philanthropy and law in india

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Philanthropy and Law in India

SANJAY AGARWAL AND NOSHIR DADRAWALA

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The Legal Context for Philanthropy and Law in India

Traditionally, the concept of law in India has been inextricably linked withdharm,1 which can loosely be translated as precepts guiding moral duty.These precepts evolved over thousands of years through public consensusand acceptance. Professor Robert Lingat has contrasted this aspect of tradi-tional Indian law with modern civil law, on the basis of internal acceptancefor one and external enforcement for the other.2 The law was not framed bythe king through fiat. Rather, his role was to ensure that serious departuresfrom the dharm were punished. Conflicting opinions of different sages, andthe evolving nature of the law, allowed it to adjust as society changed.3

Historically, India’s nonprofit sector has been vast but has required littleregulation. Most charity work was done directly by individuals and wasencouraged by varn dharm, or the moral duties of different classes of society.No deductions were given from income tax for charity. Charity was also

1 This word should not be confused with the English word “religion,” which can be translated as panth (path) in India.

2 Robert Lingat, The Classical Law of India (New Delhi, Munshiram Manoharlal, 1973).

3 There are nearly 200 codes (smritis) containing the views of different sages. Of these, about 60 are relatively well

known and the best-known is Manusmriti. These represent a healthy tradition of dialogue, debate and pluralism.

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not corporatised. Acharya Chanakya’s Arthashastra contains reference tosome of the problems that may arise in charitable transactions, and howthese were to be resolved. For instance, a promise to give was enforceableagainst the donor. Judges were instructed to treat temples as privileged litigants.4 Village elders were charged with responsibility of looking aftertemple properties.5 Punishments were prescribed for embezzlement of temple property by trustees.6 Two privileges accorded to temples were that:(i) temple property could not be seized as war booty;7 and (ii) temple bullscould graze freely in any pasture.8 A government department, headed bythe Chief Superintendent of Temples, was responsible for temple affairs.9

This law appears to have continued more or less without any change dur-ing the period of Muslim rule. However, with the coming of the BritishCrown after the 1857 war of Independence, the indigenous system of lawsand law-enforcement was dismantled gradually and replaced with Britishcivil law. Though the British borrowed heavily from Indian traditionswhile framing the law, the basic orientation of the law changed. It was nolonger rooted in community traditions or evolved from their practices —rather it was imposed from above after being framed by a select set of people.

One of the first laws passed was the Societies Registration Act, 1860. Itprovided that all societies, associations, libraries, and reading rooms couldbe registered with the government. This would give them legal recogni-tion, and perhaps help the government keep a better eye on their activities.

The British Crown also introduced income tax in India for the first timein 1893. The earlier system was based on paying tax on the gross produceor transaction value. The new system allowed a deduction for expenses,and taxed net income. Since 1921, the Income Tax Act has recognized thatcharitable expenditure is also eligible for tax incentives.

Almost all the laws existing on the statute books at the time of independ-ence from the British were adopted by the Indian government. After this,

4 The judges themselves shall look into the affairs of gods [temples] …, when [they] do not approach [the court]….

The Kautiliya Arthashstra, R.P. Kangle, vol. I/II, 1969, Motilal Banarasi Das, Delhi. (Verse no. 3.20.22).

5 Id., 2.1.27.

6 Id., 4.10.13.

7 Id., 3.16.28.

8 Id., 3.10.24.

9 Id., 5.2.38.

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it set about framing new laws for the nation. Over the next fifty years,nearly 2,500 statutes were passed at the central level, with another 30,000or so being passed by various states taken together.10 India was now firmlyin the grip of civil law. Fortunately, except for one piece of legislation (theForeign Contribution (Regulation) Act), none of these were related to thenonprofit sector.

The first years of the twentieth century saw some of the most unprece-dented famines in India, generated by the modified land tax collectionprocedures introduced in the British period. These attracted internationalattention and after the Second World War, international charities startedlooking at India as a worthwhile cause. During the Cold War years thatfollowed, bilateral aid also increased. Some of this foreign money alsoattracted adverse publicity in the late 1960s, and as a result, in 1976, a lawcalled the Foreign Contribution (Regulation) Act (FCRA) was passed tocontrol and monitor foreign donations to political parties, quasi-politicalorganisations, and charitable organisations.

The Legal Regime

Legislation Governing Nonprofit Organisations in India

India has a statute and case law system with a multiple set of statutorylaws governing various types of nonprofit organisations. The most impor-tant of these laws include the following:

• Public Trusts Acts applicable to different states in India (e.g., TheBombay Public Trusts Act, 1950 applicable in the states ofMaharashtra and Gujarat; Rajasthan Public Trusts Act, 1959 applica-ble in the state of Rajasthan; Madhya Pradesh Public Trusts Act, 1951applicable in the state of Madhya Pradesh; and others);

10 Bibek Debroy, In the Dock – Absurdities of Indian Law (Konark, Delhi, 2000).



• Societies Registration Act, 1860 (which is all-India national legislation,a federal/national act with each state adopting certain modifications11);

• Indian Companies Act, 1956 (which is also national legislation);• Income Tax Act, 1961 (also national legislation applicable uniformly

in all states of India);• Cooperative Societies Act, 1904;• Trade Union Act, 1926;• Indian Trusts Act, 1882 (essentially applicable to private trusts);• Charitable and Religious Trust Act, 1920 (repealed in most states that

adopted the Public Trusts Act after India’s independence);• and the Foreign Contribution (Regulation) Act, 1976.

There is no single body of law for all of the classes of nonprofit organisa-tions; instead, as specified above there are specific laws and regulations foreach major type. In other words, different legal provisions exist at thenational and state level.

Constitutional Provisions and the Problem of Individual Constituencies

The right of all citizens to form associations or unions is laid down in arti-cle 19(1)(c) of the Constitution of India.

Article 26 of the Constitution of India provides every religious denomina-tion or any section thereof (subject to public order, morality and health),the right (a) to establish and maintain institutions for religious and chari-table purposes, (b) to manage its own affairs in matters of religion, (c) toown and acquire movable and immovable property and (d) to administersuch property in accordance with law. State-made law can “regulate” theadministration of property of a religious endowment, but the law cannottake away the right of administration altogether.

Article 30 of the Constitution of India gives all “minorities,” whetherbased on religion or language, the right to establish and administer educa-

11 The original British act has served as a model, rather than a central act. The act has been adopted without amend-

ment by some states, modified by some others, and completely replaced by other states (such as Rajasthan,

Manipur, Madhya Pradesh, Chattisgarh, West Bengal, Karnataka, Mehgalaya, Tamilnadu). Also it was never adopted

by some states, where the original statutes still apply (Jammu & Kashmir, Telangana region, Travancore region). Full

details are available in AccountAble 60, 78-83 at www.AccountAid.net.


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tional institutions of their choice. The term “minority” includes only thosegroups in a population who possess and wish to preserve stable ethnic, reli-gious or linguistic traditions or characteristics markedly different fromthose of the rest of the population. In India, religion and state are legallyseparated.

Nonprofit organisations are not permitted to engage in any political activi-ty. Even “political education” is outside the ambit of “charitable purpose”as defined in the Bombay Public Trusts Act, for example. However, section20 of the Societies Registration Act allows registration of a society whoseobject may be “the diffusion of political education.”

