Regulation Study about development sector

8/13/2019 Regulation Study about development sector

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Review of Legal and Fiscal Regulatory Mechanism ofVoluntary Sector: Comparing India and the World

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

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TABLE OF CONTENTS

Introduction 2 - 4

Section 1: Regist ration 5 18

Section 2: Taxation 19 31

Section 3: Foreign Funding and Giving 32 38

Conclus ion 39 - 41

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INTRODUCTION

Voluntary Organisations (VO) have been and continue to be an important partner in identifying andmeeting the needs of the worlds have-nots. Traditionally, there has been large entities in the

developed world extend varying forms of aid to the parts of the world with the greatest need. Bymany of the worlds measures there has been no abatement in the needs that exist. In fact theneeds are graver in many places. Economic development and the changes in our needs and howthey are met have widened the gap between our richest and poorest people. If the need were infact greater, conventional wisdom would have us expect that there would be a comparableexpansion of voluntary organisations. This has not been the case. In places where the need isgreatest such as India there is forecasting of a contraction of the voluntary sector. New legislationcoming out of the government has generated a large degree of concerns, regarding the future ofthese organisations and the people they serve.

Voluntary Organisations in India are facing a crisis of confidence. It appears that the public as well

as the government has little trust of the sector. The government has shown its miss trust with abevy of legislation that at first glance appear to add hurdles to the already difficult terrain thatIndian VOs must navigate to bring vitally needed services to the most vulnerable among us. Indiais not alone in what is being perceived as a serious backlash against voluntary organisations. Inthe interest of national security whether real or perceived; this wave of legislation is having anegative impact on the ability of VOs to deliver on expectations.

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 orvoluntary 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 notexclusively authoritarian or hybrid regimes working to undermine voluntary organisations.1Whilewe 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 formersoviet fledgling democracies. There are however alarms being sounded about countries like

Argentina, India and the United States of America.

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, unchallengedevidence 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)

1INCL & NED. Defending volunteer, 2008 p10.

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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 the

form of two major bills to the Direct Tax Code and the Foreign Contributions Registration Act(FCRA).

It is important at the beginning of any discussion to set the parameters of the discussion. Thedictionary defines regulation as a rule or directive made and maintained by an authority2To thatend the term regulatory regime in the context of this study refers to the mechanisms in place todefine the parameters in which VOs operate. Equally important is the ability to monitor maintain inorder 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 quote above specifically identified FCR Bill, 2006, which was passed in the month of August of2010 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 localgiving and registration.

As stated this work will employ a comparative approach. We often look at countries like theCanada, UK and USA as the standard bearers for all things philanthropic. To be certain thesecountries have arguably the most progressive, permissive and supportive regulatory regime forVOs in the world. It is with this in mind that we will look at these countries, in the hope of deriving aset of best practices for regulating the sector. In addition to these countries we have also included,from Asia, Japan and the Philippines, and from the African continent, South Africa. While we willdo a general comparison of the regulatory regimes, special care is taken to address the areas thatare highlighted in the Financial Management Service Foundation (FMSF) reviews of the new FCRAregulation and proposed changes in the Direct Taxes Code Bill (DTC).

1. Laying out the Condit ions 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 howeverIndia also has more than 300 million people that are food insecure. The world hunger index for2010 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 high3. 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. There isequally alarming statistics when we consider education.

Voluntary organisations have been active partners in the fight to improve the livelihood of Indiaspoor for many years. It has always been a very difficult task. The numbers quoted show just how

2Oxford Dictionary3http://www.ifpri.org/publication/2010-global-hunger-index

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large a task it is. There is little dispute that the need in India is great. There is also a noticeabledecline in the funding available to voluntary organisations. For a number of reasons the fundingavailable to the voluntary sector is in retreat the world over. The current global economicenvironment not withstanding, we are seeing a significant decline in the foreign sources of fundingavailable to Indias voluntary organisations. This is troubling because we are not seeing a

corresponding increase in local giving to fill the void. It is in this environment of substantial needand retreat of foreign capital that the government of India has introduced bills to replace theIncome Tax Act, 1961 and the Foreign Contribution Regulation Act, 1976, with the Direct TaxesCode Bill, 2010 and the Foreign Contribution Regulation Act, 2010 . The new laws, in the eyes ofmany experts, tighten the noose around the neck of Indias much needed but obviously strugglingVOs.

