NEW DELHI: As part of its wish list for the upcoming Union budget, India’s non-profit sector, representing roughly 1.2 million organizations, wants the Centre to simplify tax rules and reduce red tape in giving funding and operating clearances.
Representatives of some non-governmental organizations (NGOs) recently met officials in the finance ministry for the purpose, saying the procedure of obtaining tax exemptions could be cumbersome.
NGOs say they file reams of paperwork so their donors can deduct charitable donations from their taxes. An NGO that has filed under clause 80G of the Income-Tax Act, 1961, for example, can offer givers a 50% tax break on the total donation. The so-called 35AC designation allows an NGO to give 100% exemption to donors, but very few NGOs have applied for it successfully.
NGOs say the government needs to speed up and standardize the designations. Both clauses are restrictive in nature, with no official time period within which certification is awarded, says Rajesh Tandon, chairman of Voluntary Network Action India, a network that advocates on behalf of NGOs. “This is discouraging NGOs to apply for 80G certificates, without which donors hesitate to give,” Tandon says.
In order to even qualify to offer tax breaks, NGOs must first apply for a separate designation, known as a 12A. The process of applying for one designation in order to apply yet again for another, NGO advocates say, is long and bureacratic. “The Centre must decide whether it wants to treat us as charitable organizations or profit-making companies,” Tandon says.
NGOs have to obtain clearance certificates from various ministries, including the home and finance ministries, to operate and obtain funds. To offer 100% tax exemption to donors, NGOs have to apply to the ministry of finance and the income tax department. Funding agencies and foundations, a large source of grants for NGOs, are prohibited from making tax-free grants from accumulated funds, a government rule to curb corporate tax evasion.
Such restrictions hamper the growth of funding for Indian donor agencies, says Sanjay Agarwal, advisor to AccountAid, a consultancy that advises NGOs on regulations and accounting.
To be sure, the government has its reasons to scrutinize NGOs, a growing sector of the economy. Last week, the Council for Advancement of People’s Action and Rural Development, a government agency overseeing rural development plans, blacklisted 150 NGOs for not submitting proper documents or submitting bogus addresses or progress reports.
In the budget last year, finance minister P. Chidambaram said the amounts Indians report in their donation boxes must be taxed to avoid “anonymous funding”.
Their demands come in the wake of the amended Foreign Contribution Regulation Act, which will force NGOs to re-register every five years, and cap administrative expenses at 50% of their total budget. The measures have attracted the ire of the NGO community.
The Confederation of NGOs of Rural India, an umbrella group of 3,500 rural organizations, also wants NGOs that sell goods to be exempt from paying value-added tax (Vat).
“Most of these organizations operate like self-help groups and are involved in micro-enterprises,” says N. Balagopal, the confederation’s Kerala chapter chairman. “A Vat of maximum of 12.5% is too high, as it doesn’t leave any profit.”