The Constitution of India has established a secular state and has attempt-ed to do away with distinctions of caste, colour and creed. However, it isopen to any citizen of India to create a valid trust for the benefit of a par-ticular section of the community. For example, it was held in the AgaKhan Diamond Jubilee Trust case, decided by the Bombay High Court,that a trust for the uplifting of the Khoja community would be a publictrust under the Bombay Public Trusts Act, 1950.12

Section 13 clause (a) of sub-section 1 of the Income Tax Act pertains to“religious trusts”, and clause (b) pertains to “charitable trusts.” In the caseof a trust or institution for charitable purpose, created or established after4 January 1962, its income would not be exempt under section 11 or 12,if the trust or institution is created or established for the benefit of anyparticular religious community or caste.

Hence, although it is permissible to create a valid trust for the benefit of aparticular section of the community, that particular trust would not enjoytax exemption under section 11 or 12 of the Income Tax Act.

12 Unreported decision of Bombay High Court Appeal No. 50 of 1952 - Original side.



Types of Organisations (Legal Forms)

Under Indian law, there are five basic types of nonprofit organisations:trusts, societies, companies, cooperatives and trade unions. It is a matter ofdispute whether the last two really fall within the ambit of nonprofitorganisations.

The characteristics common to the first three types are that they existindependently of the state; they are self-governed by a “board of trustees”or “managing committee” or “governing council” which comprises individ-uals who generally serve in a fiduciary capacity. They all also produce ben-efits for others, generally outside the membership of the organisation; andare “not profit making,” in as much as they are prohibited from distribut-ing a monetary residual to their own members.

In the discussion that follows, many of the examples are drawn from legis-lation in force in Bombay. In many cases the principles will be similar inother parts of India, though for legal purposes advice should be sought inthe particular jurisdiction concerned.

TrustsA public charitable trust has an uncertain and fluctuating beneficiarygroup. In ascertaining whether an organisation’s purpose is public or pri-vate, one must confirm whether the class to be benefited constitutes a sub-stantial body of the public. Hence, trusts which lack the public element,such as trusts for the benefit of workmen or employees of a company,however numerous, have been held not to be “public charitable” trusts.

While there is no central law for public trusts, private trusts are governedby the Indian Trusts Act, 1882. Section 3 of the Indian Trusts Act definesa trust as “an obligation annexed to the ownership of property, and arisingout of a confidence reposed in and accepted by him for the benefit ofanother.”


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It is a clearly established principle of the law of charity that a trust is notcharitable unless it is directed to public benefit.13 In the case of trusts foreducational purposes, the conditions of public benefit must be satisfied. A trust by a father for the education of his son is not a charity. The publicelement is not supplied by the fact that from the son’s education, all maybenefit. But the establishment of a college or a university is, beyonddoubt, a charity.

A trust is generally irrevocable and once set up, cannot be wound up. If it becomes defunct due to the negligence of the trustees, the charitycommissioner14 can take steps to revive it, or in case it becomes difficult to carry out the objects of the trust, the doctrine of cy pres (i.e., changingthe objects, while keeping them as close to the original as possible) can be applied. Two or more trusts with similar objects can also be legallyamalgamated or merged.

Under the Bombay Public Trusts Act, 1950, a public charitable trust maybe registered with the office of the charity commissioner for any one ormore of the following purposes:

“…1) relief of poverty or distress, 2) education, 3) medicalrelief…provision for facilities for recreation or other leisure time occupation (including assistance for such provision), if the facilitiesare provided in the interest of social welfare and public benefit, and 4)the advancement of any other object of general public utility, but doesnot include a purpose which relates exclusively to religious teaching or worship.” (Section 9(1) of the Bombay Public Trusts Act, 1950)

A trustee of a public charitable trust must not, in any way, make use of thetrust property or of his position as trustee for his own interest or privateadvantage, nor may he enter into engagements in which he has or canhave a personal interest which conflicts or may possibly conflict with theinterest of those whom he is bound to protect. A trustee may remaintrustee for life unless there is a scheme for election in the trust deed.

13 Unreported decision of the Bombay High Court in Appeal No. 5 of 1975.

14 This applies in Maharashtra and Gujarat. For other states, there is no similar officer. The process is undertaken by

the civil court on application.



It is an accepted principle that a trustee of a religious or charitable trustshould take proper care of the trust property just as a man of ordinaryprudence does, in respect of his personal property.

SocietiesSocieties are governed by the central Societies Registration Act of 1860, though many states have amended the Act to suit their specificrequirements.15

According to section 20 of the Societies Registration Act, the followingsocieties can be registered under the Act: “charitable societies, militaryorphan funds or societies established at the several presidencies of India,societies established for the promotion of science, literature, or the finearts, for instruction, the diffusion of useful knowledge, the diffusion ofpolitical education, the foundation or maintenance of libraries or readingrooms for general use among the members or open to the public, or publicmuseums and galleries of paintings and other works of art, collections ofnatural history, mechanical and philosophical inventions, instruments ordesigns.”

Societies are legal entities and can thus sue and be sued. The liability oftheir members is limited and their private assets cannot be confiscated tosatisfy the society’s liabilities.

State amendments have broadened the scope of organisations that can beregistered under the Act. Notwithstanding variations at the state level, thetypes of organisations that may generally register as societies include wel-fare, development and empowerment-oriented nonprofit organisations;clubs; cultural and literary societies; professional associations; educationalinstitutions; and scientific and medical institutions. There are also somegovernment-sponsored nonprofit organisations, such as the NationalLabour Institute and the National Development Board, that have beenregistered under the act.

15 The original British act has served as a model, rather than a central act. The act has been adopted without amend-

ment by some states, modified by some others, and completely replaced by other states (such as Rajasthan,

Manipur, Madhya Pradesh, Chattisgarh, West Bengal, Karnataka, Mehgalaya, Tamilnadu). Also it was never adopted

by some states, where the original statutes still apply (Jammu & Kashmir, Telangana region, Travancore region). Full

details are available in AccountAble 60, 78-83 at www.AccountAid.net.


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Unlike trusts, societies have a more democratic structure. There is usually ascheme of election for members of the governing council/managing com-mittee. The founders of the society can continue to remain members ofthe governing council or managing committee, subject to their being elect-ed to the same from time to time. In rare cases, one or two founder mem-bers may be permitted to remain permanent/life members on the govern-ing council or managing committee.

Members of the general body enjoy voting rights and the right to demandthe submission of accounts and the annual report of the society.

A society can be wound up by following certain procedures laid down inthe law — including convening a special general meeting, passing properresolutions, and transferring all funds and properties of the society toanother nonprofit organisation with similar objects and activities.

CompaniesAlthough the Indian Companies Act, 1956 is primarily intended to governprofit-making entities, section 25 of the Act allows for the possibility ofobtaining nonprofit status for certain companies.

A Section 25 company is a company with limited liability which may beformed for “promoting commerce, art, science, religion, charity or anyother useful object,” provided no profits or other income from promotingthe objectives is distributed by way of dividend, etc., to its members. Sucha company is not required to suffix the term “limited” or “private limited”to its name.