2. ObjectivesThis work will assess the difficulties facing Indias Voluntary sector by highlighting the difficultiesfrom the perspective of leaders in the sector. The work will focus on Indias regulatory regimebringing into focus best practices through comparing a few regulatory regimes around the world.

By regulatory regime we mean the rules under which VOs operate in India. The actual rules arenumerous and varied; as a result this work will be limited to three independent but overlappingareas: registration, taxation (with a special look impact home grown philanthropy) and the flow offoreign contributions into and out of India.

To start, this work will lay out in brief the regulatory environment in India. That will be followed witha brief review of the changes being proposed by the two major pieces of legislation the already,passed FCRA and the proposed DTC. Both will be examined regarding their prospective impacton Indias civil service sector. Another area of special interest will examine Indias increasing roleas a donor nation, in light of its tax policy on movement of privately collected Indian resources forcharitable purposes outside of India. Once we have a complete picture of Indias regulatory

regime, we provide a contrast by looking at the regimes in the below mentioned countries (Canada,Japan, Philippines, South Africa, United Kingdom England and Wales and United States ofAmerica).

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SECTION 1

REGISTRATION

1. Registration in IndiaOur examination of the regulatory regime will begin with the process of registration. Registration inIndia in the eyes of many has not changed much over time. Two of the three major avenues forregistration for public benefit VOs in India predate1947. The Societies Registration Act, 1860 andThe Indian Trust Act, 1882 are 19thcentury laws passed while India was under British rule. Thesingle fact that these acts were created to serve the interest of a colonial dependency does notdiminish their worth. On the contrary the endurance could be seen to speak volumes about thesoundness of the legislation.

It can also be argued that these acts are federal laws which has given States the right to regulateVOs within their jurisdiction merely serves as a guideline for a minimum requirement for VOs tooperate. This view is supported by the fact that many states have added tweaks to strengthen thelaws.

1.1 Registration Laws in India

There are three avenues to establishing an 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 federal

provision. 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 asociety.

The general body of members delegates the management of day-to-day affairs to the managingcommittee, which is usually elected by the membership. Members of the general body of thesociety have voting rights and can demand the submission of accounts and the annual report of thesociety for inspection. Members of the managing committee may hold office for such period of timeas may be specified under the bylaws of the society. Societies must annually file a list of thenames, addresses and occupations of their managing committee members with the Registrar ofSocieties. Furthermore, in a society all property is held in the name of the society.

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Finally, societies may be dissolved. Dissolution must be approved by at least three-fifths of thesociety's members. It should be noted that upon dissolution, and after settlement of all debts andliabilities, the funds and property of the society must be given or transferred to some other society;there is an expressed preference that the resources go to one with similar objects as the dissolvedentity.

1.1.2 The Indian Trusts Act, 1882

The Indian Trusts Act, 1882, is applicable for the registration of a private trust. The act extends tothe whole of India, except the State of Jammu and Kashmir and the Andaman and Nicobar Islands.The Indian Trust Act applies only to private trusts. Some states have separate acts governing theadministration of charitable institutions and endowments.Generally, a charitable trust must registerwith the office of the Charity commissioner of the state in which the trustees register the trust inorder to be eligible to apply for tax-exemption. In general, trusts may register for one or more of thefollowing purposes:

Relief of poverty or distress; Education; Medical relief; Provision of facilities for recreation or otherleisure-time occupation (including assistance for such provision), if the facilities are provided in theinterest of social welfare and public benefit; and the advancement of any other object of generalpublic 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 is

formed 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 othersection 25 company, preferably one having similar objects as the dissolved entity.

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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.

1.2.2 Trusts

If 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 they are notsatisfied with his judgment they can appeal to the Charity Commissioner, who gives directions forremoval 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.

2. Registration in Other Countries

2.1 Canada

The 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 as a regular VO and are subjected to a different set of regulations from organisationsdeveloped to service 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 that

the 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 makers4.

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:

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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]

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 ortrust; 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 witheach other.

With the exception of federal incorporation, the creation of any organisation is a function of 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 forthe regulation of entities operating within its jurisdiction. The federal provisions for the regulation ofa charity serve as a guideline except for a charity that operates in multiple provinces where it willsupersedes the provincial regulations.

