare corporations, Private School Corporations and relief and Rehabilitation Enterprisesfrom theOrganisations Authorized by Special Laws Arising Under Civil Code Article 34grouping tend to be subject to the same tax regime asPILPs with some noteworthy exceptions.The former are permitted to deduct the greater of 50% or 2 million yens of income generated fromfor profit activities. Other entities within the grouping such as Medical Corporations are taxed atthe full corporate rate, the exception being on money received as reimbursements from the social

insurance system. Finally, there is a classification for Special Medical Corporation, recognized bythe Ministry of Finance, which entitles qualified entities to a reduced tax rate of 22% on profits aswell as other tax benefits.

3. Tax Incentives in IndiaThe Income Tax Act, 1961 section 80G, sets forth the types of donations that are tax- deductible.The Act permits donors to deduct contributions to trusts, societies and section 25 companies. Manyinstitutions listed under 80G are government-related; donors are entitled to a 100% deduction for donations to some of these government funds. Donors are generally entitled to a 50% deductionfor donations to non- governmental charities. Total deductions taken may not exceed 10% of thedonor's total gross income.

As to those entities not specifically enumerated in section 80G, donors may deduct 50% of their contributions to such organisations, provided the following conditions are met:

The institution or fund was created for charitable purposes in India; The institution or fund is tax-exempt; The institution's governing documents do not permit the use of income or assets for any

purpose other than a charitable purpose; The institution or fund is not expressed to be for the benefit of any particular religious

community or caste; and The institution or fund maintains regular accounts of its receipts and expenditures.

It is important to note that donations to institutions or funds "for the benefit of any particular religious community or caste" are not tax-deductible. Donations to Scheduled castes, backwardclasses, Scheduled Tribes or women and children may qualify for deduction under section 80G,even though the organisation, as a whole, may be for the exclusive benefit of only a particular religious community or caste. The organisation must maintain a separate account of the moneyreceived and disbursed through such a fund. In-kind donations are not tax-deductible under Section 80G.


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To be valid, receipts issued to donors by not-for-profit organisations must bear the number anddate of the 80G certificate and indicate the period for which the certificate is valid. Previously, asper section 80G(5)(vi), approval under section 80G had effect for such assessment year or years,not exceeding five assessment years, as may be specified in the approval. However, the Finance

(No.2) Act, 2009 omitted clause (vi) of section 80G (5), effective September 1st

2009, therebyeliminating the need for organisations to become frequently recertified.

As a result of the amendment:1. Approvals, once granted, shall be valid indefinitely. Therefore, all the approvals granted

after January 10, 2009 shall be valid indefinitely, unless specifically withdrawn.2. Existing approvals expiring after January 10, 2009 need not be renewed and shall then

be deemed valid indefinitely, unless specifically withdrawn.3. Approvals expiring before January 10, 2009 will have to be renewed once, but after such

shall be valid indefinitely, unless specifically withdrawn.

The Income Tax Act, 1961 contains a number of other provisions permitting donors to deductcontributions. Under section 35AC34 of the Act, donors may deduct 100% of contributions tovarious projects, including:

1. Construction and maintenance of drinking water projects in rural areas and in urbanslums;

2. Construction of dwelling units for the economically disadvantaged; and3. Construction of school buildings, primarily for economically disadvantaged children.

Furthermore, under section 35CCA of the Act, donors may deduct 100% of their contributions toassociations and institutions carrying out rural development programs and, under Section 35CCBof the Act, 100% of their donations to associations and institutions carrying out programs of conservation of natural resources.

A weighted deduction of 175% is also allowed for contributions to organisations approved under section 35(1) (ii) (i.e., a research association or a university, college or other institution) specificallyfor "research," and for contributions made under section 35(1) (iii) specifically for "research insocial science or statistical research."

The Finance Act, 2008 introduced a weighted deduction of 125% for contributions for scientificresearch, made to a company registered in India, whose main objective is scientific research anddevelopment, when those contributions are approved by the prescribed authority and fulfillspecified conditions. Previously, such a deduction was available only for payments made toscientific research associations or to universities, colleges, or other institutions.

However, under Finance Act, 2008, the weighted deduction of 150% available under section35(2AB) to qualifying companies and manufacturers for expenditures incurred on scientificresearch or in-house research and development, would not be available to a company approvedunder section 35(l)(ija).

34 Section 35AC will be deleted if the DTC is passed and receives assent in its current iteration


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4. Tax Incentives Elsewhere

It is being recognized that individuals will be more generous to their favourite cause if there arebenefits to be had35, a number of organisations have seized on this and have created incentiveprograms. Gifts that vary in value are offered at various increments to inspire generous giving. In

a number of countries the governments have recognised this and are offering their own incentivesfor giving in the form tax deductions and/or tax credits to individuals and corporations that makedonations.

4.1 United KingdomThe UK government has the Gift Aid Scheme36. Further, donors that are in a high tax bracket arepermitted to claim relief against their contributions. The process is user driven; as a result theclaimant must file a Gift Aid Certificate with the Inland Revenue. That filing is necessary for thecharity to be able to claim its benefit under the Gift Aid Scheme. Also, a donor who is a higher-ratetaxpayer may claim back higher- rate relief from the Inland Revenue, reducing the net cost of making the gift. Corporations can get in on the benefits if their donations are considered an

allowable expense. In that case they are permitted to advance a claim against the contribution.Donation of land, buildings and stocks etc. are also exempted from taxes.

4.2 United States and CanadaIn the USA and Canada, the incentives for philanthropy allows for the distinction between regular VOs and charities. The laws permit only charities and other qualified donees to receive a donationfor which the donor might claim a tax benefit. Other VOs are not granted this privilege. In theevent of a tragedy such as the recent Haitian earthquake, American and Canadian governmentshave been known to add incentive establishes specific exemptions to encourage additional giving.Both countries also permit a five-year window for carry over of claims that may exceed themaximum in the year of the donation37.

An individual in the US can claim a deduction depending on the nature of the donation, cashcontributions are claimed in full up to 50% of adjusted gross income; property contributions can bededucted in full up to 30% of adjusted gross income; and one can deduct contributions of appreciated capital gains assets in full up to 20% of adjusted gross income. Corporations arelimited to a deduction of 10% of gross income. The rules vary for other businesses depending onwhether it is a sole proprietorship or a partnership. Also, USA charitable giving receives a boost asan alternative the inheritance tax.

In Canada an individual or corporation can claim a deduction up to 75% of their net income againsta contribution to a charity. There is an exception for the year the individual dies. In that year andthe year prior; the estate is permitted to claim 100% of net income donated as a deduction.

4.3 PhilippinesIn the Philippines, contributions to anAccredited Non-stock Non profit Corporation by acorpor

Documents

A Comparative Look at India's Regulation Regime for the Voluntary Sector