A Section 25 company can be wound up by following certain procedureslaid out in the law — including convening a special general meeting, pass-ing proper resolutions, and transferring all funds and properties of thecompany to another nonprofit organisation with similar objects and activities.



In Maharashtra and Gujarat, a Section 25 company enjoys certain advan-tages over a public charitable trust or society. Being outside the purview ofand jurisdiction of the charity commissioner, the company enjoys moreoperational freedom. For instance, under the Bombay Public Trusts Act, atrust has to obtain prior permission of the charity commissioner to buyproperty, sell property, file regular “change reports” and “budgets” and, inaddition to all this, also pay an annual fee (presently 2% of the grossannual income of the trust/society). As a company, the foundation wouldbe free from all these constraints.

The Income Tax Act gives equal treatment to trusts, societies and Section25 companies as far as tax exemptions are concerned. Tax issues are morethoroughly discussed below.

CooperativesAlthough there is no clear legal definition of a cooperative, it is generallydefined as an institution that promotes the economic and social better-ment of its members, and an enterprise that is based on mutual aid con-forming to cooperative principles. All states and union territories havetheir own laws governing cooperatives, and institutions registered as coop-eratives are expected to abide by these laws, which can vary considerablyfrom state to state.

Trade UnionsTrade unions are governed by the Trade Union Act of 1926, which definesa trade union as a temporary or permanent institution formed for regulat-ing the relations between workers and employers, among workers, oramong employers. The Trade Union Act also allows for a federation of twoor more unions. In contrast to all other forms of nonprofit organisations,trade unions are allowed to use their general fund to remunerate theirmembers and staff; and to fund legal procedures, educational activities andthe general welfare of its members. Trade unions are also allowed to haveseparate funds for promoting civil and political interests of their members.


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Required and Prohibited Purposes

The Income Tax Act, 1961, which is a central act applied uniformlythroughout the Republic of India, defines “charitable purpose” for the pur-pose of tax exemption as “relief to the poor, education, medical relief andthe advancement of any other object of general public utility.” The qualify-ing line “not involving the carrying on of any activity for profit,” wasomitted by the Finance Act, 1983 (effective 1 April 1984), because a num-ber of nonprofit organisations were carrying on some activities for profit inorder to raise funds for their nonprofit purposes. Promotion of sports andgames is also considered to be a charitable purpose within the meaning ofsection 2(15) of the Income Tax Act.

The scope of “eligible purposes” is reasonably wide as long as the purposeis not for private gain, such as an undertaking for commercial profit,though some commercial activities are permitted in the broader interestsof the nonprofit organisation’s charitable purposes.

Chambers of commerce, which were incorporated as companies under sec-tion 25 of the Indian Companies Act, 1956 — with the object of promot-ing trade, commerce and industry — are considered as established for acharitable purpose. Similarly, a company incorporated without a profitmotive, with the object of publishing law reports, maintaining and run-ning a stock exchange, or promoting home industries, arts and crafts; or asociety whose object is the general improvement and promotion of agricul-ture or to effect economic amelioration by imparting technical education,setting up model industries and reducing unemployment would all bedeemed to be established for “charitable purposes.”

Formation Requirements

Nonprofit organisations in India are free to address any public need as



long as the need is addressed in a lawful manner (i.e., without attempt topromote disharmony or general public disorder) and without any inten-tion of private gain.

A public charitable trust is generally floated with some property (movableor immovable) that legally vests in the trustees. A minimum of twotrustees is required to start and run a trust. The founders of the trust canremain trustees for life and they need not be elected unless otherwise stip-ulated in the trust deed. The surviving trustees may appoint new trusteesby resolutions passed at board meetings.

In a society a minimum of seven individuals is required for registration.Members of the general public may enrol as members of a society by pay-ing the membership fee and agreeing to abide by the rules and regulationsof the society. The managing committee may have the right to refusemembership or terminate the membership of a member under specifiedcircumstances.

In the case of a Section 25 company, the income and property of the com-pany must be applied solely for the promotion of the objects as set forth inits memorandum of association and no portion thereof can be paid ortransferred — directly or indirectly, by way of dividend, bonuses or other-wise — to the members of the company.

The founders of a Section 25 company may continue to remain directors,subject to their being elected to the board of management from time totime. A minimum of seven persons is required to found a Section 25 com-pany. As in the case of a society, the set-up is quite democratic and mem-bers enjoy voting and other rights.

Ten persons from different families are required to form a cooperativeunder the Delhi Societies Cooperative Act, 1972. Agricultural cooperativesmust reserve half of their membership for scheduled castes (i.e., certaincastes in India that are socially and economically marginalised). In cooper-

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atives in which the central government shares capital, up to one-third ofthe managing committee members can be nominated by the government.

The minimum membership requirement for trade unions is seven.

Choosing the Type of Nonprofit Organisation in India: Comparing Trusts,Societies, and Nonprofit Companies

The legal framework in India gives nonprofits a choice to register generallyeither as a trust, society or company. The question is which one? Howshould a new nonprofit make an “enlightened choice”?

In states where a Public Trusts Act is in force, trusts offer simplicity andease in registration procedures. Two trustees are required to found a trustor Section 25 company set up as a private limited company, while societiesand Section 25 companies set up as public limited companies require aminimum of seven founders. The paperwork to establish a trust is lesselaborate and in states where there is no charity commissioner the trustdeed can be easily registered with the sub-registrar’s office.

Trusts also offer autonomy in management and administration. An indi-vidual may remain a trustee for life and new trustees may be selectivelyappointed over a period of time. In a society or Section 25 company, thereare requirements for a general body of members, periodic elections andannual general meetings. The setup is more democratic, and thus morecumbersome.

Generally schools, colleges and hospitals established by wealthy families orcorporate houses are founded as trusts. These educational or medical insti-tutions are usually built on private and family lands and from private andfamily wealth for public good. Trusts offer them greater control and auton-omy in management and administration. Members of the family mayremain on the board for as long as they may want to. New trustees may be



selectively appointed from time to time and there is no requirement of ageneral body of members or annual general meetings.

Usually grassroots level organisations, which require greater public partici-pation and involvement by way of membership, are registered as societies.And societies become a natural choice in states where there is no PublicTrusts Act in force.

Very few opt for the Section 25 company format. Many are not evenaware that this choice exists.

Registration Procedures

Registering a TrustThe application for registration of a public charitable trust should be sub-mitted at the office of the charity commissioner having jurisdiction overthe region/sub-region of the state in which the trust is seeking to be regis-tered. The application should be made in the prescribed form providingdetails regarding name of the trust, names and addresses of the trustees,mode of succession, and other key matters defined by law. The trust deedshould be executed on non-judicial stamp paper, the value of which woulddepend on the valuation of the trust property.16

In some states, the trustee applying for registration is also required to sub-mit an affidavit, and all co-trustees are required to sign a consent letter. Anominal registration fee is also charged.