2.2 Monitoring

The Charities Directorate is responsible for ensuring that charities comply with the Income Tax Actand with the rules that have been established for charities.

All charities must file an annual information return with the Charities Directorate. This form containsinformation 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 Sanctions

If 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.

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2.2.2 Appeals

If 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 othermaterial. 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 othercountries can sometimes be helpful, but are not binding on the Charities Directorate.

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 a study, the number of VOs in the USA hasgrown 20 fold from the 1950s, 50k to well over a million today5. Monitoring of charities in the USAis largely achieved through the use of the tax laws

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 ofthe 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 mayinspect any of these reports, which are available on request.

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The members of the charitys governing body owe a fiduciary duty to the charity. If a directorbreaches the duty, the state attorney general has powers to compel the director to repair anydamage that the charity suffered as a result.

3.2 Federal Law

The 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 Returns

Public 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 longerversion 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 key

employees. Fundraising expenses, accounting fees, legal fees, and similar payments to outside

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

3.4 IRS Audits

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.

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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 Penalties

The 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 o the wrongdoer rather than the charity itself, gives the IRS an effective weapon againstabuses.

3.6 Mechanisms for Appeal

In 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 ortelephone. 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 the

organisation to be the prevailing party, it can recover its administrative and litigation costs.

3.7 Mechanisms for Public Accoun tability

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. Inpractice, the responsibility for ensuring that the charitable assets remain devoted to charitable

purposes when a charity ceases to exist, its future rests with the states, specifically with the officeof the Attorney General.

4. England and Wales (UK)

The registration requirements in the UK also run along similar lines. It is important to note thatreference to the United Kingdom in this work is limited to England and Wales. As is the case withCanada and the USA, VOs organized for the benefit of its members are not required to register. A

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key difference is that in the UK such VOs do not receive the benefit of a tax exemption granted toits 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 in

England and Wales. The Charities Commission aims to provide the best possible regulation ofcharities, 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.

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 forregistration, 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 belegally 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 the

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public. 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 yearprofessionally 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.

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 theiraccounts examined by a competent independent person.

4.1.1 Assistance on Legal, Governance and Administrative Issues

This function, which the Charity Commission calls Charity Support, consists of modernizing thepurposes, 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 wideradvisory 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 ofregulator and adviser.

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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 ororganisation after having met certain basic requirements under Philippines law. As is the case with

the 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 veterans;or 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 ofany 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) andlimitations on the distribution of assets upon the organisations dissolution (Section 1(b), RevenueRegulation No. 13-98).

6. Japan

In Japan registration for a VO can be done in one of five legal forms. There are some recentchanges to the Japanese regulatory machinery. In December 2008, a set of laws were enactedthat effectively abolished Article 34 (the section that regulated VOs) of Japan's Civil Code. Newlaws include the Association and Foundation Law, that Law on Recognizing Organisations asPublic Interest, and the Law to Consolidate Relevant Laws. Under the Association and FoundationLaw, citizens can form an association or foundation even if the organisation's activities are not inthe public interest.

6.1 Associations and Foundations of Public Interest

The 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 forPublic Interest Organisations, which is comprised of experts from various fields, screensapplications from organisations and authorizes or rejects the public interest status of each. Thecommittee 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

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activities;3. The organisation shall be capable of undertaking proper accounting and managing its projects;4. Revenues earned from its public purpose activities shall not exceed the expenses for these

activities;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 given

company;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-profitActivities (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 SNCs6.

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 activities)specified 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,

6ICNL

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creating a prominent role in this field for not-for-profit organisations. However, except for the smallcategory of Special Medical Corporations, most Medical Corporations are not accorded the sametreatment 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 rehabilitate

and 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, afterwhich 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."

7. South Afr ica

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

Voluntary Associations Non-Profit Trusts Section 21 Companies.

7.1 Voluntary Associ ationsThe 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 a universitas:

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.

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If all of these requirements are met, the organisation will be deemed a universitas with legalpersonality. Otherwise it is a non-corporate association without a legal personality.

7.2 Non-Profit Trusts

Trusts 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 trustee7. A court official, called a Master of the High Court,has jurisdiction over a trust if the majority of the trust property is situated in his or her jurisdiction8.The Master holds the trust instruments, oversees the appointment of trustees, and polices thetrustees' performance with respect to the trust property9. A trust does not have separate legalpersonality, but trustees still enjoy limited liability. All rights and responsibilities vest collectively inthe Trustees.

7.3 Section 21 CompaniesThe South African Companies Act provides for an association not for gain in terms of Section2110. 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 othercultural or social activity, or communal or group interests11. A Section 21 Company must registerwith the Registrar of Companies12. 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 offoreign not-for-profits in South Africa can be registered under Section 21A of the Companies Act.

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. However, at the core there are threefundamental designations. Non-profits serving the interest of its members, Non profits/publicbenefit organisations/charities serving the interest of the society at large and not for profitcompanies which are essentially companies that return the proceeds to the further the objective ofthe organisation.

7[TPCA 1]8[TPCA 3]9[TPCA 4; 6-7; 16-20]10[Companies Act 21]11[Companies Act 21(1)(b)]12[Companies Act 63(1)]

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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. A charitable trust in India is similar to a public orprivate foundation under Canadian labelling. The differences as they exist regarding the governingstructures 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 Delhithan 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 isthe same as a multi state VOs in Canada or the USA. Federal registration supersedes stateregistration and allows the organisation to operate in all regions. States in India and provinces inCanada are under a single set of regulations.

Once we have registered the organisations within the various categories to operate under the

specified rules. It is important to ensure that the organisations adhere to the regulations that theyagreed to by virtue of being registered. Monitoring emerges as an area of significant shortcomingsin India. On paper there appears to be clear rules for revocation of privileges however theadministration of these regulations is sorely lacking.

One needs only to look to the fact that all of the registrants under the Societies Act of 1860 are stilldeemed registered despite failure to comply with requirements, for which have as a penalty de-registration. The Indian government in parliamentary debate cited the fact that organisations thathave never filed a tax return were still receiving foreign funds, that despite the fact that failure to filetimely returns is listed as a reason for revocation of charitable status13.

The assessment of the capacity of the state to monitor is an extremely completed exercise. Thiswork will not deal directly with the issue of because it requires more resources and a more lengthyengagement that the current time permits. There is a strong recommendation that a throughevaluation of the government capacity to provide adequate supervisions through the administrationof the laws be undertaken.

13Rajya Sabha 2010 FCRA debate

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SECTION 2

TAXATION

As is the case in India, the voluntary sector in countries the world over makes a valuablecontribution to the development and sustainability of the society. One look at the relationship thatexists between the institutions and the government reveals the magnitude of the needs. In turn wesee that in many places the government has placed great value on the sector as a legitimatepartner for sustaining the development principles of empowerment and education among others.

While not as helpful as it might be in all instances, the tax regime of western democracies tends topromote an enabling environment for VOs. Without expecting India, given the significantdifferences that exist between its reality (security and other concerns) and that of other nations, tosimply apply examples from other regions, it is important to note what works or does not workelsewhere. After all there is no need to reinvent the wheel.

This section will provide a brief look at the relationships between the Voluntary Sector and IndianGovernment and the same for other countries in the study. The areas of focus is namely onTaxation.

There are tremendous overlaps among the areas and all are subject to the all-important legalframework that is in place.

1. General Scheme in IndiaThe Income Tax Act, 1961, which is a national all India Act, governs tax exemption of not-for-profitentities. Organisations may qualify for tax-exempt status if the following conditions are met:

The organisation must be organized for religious or charitable purposes; The organisation must spend 85% of its income in any financial year (April 1st to March 31st) on the objects of the organisation. The organisation has until 12 months

following the end of the financial year to comply with this requirement14. Surplusincome may be accumulated for specific projects for a period ranging from 1 to 5years;

The funds of the organisation must be deposited as specified in section 11(5) of theIncome Tax Act;

No part of the income or property of the organisation may be used or applied directlyor indirectly for the benefit of the founder, trustee, relatives of the founder or trustee or

a person who has contributed in excess of Rs.50,000 to the organisation in a financialyear; The organisation must timely file its annual income return; The organisation's income must be applied or accumulated in India. However, trust

income may be applied outside India to promote international causes in which Indiahas an interest, without being subject to income tax; and

14May change if the DTC is passed in its current iteration.