Registering a SocietyThe application for registration of a society should be made to the registrarof societies having jurisdiction over the region/sub-region of the state inwhich the society is seeking to be registered. The application should besubmitted together with the memorandum of association and rules andregulations. In addition to the above, different states require additional

16 In most states, except Gujarat and Maharashtra, one can simply go to the sub-registrar's office and register a trust

deed by paying a nominal fee. The deed has to be executed on stamp paper. The process is very simple and is con-

cluded in 2-3 hours.


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documents such as consent letters of all members of the managing com-mittee, affidavit, etc. A registration fee is also charged.

Registering a CompanyThe first step towards registration of a company (under section 25 of theIndian Companies Act) is the application to the registrar of companies foravailability of name — which must be made in the prescribed form —together with a certain fee. It is advisable to suggest a choice of three othernames by which the company may be called, in case the proposed name isnot found acceptable by the registrar.

Once the availability of name is confirmed, an application should be madein writing to the regional director of the company law board. The applica-tion should be accompanied by three printed copies of the memorandumand articles of association of the proposed company, duly signed by all thepromoters with full name, address and occupation. The following docu-ments should also be furnished for the purposes of registration:

1. A declaration by an advocate or a chartered accountant that thememorandum and articles of association have been drawn up inconformity with the provisions of the Indian Companies Act andthat all the requirements of the act have been duly complied within regards to registration or matters incidental or supplementarythereto;

2. a list of names, addresses and occupations of the promoters, togeth-er with the names of companies, associations and other institutionsin which such promoters hold responsible positions, if any, withdescription of the position so held;

3. a statement of assets (with the estimated values thereof );4. an estimate of the future annual income and expenditure of the

proposed company, specifying the sources of the income and theobjects of the expenditure;

5. a brief description of the work proposed to be done after registration;



6. a declaration by each of the persons making the application thathe/she is of sound mind, not an undischarged insolvent, not con-victed by a court for any offence and does not stand disqualifiedunder section 203 of the Companies Act 1956, for appointment asa director.

After the application is made to the regional director, an advertisementmust be issued, after which the regional director will issue a license undersection 25. Upon receipt of the license, the applicant returns to the regis-trar of companies, which then incorporates the company after followinganother independent registration process.17

Registering a CooperativeThe application for registration of a cooperative should be made to theregistrar of cooperatives having jurisdiction over the region/sub-region ofthe state in which the cooperative is seeking to be registered. The applica-tion should be submitted together with the memorandum and articles ofassociation.

Registering a Trade UnionThe application for registration of a trade union should be made to theregistrar of trade unions, together with a copy of the rules of the tradeunion. Any person who has attained the age of 15 years may be a memberof a registered trade union. Under the act, seven or more persons canapply for registration of a trade union.

Registration for Tax ExemptionThe rationales and legal provisions for tax exemption are discussed in moredetail in the following section. Here we provide information specifically onregistration issues pertaining to tax exemption.

Once the nonprofit organisation is registered as either a trust, society orSection 25 company, the next logical step is to apply for tax exemptionwith the income tax authorities. In order to qualify for exemption under

17 The full procedure is described in AccountAble 48, available at www.AccountAid.net.


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section 11 of the Income Tax Act (i.e., to exempt the income of the organ-isation from tax) the nonprofit organisation must apply to the commis-sioner of income tax — within one year from the creation date of the non-profit organisation — in the prescribed form.

The application must be submitted, together with certified copies of thetrust deed or memorandum and articles of association, and certified copiesof the registration certificate obtained from the charity commissioner’soffice or the registrar of societies/companies.

80G Certificate under the Income Tax ActA donor is entitled to a 50% deduction from taxable income for donationsmade to a nonprofit organisation having an 80G(5) certificate. The appli-cation for approval of a nonprofit organisation under section 80G(5) ofthe Income Tax Act should be made in the prescribed form, together withcopies of the registration certificate and the trust deed/memorandum andarticles of association.

Approval under Section 35AC of the Income Tax ActContribution(s) made to a project/scheme notified as an eligible project orscheme for the purpose of section 35AC of the Income Tax Act, would beeligible for a 100% deduction. Unlike the certificate granted under section80G (wherein donations made to a qualifying organisation entitles a donorto a 50% deduction), the 35AC certificate is not given to any organisa-tion, but only to eligible and approved projects.

Application for approval of an association or institution for the purpose ofsection 35AC should be forwarded to the secretary of the NationalCommittee for the Promotion of Social and Economic Welfare. The appli-cation in the prescribed form should be submitted in two sets writteneither in English or Hindi and accompanied with details about the name,address and status of the applicant.

The National Committee usually recommends a project or scheme to the



central government for notification as an eligible 35AC project or schemefor an initial period of three financial years.

Approval under Section 35(1)(ii) and (iii) of the Income Tax ActA 125% deduction is allowed to donors for contributions made to anorganisation involved in “scientific research” [section 35(1) (ii)] or“research in social science or statistical research” [section 35 (1) (iii)].

The application should be made by the research institution in the pre-scribed form to the director general of income tax (exemptions) in tripli-cate, through the commissioner of income tax having jurisdiction over theapplicant. Six copies of the application with relevant enclosures should alsobe sent to the department of scientific and industrial research.

Permanent Account NumberEvery nonprofit organisation that is required to file the return of incomeunder section 139(4A) of the Income Tax Act has to apply for a perma-nent account number (PAN). The application should be made in the pre-scribed form (49A) to the income tax officer.

Registration for Seeking Foreign FundsThe Foreign Contribution (Regulation) Act, 1976 and its rationales andenforcement are described in more detail in the following section. Here wefocus primarily on registration requirements and issues.

All nonprofit organisations in India, whether registered or not, comeunder the purview of the Foreign Contribution (Regulation) Act. Theapplication for obtaining prior permission of the central government to receive foreign contributions should be made in the prescribed formFC-1A. The application for registration of a nonprofit organisation foracceptance of foreign contributions should be made in the prescribed form FC-8.


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Analysis and Recommendations

Legal Status and RegistrationThe fact that there is a choice of legal status (trust, society, company)which one can exercise at the time of registration is relatively unknown.Most Indian founders and organisations seem to think that a society is theonly form in which a nonprofit can or should be registered. Those who areaware often exercise a choice for the wrong reasons. For example, manyseem to think that forming a trust in Delhi or a state where there is nocharity commissioner is the best way to escape from the clutches of a gov-ernment regulatory body like the charity commissioner.

Diversity in legal status also leads to conflict with regard to uniformity onissues of accountability and governance. The board of a trust does notlegally require rotation of its board members whereas the board of a socie-ty or company does. In a society or company the liability of the membersis limited while in a trust the trustees can be held personally liable.

Trusts and societies registered in Maharashtra and Gujarat state have toseek the prior permission of the charity commissioner before taking outloans, or buying or selling immovable property. Nonprofits in other statesenjoy more operational freedom.

Registration procedures often drag on for months. The Public Trusts Actsapplicable in various states lay down the procedure for registration, includ-ing a checklist for the registering officer. What it fails to stipulate is themaximum timeframe within which the application for registration shouldbe processed.

Under the Foreign Contribution (Regulation) Act (FCRA) an applicationfor “prior permission” to receive foreign funds should be disposed of with-in 90 days (but this can be extended to 120 days under law). Howeverthere is no timeframe given with regard to “registration” under the Act.Organisations that are less than three years old are refused FCRA registra-



tion. Even “prior permission” to receive foreign funds is often denied with-out ascribing any reason.