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The organisation must keep a basic record (name, address and telephone number) ofall 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 Contributions

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

1.2 Business Income

Under 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 India

The 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. However, profits must be applied fully towards charitable objects. Ifthis 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 forthe 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 Exemption

The 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 System and Exemptions ElsewhereIn the majority of western democracies, there is a general practice of extending income taxexemption to registered VOs. For the purpose of illustrating the variations across different regions,we have selected a few countries namely Canada, USA, UK, Japan, Philippines, and South Africa.

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The British, Canadians and Americans are very supportive of their voluntary sector, in that theypermit exemptions on - most forms, (in the case of England) and all forms (in the case of Canadaand the USA) of direct income. In England, charities are exempted from taxes on income receivedfrom foreign sources. As stated earlier, references to UK will be a reference to England and Walesexclusively, as Scotland and Northern Ireland have separate legal systems and have in place

different rules for VOs operating in those regions.

2.1 United Kingdom

Within England and Wales there are four forms for VOs. They are namely Companies Limited byGuarantee, Unincorporated Associations, Trusts and Industrial and Provident Societies; it isexpected that a new category will be added before the end of 2010 Charitable IncorporatedOrganisations. A VO from any of these categories can qualify as a charity, while the newcategory will be exclusively charitable organisations. As stated the scope of the study has beenlimited to exclude Churches Political Parties and Trade Unions. In the case of Britain alsoexempted is the Community Interest Company15(CIC). Only registered charities receive incometax exemptions. In Addition, grants and donations regardless of the source are exempted.Membership subscriptions16that are not in effect donations attract a tax.

2.2 Canada

Canadians are very supportive of their voluntary sector. With the afore mentioned exceptions,churches, political parties and trade unions, not with standing, there are three legal forms for VOsin Canada. They are namely Non-share, Trusts and Unincorporated organisations orAssociations. Entities from any of the groups may register as a charity if the meet therequirements. While charities are granted additional tax benefits the basic benefit of income taxexemption is available to all legitimate VOs on direct income from any source.

2.3 United States of America

The Americans dispense with the multiple categories and have two general classifications. In the

US all tax exempted VOs are 501 (c)(3). A 501(c)(3) is considered a "private foundation". Inaddition to the 501 (c)(3) the Internal Revenue Service (IRS) also recognizes the 509 (a)by virtueof their qualification under rules of the IRS as a public charity. It is important to note that somepublic charities are grant makers. In the USA, whether 501 (c)(3) or 509 (a), there is not completeexemption from income taxes regardless of the source of the income. Charities are required to payfederal taxes on income that is not related to their exempted purpose17.

2.4 Philippines

The 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

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

15CIC is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in

the community, rather than being driven by the need to maximize profit for shareholders and owners.16Subscriptions that entitle the giver to services or other benefits, it is considered a trade and is taxable.17Special rules for unrelated business incomeTax"http://www.irs.gov/charities/article/0id=96106,00.html

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Even then the exemptions are only extended for income that comes by way of grants orcontributions, irrespective of whether the source is foreign or domestic. There is no relief forincome generated from for profit activities, like investments or bake sale, irrespective of how theproceeds are spent (Section 30 Tax code)18. Elsewhere economic activities attract tax relief if the

proceeds are employed in pursuit of the organisations mission.

2.5 South Africa

In South Africa there are three legal forms under which associations of individuals seeking to berecognized as a VO qualifies, they are as a Voluntary 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)19. 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 limitsthe tax exemption surrounding for profit activities (ITA 10(1)(cN)).

2.6 Japan

Japan 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 are Foundation & 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 a SpecialPublic 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.

In JapanPublic interest Associations and FoundationsandAssociations and Foundationsmust 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 will be taxed at a rate of 30% (Articles 4-7 corporate tax law). SNCsand PILPsareboth required to pay corporate income tax on income generated from 33 specified for profit

18A complication arises with regard to non-stock, nonprofit educational institutions. Under the Constitution, all revenues and assets of

such entities used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties (Philippine

Constitution 1987, Article XIV, Section 4). Privately owned educational institutions are allotted similar exemptions, though limited by

restrictions on dividends and reinvestment. Notwithstanding the constitutional provision, however, Section 30(f) of the Tax Reform

Act of 1997 imposes tax on the income of non-stock educational institutions derived from any of their properties (real or personal) ortheir economic activities. The constitutional dilemma created by this provision has yet to be resolved, and the provision in the tax code

is still enforced by the Bureau of Internal Revenue.19PBO 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 add

more activities as necessary.