While the Foreign Exchange (Regulation) Act (FERA) applicable to com-mercial organisations has been replaced by a more friendly ForeignExchange Management Act (FEMA), the Foreign Contribution(Regulation) Act continues to be a “thorn in the flesh” for most nonprofitorganisations.

In Maharashtra and Gujarat, societies are also required to register underthe Bombay Public Trusts Act, 1950 for regulatory purposes. In otherwords, in these two states, a society has one registration number under theSocieties Act and another under the Trusts Act. The Societies RegistrationAct as applicable in these two states does not require payment to the“Public Trusts Administration Fund.” However since societies in these twostates are also required to register as trusts, they end up paying a contribu-tion (presently at the rate of two percent of the gross annual income orreceipt) that societies in other states do not.

In India, while it is permissible to create a valid nonprofit organisation forthe exclusive benefit of a particular community or religious denomination,the organisation would not be entitled to the various tax exemptions avail-able to secular nonprofit organisations. While it is quite understandablethat the Constitution of India has established a secular state and hasattempted to do away with all distinctions of caste, colour and creed,many feel that the tax law is rather unfair with regard to nonprofit organi-sations seeking to work at a more focussed level.

Nonprofit organisations must register with and report to a number of government authorities. At the state level, the organisation has to registereither with the office of the charity commissioner or the registrar of societies or the registrar of companies. At the federal level, it has to register with the income tax authorities and, if it receives foreign contributions, then it must also register with the Home Ministry.


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Separate returns must be filed annually with all three authorities.

There is often a dichotomy between state and federal laws. For examplethe Income Tax Act, a federal law, allows nonprofits in India to invest theirmoney in all mutual funds, while the charity commissioner inMaharashtra and Gujarat allows trusts and societies to invest only in cer-tain mutual funds.

It is recommended that there should be “single window clearance” withregard to registration of nonprofits, and the system of dual registration forsocieties in states like Maharastra and Gujarat should be done away with.A suitable timeframe should be legislated for processing applications forregistration. The term “nonprofit” or “not-for-profit” should be properlydefined and incorporated in Indian law books. Even terms like NGO,PVO etc., are used colloquially and not recognized or incorporated inIndian law books.

Some in the NGO community have suggested that it may be worth con-sidering the idea of scrapping all the present choices available for legal sta-tus (trust, society, or company) and introducing a new, comprehensive,federal “Indian Not-for-Profit Act” which would be uniformly applicableto all nonprofits throughout India.

In recent years, the feasibility of having a single comprehensive central lawfor nonprofits has been a significant issue in India. The Indian Trusts Act1882 enacted by the central legislature applies only to private trusts anddoes not apply to charitable trusts. Parliament is competent to make lawsfor the whole or any part of the territory of India, with respect to “trusts”and “charities,” including religious and charitable endowments and institu-tions. There is, however, no central law on these subjects.

To secure uniformity and to avoid irreconcilable conflict of laws on thesubject, many feel it is advisable to have a central law with respect to“charities” or “nonprofits” enacted by Parliament for the whole of India or



any parts thereof. Article 245 of the Constitution of India empowersParliament to make laws for the whole or any part of the territory of Indiaand the legislature of a state to make laws for the whole or any part of thestate. Parliament, alone, is thus competent to make laws applicable toIndia or one or more states, including union territories.

Under Article 246(1), Parliament has exclusive powers to make laws withrespect to any of the matters enumerated in List I in the Seventh Scheduleto the Constitution (referred to as the “Union List”). Under Article 246(3), the legislature of any state has exclusive powers to make laws for thatstate, or any part thereof, with respect to any of the matters enumerated inList II in the Seventh Schedule (referred to as the “State List”). Parliamentand state legislatures are supreme and sovereign to make laws within theirrespective spheres.

Under Article 246(2), Parliament and the legislature of any state also havepower to make laws with respect to any of the matters enumerated in ListIII in the Seventh Schedule (referred to as the “Concurrent List”). BothParliament and state legislatures are thus competent to make laws withrespect to any of the matters in the Concurrent List. This is subject to therestriction contained in Article 254(2).

Article 254(2) provides that where a state law, with respect to any matterin the Concurrent List, is inconsistent with a union law or an existing law(i.e., the law made by the centre or any province or Indian state before thecommencement of the constitution) with respect to that matter, the statelaw shall prevail in that state, if it is reserved for the consideration of thepresident and has received his assent. Assent of the president is given onlyon the advice of the union executive. The article imposes no such restric-tion on the exercise of power by Parliament in this regard.

State law enacted on any matter falling in the Concurrent List is, however,subject to the power of Parliament to enact a law with respect to the samematter, including a law adding to, amending, varying or repealing the said


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state law [proviso to Article 254(2)]. This clearly establishes the prevalenceof the central law over the state law, with respect to such matters.

Entry 10 in the Concurrent List is “trusts and trustees.” Entry 28 in thelist is “charities and charitable institutions, charitable and religious endow-ments and religious institutions.” Parliament and state legislatures are thuscompetent to make laws on these subjects.

Purposes (Required and Limited/Prohibited)

The laws applicable to nonprofits in India only recognize “charitable pur-poses” and “religious purposes.” “Charitable purpose” — as defined underthe federal Income Tax Act — is fairly comprehensive and covers, besidesrelief of the poor, education and medical relief, or “any other object ofgeneral public utility.” The law in India adequately enables nonprofits tobe registered for “charitable purposes” and implement welfare and develop-ment activities.

The terms “not-for-profit” and “nonprofit/s” do not exist in Indian statutebooks. Many voluntary organisations in India feel uncomfortable with theterm “charity” or to be registered for “charitable purposes.” Perhaps, substi-tuting the term “charitable purpose” with “not-for-profit purpose” wouldbe more in keeping with modern international trends in philanthropy.

While the legal environment for promoting ‘charitable purposes’ in Indiais quite enabling, one often encounters problems in convincing the regis-tering officers whether objects like “income generation programs for disad-vantaged groups” or “empowerment of women” are charitable. Registeringofficers are often known to go by the “letter” and not the “spirit” of thelaw. Registering officers should be given clear guidelines by the Ministry ofFinance regarding what is a “charitable purpose” and acquaint all register-ing officers with some of the new development terminology.



As long as the nonprofit is not established for or does not carry out any“unlawful activity,” the law in India provides a fairly conducive environ-ment for the development and growth of all lawful charitable purposes.

Dissolution, Termination and Management Takeover

Since a trust cannot be lawfully dissolved (it can only be declared defunctor moribund or de-registered) trustees are often saddled with the discom-fort of managing trusts that have very limited funds. While these trusts areunable to make any substantial difference to society, the trustees are underlegal obligation to continue filing annual returns with different govern-ment authorities.

Involuntary termination of a nonprofit can be ordered by the governmentonly if it can prove beyond reasonable doubt that the trust, society orSection 25 company has been established for or is carrying out an ‘unlaw-ful purpose,’ such as destabilizing the country; or is promoting terrorism,anti-national propaganda, etc.

In case of financial or management irregularities, the registrar of societiesor companies or the charity commissioner can intervene as a regulatoryauthority and take suitable steps to set right the various irregularities. Anonprofit cannot be dissolved or terminated by the government ongrounds of fiscal or management irregularities. The right to establishorganisations for lawful charitable or religious purposes is guaranteedunder the Indian Constitution. And while the government plays a regula-tory role through various enactments of law, the government does notinterfere with the actual management of nonprofits.

TrustsGenerally, when a public charitable trust is properly and completely con-stituted, it becomes irrevocable, even though it is voluntary. Accordingly,there is no provision under the various public trusts acts (including the


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Bombay Public Trusts Act 1950) to legally terminate or dissolve a validpublic charitable trust. “In the case of public trusts, there can be no revo-cation if there has been a complete dedication of the property.”18

When a public trust is left with no movable or immovable property and,as a consequence, all charitable activities come to a standstill, the trusteesmay apply to the charity commissioner to declare the trust as defunct ormoribund. Thereafter, annual returns need not be filed with the charitycommissioner and other authorities.

Two or more not-for-profit organisations of the same type can be mergedto form a single amalgamated legal entity. Section 50A(2) of the BombayPublic Trusts Act allows two or more public trusts to be amalgamated ormerged into one single legal entity by framing a common scheme of man-agement or administration.

The procedure of amalgamation requires a proper application with courtfee stamp to be made to the charity commissioner who, in turn, may alsorequire the trustees to publish a notice in this regard in a newspaper. Thereshould be proper justification for the amalgamation and the consent foramalgamation should preferably be unanimous on the part of the trusteesof all the trusts to be amalgamated.

After the final order is passed by the charity commissioner, those trustswhich are amalgamated cease to exist as separate legal entities and instead,a new legal entity in the form of a new amalgamated trust emerges with anew registration number and scheme of management.

If trustees of a public charitable trust wish to voluntarily dissolve the trust,they have two options: to transfer, over a period of time, all the movableand immovable property of the trust by way of donation/grant to anothercharitable trust (preferably with similar objects) and declare the trust asdefunct or moribund; or to amalgamate the trust with another trust.

18 Krishna Swami Pillai vs. Kethendrama Naiken (27 Madras. L.J. 582:25 I.C. 426) and Mahadeva Ayyar vs. Sankara

Pillai (14 Bombay L.R. 295).



The charity commissioner (only in the state of Maharashtra) has powersunder section 41D of the Bombay Public Trusts Act to suspend, remove ordismiss any trustee of a public trust if there is persistent default in the sub-mission of accounts, report or return; wilful disobedience of any lawfulorder issued by the department; continuous neglect of duty or breach oftrust; misappropriation or improper use of trust property; or if the trusteeis convicted of an offence involving moral turpitude.

With regard to involuntary termination, a trust may be extinguished orterminated if “its purpose becomes unlawful” under Section 77 of theIndian Trusts Act 1882.

SocietiesA society registered under the Act of 1860 may be dissolved if members(not less than three-fifths of the total membership) so desire — provided that whenever any government is a member of, or a contributor to, or otherwise interested in, a society registered under the Act, such societyshall not be dissolved without the consent of the government of the state of registration. The procedure for dissolution of a society is laid down under the Act, and usually in the charter (articles or rules and regulations) of most societies.19

Upon the dissolution of any society and after satisfaction of all its debtsand liabilities, the immovable and movable property is not to be distrib-uted among members of the society but instead to be given to anothersociety as may be determined by the votes of not less than three-fifths ofthe members present personally or by proxy at the time of dissolution.

The procedure for winding up a Section 25 company is about the same asthat of a society.

Foreign Contribution (Regulation) ActThe central government (Ministry of Home Affairs) may revoke FCRAregistration — given to any not-for-profit organisation under the Foreign

19 In some states, societies can be dissolved by the Government or the court. These states are: Andhra, Bihar (cancella-

tion of registration), Madhya Pradesh, Meghalaya, Tamil Nadu, Uttar Pradesh, and West Bengal.


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Contributions (Regulation) Act — if the organisation fails to file thereturn in Form FC-3 or gives false information; if funds received by theorganisation from “foreign source/s” are passed on to another not-for-prof-it which is not registered under FCRA or does not have prior permissionto receive foreign funds; or if funds received from “funding sources” areused for political or anti-national activities.

Any organisation aggrieved by such revocation may seek legal redress byfiling an appeal in the High Court.

Income TaxThe income tax department may revoke tax exemptions given to any not-for-profit organisation under section 11 if the organisation violates anyone or more of the requirements laid down under sections 11, 12 or 13 ofthe Income Tax Act. Violations include not utilizing the minimum stipu-lated income of the organisation on the objects; investing funds in formsand modes which are not approved under the act; applying any part of theincome or property of the organisation directly or indirectly for the benefitof the founder, trustee, relative of the founder or trustee; or failure to filereturns.

Appeal for redress may first be made to the Commissioner of Income TaxAppeals (CIT Appeals) and if that fails, then to the tribunal and finally theHigh Court.

Analysis and Recommendations

The procedure concerning termination or dissolution of not-for-profitorganisations in India is fairly simple and easy. A society needs only toconvene a special general meeting of its members and pass a resolution fordissolving the organisation by a vote of not less than three-fifths of itsmembers.



There is no provision in law for winding up a trust. The procedure fordeclaring a trust as defunct or moribund is not laid down in the law bookseither. The general procedure followed in Maharashtra and Gujaratrequires trustees to file a declaration before the charity commissioner thatthe trust has no funds or property and therefore should be treated asdefunct or moribund.

The law in India very clearly stipulates that the funds and properties of theorganisation that is dissolved not be distributed among members of theorganisation or the board. All the funds and properties must be transferredto another not-for-profit organisation, preferably one having similarobjects. This adequately protects the public from fraud and similar abuse.

The Income Tax Act lays down a fairly clear, systematic and reasonablyspeedy procedure for legal redress, in case the assessing officer denies taxexemption to a not-for-profit organisation. On the other hand, if theHome Ministry revokes “registration” or the “prior permission” given to anonprofit under the Foreign Contribution (Regulation) Act, the organisa-tion is left with no option but to make an appeal to the High Court —which is a lengthy, costly and time-consuming procedure.

The Fiscal Regime for Philanthropy and Law in India

Tax Exemptions

Taxes in India are imposed at three levels: central, state and local. In somecases, there is an overlap of taxes, such as sales tax.

Key taxes imposed by the centre are: income tax, wealth tax, excise duty,service tax, sales tax, customs duty, and road tax. Another tax is the stampduty, which is akin to court fees.


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Most states impose sales tax on the sale of goods, and in some cases onconstruction contracts also. Two states (Maharashtra and Gujarat) alsoimpose a tax on donations to recover the costs of administering the charitycommissioner’s office. In most states, charities have to pay registration ordocumentation fees for registering under the identity statute.20 There arealso taxes at the local level, such as property tax. In this section, we discussonly the key taxes at the central level which are relevant to activities ofnonprofit organisations, and where preferential treatment is provided tononprofits.

Income Tax 21

Charitable organisations are exempt from income tax, if they fulfil certaincriteria. These vary depending on the category of exemption sought.