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activities. The tax rate on these activities stands at 22% for PILPs, while SNCsare subjected to asplit rate of 22% for the first 8 million yens earned and 30% for income in excess of the 8 millionYens. VOs from both groupings are permitted to deduct 20% of their income from profit makingactivities if that income is used to further their primary public interest activity.

Social Welfare corporations, Private School Corporations and relief and Rehabilitation Enterprisesfrom the Organisations Authorized by Special Laws Arising Under Civil Code Article 34grouping tend to be subject to the same tax regime as PILPswith 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 socialinsurance system. Finally, there is a classification for Special Medical Corporation, recognized mythe 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 India

The 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 fordonations 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 theircontributions 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 anypurpose other than a charitable purpose;

The institution or fund is not expressed to be for the benefit of any particular religiouscommunity 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 particularreligious 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 particularreligious community or caste. The organisation must maintain a separate account of the moniesreceived and disbursed through such a fund.

In-kind donations are not tax-deductible under Section 80G.

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,

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not exceeding five assessment years, as may be specified in the approval. However, TheFinance (No.2) Act, 2009 omitted clause (vi) of section 80G (5), effective January 10, 2009,thereby eliminating 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 grantedafter January 10, 2009 shall be valid indefinitely, unless specifically withdrawn.

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

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

The Income Tax Act, 1961 contains a number of other provisions permitting donors to deductcontributions. Under section 35AC20 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 ofconservation of natural resources.

A weighted deduction of 175% is also allowed for contributions to organisations approved undersection 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 fulfil specifiedconditions. Previously, such a deduction was available only for payments made to scientificresearch 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).

20Section 35AC will be deleted if the DTC is passed and receives assent in its current iteration

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4. Tax Incentives ElsewhereIt is being recognized that individuals will be more generous to their favourite cause if there arebenefits to be had21, a number of organisations have seized on this and have created incentive

programs. Gifts that vary in value are offered at various increments to inspire generous giving. Ina number of countries the governments have started this and are offering their own incentives forgiving in the form tax deductions and/or tax credits to individuals and corporations that makedonations.

4.1 United Kingdom

The UK government has the Gift Aid Scheme22. 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 anallowable 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 Canada

In the USA and Canada, the incentives for philanthropy allows for the distinction between regularVOs 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 the

maximum in the year of the donation23

.

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 your adjusted gross income; property contributionscan be deducted in full up to 30% of your adjusted gross income; and one can deduct contributionsof appreciated capital gains assets in full up to 20% of her/his adjusted gross income.Corporations are limited to a deduction of 10% of their gross. The rules vary for other businessesdepending on whether it is a sole proprietorship or a partnership. Also, USA charitable givingreceives a boost as an 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 Philippines

21Testing for Altruism and Social Pressure in Charitable Giving (2009 DellaVigna et al)22Under this scheme, charities can reclaim the basic tax rate paid by the donor on the income from which the donation was made.23If an individual has given more than he or she can claim against in a given year; that individual can add the excess to claims for

subsequent years for up to five years after date of gifting.

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In the Philippines, contributions to an Accredited Non-stock Non prof it Corporat ion by acorporate entity can will attract a tax deduction of up to 5% of its taxable income. Individuals mayclaim a deduction of up to 10% of their annual income (section 3(a), Revenue Regulations No. 13-98)24. Cash donated to an accredited NGO can be deducted in full (Section 30(b) RevenueRegulation No. 13-98). The Benefit is also extended to the VOs receiving the donations. The

exemption from the donors tax is secured when entities are able to affirm that no more that 30% ofdonations and gifts within a single tax year is used for the administrative expenses of theorganisation.

4.4 South Africa

In South Africa, giving is supported only when donations are made to specific entities. Donationsto Public Benefit Organisations engaged in a specified slate of activities25are the only entitiespermitted to issue a receipt that can then be used by the donor to secure a tax deduction. Claimsmust be accompanied by a receipt, and are limited to 10% of donors taxable income. Bothindividuals and companies clam at the same rate.