A basic exemption under section 12A is available to all charitable or reli-gious organisations. A charity registering under this undertakes to spend aminimum percentage22 of its income each year on its objects. Charitiesmust ensure that objects are geared to general public welfare, and are notrestricted to particular persons; that surplus funds are kept in specifiedmodes of investment or in publicly regulated banks; that charity funds orproperties are not misused for personal benefit of key persons, includinglarge donors; and that surplus income (or net assets, on dissolution) is notdistributed to its members.

The exemption is available on a continuous basis, provided the charitycontinues to meet exemption requirements. The approval is granted by theIncome Tax Department itself upon application. No reference needs to bemade to any other government department. No fees are involved.Approval is granted from the financial year in which the application wasmade. In genuine cases, delay in applying can be pardoned at the discre-tion of the Department. A time limit of six months has now been imposedfor granting or rejecting the approval.

In case of rejection, the charity can appeal through a tiered structure start-

20 The statute under which charities gain legal recognition.

21 Income Tax Act, 1961.

22 Currently this is 85%. Administrative expenditures and expenditures on purchase of fixed assets (including land

and building) are also considered application of to income to the charity’s objects.



ing with the Departmental Commissioner of Appeals, through the quasi-judicial Income Tax Tribunal, and onwards through the high court andfinally the Supreme Court.

A special exemption under section 10(23C) is available to charitable orreligious organisations that are considered to be of national or regionalimportance, or that are involved in nonprofit public services related toeducation or health. The approval is granted for up to three years at atime, after which it has to be renewed. There is no application fee or pro-cessing charge, and the process takes at least six to nine months. Approvalis applicable with retrospective effect in case of delays, which are frequent.The entire approval process is completed within the Income TaxDepartment, and the usual appeal channels are available in case of rejection.

Until recently there was no minimum spending requirement for charitiesapproved under section 10(23C) for the special exemption. Recentchanges have done away with this privilege. Now the approved charitymust spend 85% of its income each year on its objects in order to main-tain its tax-exempt status. It should also keep its surplus funds in specifiedinvestments or publicly regulated banks.23 In certain cases, additional con-ditions can be specified in the approval letter at the discretion of the gov-ernment.

The approval can be rescinded or withdrawn on violation of these condi-tions or if the activities of the charity are later found not to be genuine.Before doing this, the government must give the charity a chance todefend its position. The withdrawal is subject to appeal through the nor-mal channels.

Wealth TaxThe wealth tax is a redistributive tax, and attempts to bring about a bal-ance in the personal wealth which people hold. There is a basic exemptionlimit of Rs. 15 lakhs (approximately US $32,700) Additionally, there aresome common exemptions such as a residential house, assets used in pro-

23 Banks regulated by Reserve Bank of India.


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duction of goods or services, and others. Any excess is taxed at rates rang-ing from 10% to 30%.

Nonprofit organisations are automatically exempt from this tax,24 oncethey are registered under the Income Tax Act. There are some conditionsthey need to fulfil. These include ensuring that the assets (or income ofthe trust) are not used for personal purposes of the key persons,25 and thatthe funds are invested in specified ways.26

If the nonprofit organisation is running a business, then different condi-tions apply. First, it must maintain a separate set of account books for thebusiness part of its work. Secondly, the business must fall into one of thefollowing categories: (a) it consists of printing or publication of religiousmaterials for public religious purposes; (b) its business is of a kind notifiedby the government as exempt; (c) it is carried on for charitable purposes,and the beneficiaries are mainly responsible for the work; or (d) the organ-isation is exempt under clauses 23B27 or 23C28 of section 10 of the IncomeTax Act.

Value-added TaxesThere are two types of value-added taxes in India: one is excise duty onthe manufacture of goods, and the second is service tax on provision ofprofessional or other notified services. For applicability of excise duty, thethreshold limit is Rs. 1 crore (Rs. 10,000,000) (approximately US$218,000). Furthermore, many of the items produced by charities aretotally exempt from excise duty (e.g. printed books, handicrafts, etc.). As aresult, no charities in India are paying excise duty as of now. So far as thelaw is concerned, there is no special exemption for charitable organisations.

Service tax is a relatively new concept in India. There is no threshold limit,but it applies only to specified services, such as accounting, consulting,insurance, and telecommunications. At this time charities are not generallyengaged in these services, although some do provide consulting services.

24 Sec. 5(i) and Sec. 45 of the Wealth Tax Act, 1957.25 Trustees, managers, large donors, their relatives, etc. See sec. 13(3).26 As mentioned in section 13(1)(d) of the Income Tax Act, 1961.27 Available to Khadi (handmade cotton cloth) or village industries.28 Available to various named funds, charitable hospitals, educational institutions, important nonprofit

organisations, etc.



However, there is no provision in the law for exempting charities from this tax.

Sales TaxTax on the sale of goods is a major source of revenue for the government.State sales tax is applicable on sales within a state — each state writes itsown law in this regard. Central sales tax is applicable when the transactioninvolves the inter-state movement of goods. Rates of sales tax depend onthe product and the state, usually ranging from 4% to 12%. Some prod-ucts are not taxable. There is also a threshold limit of Rs. 4 lakhs (Rs.400,000) (approximately US $8,700). Sales tax applies to a trader29 onlywhen annual transactions cross this limit. Sale transactions of most NGOsare generally below this limit.

Other, larger NGOs are entitled to exemption from sales tax even if theirproducts are in the taxable category. The procedure for exemption requiresproduction of records and proving the bona-fides of the charity. The pro-cedure is daunting, to say the least, and varies from state to state.

Customs DutyCustoms duty is applicable on import of specified goods into India. Therates vary for different classes of goods and from time to time. Currently,the lowest average effective rate for goods subject to duty is 39%.

Exemption from customs duty is provided to goods imported for certaincharitable purposes. This is done through general exemption notificationsissued from time to time under section 25(1) of the Customs Act, 1962.Examples of such exemptions are goods imported for blind or deaf per-sons; for relief of people affected by the Gujarat earthquake of January2001; and for goods imported by Ford Foundation, Delhi.

29 This limit is Rs. 2 lakhs (Rs. 200,000) for manufacturers.


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Analysis

Historically, the nonprofit sector in India has been highly diffused. By oneestimate, there may be as many as 40 lakh (4 million) nonprofit organisa-tions in India — this includes religious trusts, educational institutions, aswell as charitable or development organisations. Most of these have tradi-tionally been very small, with limited income, serving just the local villageor community. Many of these are neither registered under the Income TaxAct nor do they maintain formal accounts. The regulatory issues associatedwith these kinds of organisations have also not been significant. This situa-tion is also reflected in the structure of Income Tax Act, which does notdeal with grants made by donor agencies at all. The objective of the Act atthat time was to make sure that business groups should not be able to dis-guise their commercial activities using the cover of charity.

In the last 30 years, the shape of the nonprofit sector began to change,with the emergence of development NGOs and transnational agencies.These organisations handle large amounts of money, have a wider reachand are often working in areas far away from their donors and/or support-ers. As a result, the income tax provisions designed for an earlier era arenot really suitable for these organisations or times.