4.5 Japan

In Japan selected organisations are permitted to grant receipts entitling donors to a tax deduction.The difference in the Japanese instant is that it is not exclusive to a category. Japanesespecialists have argued that there are no clear criteria for determining which entities are permittedto receive tax deductible donations (APPC Conference, p. 161). Donations are deductible if theyare made to SPIPCs, Organisations eligible for Designated Contributions and SNCs , allrequire the approval of the National Tax Administration. Donations to the SPIPCand the SNCsfrom individuals can be deducted at a rate up to 25%of his or her income above 5 000 yen.Corporations are permitted to claim up to 1.25% of income plus and additional 0.125% of paid-incapital26. Individual donations to the Organisations eligible for Designated Contribut ionsarealso deductible up to 25% of the individuals income above 5 000 yen. Corporate contributions tothese organisations have no limits on deductions.

5. Value Added and Other Tax in Ind ia

The value added tax is in and of itself not a regulatory tool, it is included here because it is one of aseries of tax benefits that voluntary organisation in some countries. India subjects certain sales ofgoods and services to VAT, with a fairly broad range of exempt activities. The rates range from 1percent to 12.5 percent, with most goods and services taxed at 12.5 percent. An entity (including apublic charitable trust) is liable under the VAT Act if its sales/purchase turnover in the previous yearexceeded Rs.500, 000. The threshold is lower, Rs.100, 000, for importers. Several other tax lawshave now merged into VAT, including the Sales Tax Act, Motor Spirit Taxation Act, Purchase Taxon Sugarcane Act, and the Transfer of Right to Use Act. [3]

24Income is defined as, donors income from a trade, business or profession as computed without the benefit of this deduction.25The slate of activities are: Welfare and Humanitarian; Health Care; Education and Development; Conservation, Environment and

Animal Welfare; Land and Housing (ITA Schedule Nine 2 (1-5)).26Paid-in Capital refers to a situation where a corporation is a primary sponsor of a charity and makes donations in excess of its

standard commitments to the entity.

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6. Value Added and other Taxes Elsewhere

6.1 United Kingdom

In the UK Charities and other VOs alike are subjected to the Value Added Tax (VAT) currently

applied at 17.5%. A new law, in place since January 1st

2010 allows for charities that deliver goodsand services in excess of 67 000 each year to pay at a reduced rate of 5% on some suppliesemployed within that year. The VAT, which is not normally applied to grants, might be applied inthe event that the grant is conditioned on benefits to donor or a third party. The VAT may also beapplied if the grant is employed as a subsidy for trading activities of the VO.

When it comes to other taxes Charities are eligible for an 80% reduction of its local property taxes,local authorities have the authority to grant an additional 20% reduction effectively eliminatingproperty taxes for charities. The local authorities have discretion to grant a partial or total propertytax exemption to other VOs. The benefits to charities continue in that they are also not required topay ad valorem Stamp Duty on transfer of assets including shares; inheritance Tax on legacies

and bequests and Capital Gains Tax (ICNL country Profile 2010).

6.2 Canada

In Canada, the VAT is called the Goods and Services Tax (GST). Generally speaking, there areno exemptions from the GST for charities and VOs alike with a notable exception. Charities andVOs that receive 40% or more of its income from government at any level, is entitled to a rebate ofnet tax paid. This condition will remain unaffected by the new HST27that was implemented in acouple of provinces on July 1st2010. Canada does not have in place a gift tax or death tax. Bothcharities and VOs are exempted from property tax.

6.3 United States of America

The United States does not presently have a VAT. As stated earlier the US does have aninheritance tax. However that is argued to be an incentive for charitable giving28. Individuals, it isnoted might rather their money go to their favourite charity than to the federal government. In thearea of other taxes, charities are generally not subjected to property tax though this is the domainof the State and municipal government bodies. Usually entities have to apply to the governing bodyfor the necessary exemption, State government for sales tax exemption and municipal governmentfor property tax exemption

6.4 Philippines

In the Philippines, VOs engaged in commercial activities with gross sales in excess of PHP1 500000 within a year, are required to register as a VAT taxpayer (Sec. 4. 109-1 revenue Regulation16-2005, VAT- Exempt Transaction). Otherwise, Non-stock, non-profit organisations and

association, with revenue from commercial activity less than PHP1 500 000 are required to registeras Non-VAT entities. There is a fee required for this registration (Sec.9. 236-2 (3) and (4) ofRevenue Regulation 16-2005). Given the VAT rate of 12%, Non-VAT registered VOs aresubjected to a tax rate of 3% of the monthly sales receipts (Sec. 7 of RA 9337 (which amends

27HST is the harmonized tax it merges the provincial sales tax in Ontario and British Columbia with the federal GST.28Washington Post, Editorial, June 6, 2006

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section 109 (z) of the Tax Code) and Sec. 4.116-1 of Rev. Regulation 16-2005). The Philippinesalso grants VAT exemptions on goods used for education, medical and cultural activities.

6.5 South Africa

In South Africa the VAT sits at 14%. South Africa is one of a few countries that grant specific VAT

exemptions, they are granted to entities that qualify asAssociations not for Gainand WelfareOrganisations(VAT A 1). These entities are permitted to claim for VAT paid on acquisitions.They must however collect and transfer VAT on the goods and services that they provide.

6.6 Japan

Japan has the lowest VAT of all the countries in this proposal. There are no exemptions from the5% VAT at an organisational level in Japan. There are however, exemptions for goods namelybooks and equipment for use by disabled individuals.

7. The Direct Taxes Code Bil l, 2010

There is a proposal that is due to come through the Indian parliament that proposes reforms to thetax code, there are many provisions that will directly affect VOs in India. In this section we reviewthese proposals. Within the Direct tax code, the changes of the greatest concerns to voluntaryorganisations are:

a. The elimination of the provision that permitted an annual growth in the corpus of 15% ofthe annual income for the VO. The new rule requires 100% application of income with anyunused amounts being subject to 30% tax. Where as before VOs were allowed to growtheir Corpus through adding maximum of 15% of annual earnings, they are now requiredto spend it all. In addition, only 15% can be carried over and must be utilized within 3years. This virtual spend out clause undermines the ability of VOs to plan for the future.

There is a more pressing problem regarding organizing funding around a multi-yearproject. The provision reverses a 2005 Supreme Court ruling, where the justices deemedit reasonable that necessary a VO can allow its corpus to grow.

It is difficult to determine what is driving this decision. There are all kinds of laws in place thataddresses misuse of donated funds. For example, if a charity goes out of business the moneytransfers to another charity. Inurnment is strictly prohibited. There are significant laws prohibitingmembers from benefiting, beyond receiving a salary for services rendered. None of the countriesin this study apply any such conditions on their charities. We must assume that given the laws inplace a charity is in the business to provide relief and will employ funds accordingly. There are noclear benefits in this clause, and places an unnecessary restriction on legitimate charities.

b. the new law limits the ability of VOs to claim depreciation on assets and corpus funds.This revokes the ability for VOs to claim erosion of on the capital assets.

c. a prohibition of business activities except where that business is a component of thecharitable exercise.

This replaces the incidental business activities that was permitted under the FCRA 1976. It has thesupport of leaders within the sector, because is unambiguous.

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d. the exemption of Sixth Schedule income for persons.Since registered VOs by virtue of being registered have acquired a legal personality then themsixth schedule exemptions should be extended to them. It should be noted though that it is unlikelythat an VO engaged in sixth schedule activities will likely have hose activities already exempt asbusiness conducted as a part of the charitable exercise.

e. that the new law places the government in the mix, if upon dissolution an VO fails totransfer its assets to another VO. Failure to do this results in a levy of taxes on assets at arate of 30%.

This provision is decried by the review as grossly unfair because the tax is applied to the entirecorpus. They cite that money in the corpus might have already been subjected to taxes or hadotherwise met with other government stipulations.

The risk of loosing charitable status because of inactivity makes this law a real threat to legitimateVOs. Beyond that possibility, it is hard to understand what is being decried. If an entity collectsmoney to perform some public good and is unable, for whatever reason to meet that responsibility

then that entity should turn over resources to an entity that will continue in a vane consistent withthe original mandate. Taxation is harsh, to be sure; the money should be transferred if necessaryby the government to an entity that will continue the works. Elsewhere there governments exercisesimilarly stringent measures in an effort to ensure that citizens are protected.

f. that the new Act makes mandatory the requirement that VOs engage in charitableactivities each year, if not then the VO is treated as a for profit entity for that year. F

Documents

Regulation Study about development sector