Changes in the Income Tax Act have been mainly reactive, based onrequests from the nonprofit organisations or on reports of committees setup mainly to streamline provisions that were being misused. These reviewsdo not appear to have considered changes in the structure and complexityof the nonprofit sector.

For instance, in 2001, the government reduced the accumulation period offunds for a specific program from 10 years to 5 years. In 2002, the mini-mum expenditure requirement was enhanced to 85%. Also, disbursementsmade to other charities would not be recognised as expenditures, if thesewere made out of accumulated funds. These amendments came amongwidespread fears that non-donating charities30 might lose their income tax

30 The Parthasarthy Committee Report suggested that charities which received more than 90% of their income

from donations would be treated as donative charities. Specific-purpose grants were excluded from the definition

of donations.



exemption altogether. The actual changes, therefore, were greeted with asense of relief.

Over the last decade, several suggestions have been made by tax commit-tees and working groups to effectively withdraw or curtail the income taxexemption presently enjoyed by charities. Strangely enough, there alsoappears to be some public support for this31 among business executives. Apossible reason for this could be a perceived lack of public accountabilityon part of charities.

Another reason for this could be that over the years, a number of schoolsand hospitals that are being run on commercial lines, have acquired tax-exempt status. This allows these organisations to claim expenditures oncapital assets as a deduction.32 These organisations run a nominal charita-ble program in order to project an image of nonprofit work. The IncomeTax Act was amended in recent years asking such organisations also to filean income tax return, if their gross receipts exceeded Rs. 1 crore (Rs.10,000,000) (approximately US $218,000).33 The late 2002 report by theKelkar Task Force on Direct Taxes also made suggestions for the withdrawalof some income tax exemptions to nonprofit organisations.

Overall, the trend appears to be one of a narrowing window of tax exemp-tions for nonprofits in India. This is contrary to the sector’s expanding roleand diversification into non-traditional methods of fundraising such asmicrocredit and income-generation.

Recommendations

Certain information should be made public in order to enhance theaccountability of the nonprofit sector. The following information can bemade public by the Income Tax Department, through an amendment in

31 See AccountAid Capsule 61, (www.accountaid.net) based on an Economic Times internet poll of 8 January 2002.

93% of the participants voted for withdrawal of income tax exemption to charities. Most of the participants are likely

to have a business background--it is not known how many votes were polled.

32 Commercial organisations are allowed to charge only depreciation over the life of the asset. For land, no depreciation

is allowed. This increases their taxable income.

33 This provision was later dropped on representations made by some nonprofit bodies such as AICC (All India Christian

Council).


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the Income Tax Act, 1961: (1) the name, address, and other relevant par-ticulars of charities granted tax-exempt status under sections 10(23C) and12A of the Income Tax Act, 1961; and (2) an annual statistical report onthe total number of exempt charities, returns filed, income and funds.

In addition, exempted charities should be directed to fulfil public requestsfor financial information, such as audited accounts.

The following recommendations would also assist in the development ofthe Indian nonprofit sector:

• Allow grantmaking agencies to make tax-deductible grants to othercharities from accumulated funds;

• Revamp the structure of the Income Tax Act so far as it deals withnonprofit organisations, recognising the changes in the structure ofthe sector over the last three decades;

• Establish clearer tests for distinguishing between public-benefit organ-isations and commercial organisations using a nonprofit shell or asso-ciate as a cover;

• Exempt charities from collecting and paying service tax; and • Simplify procedures relating to sales tax exemption for charities.

Tax Deductibility and Credits for Contributors

All individuals above a certain limit of taxable income (currently Rs.50,000 annually) (approximately US$1,000) have to pay income tax. Thetax rate increases progressively from 10% to 30%. The net income is cal-culated after giving various deductions and tax incentives. Other assesseessuch as companies and firms also have to pay tax on their income, thoughthe calculations vary according to the category of assessee. Non-individualsare taxed at flat rates instead of progressive rates.

Any of these assessees can claim a deduction from their income for



amounts donated to approved charities. This may range from a deductionof 50% of the amount donated, to 125% of the amount donated.34 Thisreduces the amount of taxable income and in turn the amount of tax. Atpresent there are four tax slabs (sometimes also called brackets in othercountries): Nil up to Rs. 50,000; 10% for Rs. 50,000-60,000; 20% for Rs.60,000–150,000; and 30% for Rs. 150,000 and above. The actual benefitfor a donation depends on the slab occupied by the assessee.

All donations must be itemised in the return, and proof of donation(receipt or certificate) must be attached. Only money donations (not in-kind donations) are eligible for deduction. The various deductions aresummarised below:

50% Deduction under Section 80-G of the Income Tax ActDeduction under section 80G of the Income Tax Act may be 100% or50%. The higher deduction of 100% is given for donations to govern-ment-defined high priority activities (such as family planning, armedforces, and disaster relief ) that are mostly under government control. Mostnon-government charities are entitled to seek approval only for 50%deductibility under this section.

Almost any non-religious charity can be approved under section80G(2)(iv) for 50% deductibility. Approval is given for a maximum of fiveyears at a time. Important conditions for approval include: (1) the NGO’sincome should be exempt from income tax; (2) its income and assets areused for charitable purposes only, and the benefit should not be limited toa religious community or caste; (3) the organisation should maintain prop-er accounts; (4) the organisation should be a public trust, registered socie-ty, nonprofit company, or fund; (5) if the NGO is running a business,then it should keep separate books for the business, and donations shouldnot be used for business purposes; (6) the charity should not apply morethan five percent of its income for religious purposes;35 and (7) theCommissioner of Income Tax (CIT) must approve the NGO for thispurpose.

34 India does not have a system of tax credits for donations. References to tax-deductibility should be understood as

deduction of the donated amount from taxable income.

35 Sec. 80G(5B).


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Donations collected under section 80G can be applied for any charitablepurpose by the charity. The donor can claim 50% of the amount donatedas a deduction. If the total of donations under section 80G is more than10% of the total income of the assessee, then the excess is ignored.36 Thesame deduction rules apply for donations made by corporate donors orbusiness donors.

100% Deduction under Section 35AC of the Income Tax ActNonprofit organisations approved under section 80G mostly are entitledto offer 50% tax deductibility to their donors. However, nonprofitsapproved under section 35AC can offer 100% tax-deductibility to donors.The limitation of 10% for 80G donations also does not apply here.

This 100% deductibility approval is not given to the nonprofit as a whole— it applies only to a specific project. (For-profit organisations can alsotake up such projects directly, as part of their social responsibility efforts.)Approval is given only to priority projects selected by the government,normally run by an NGO. For this, the NGO has to write a project pro-posal with a budget. The application is sent to a national committeedrawn from various sectors — including the nonprofit sector — that sitsat Delhi. Approval is normally given within six months, and generally fortwo to three years at a time. In order to claim this deduction, the donorneeds a certificate in the appropriate form issued by the recipient NGO.

125% Deduction under Section 35(1)(ii) or (iii) of the IncomeTax Act Under this section, the deduction exceeds the donation: it is equal to125% of the amount donated by business or professional firms or individ-uals. Assessees who do not have business or professional income get only a100% deduction.37 There is no upper limit on the proportion of donor’sincome that can be donated. The donation must be made to an institutionapproved under section 35(1) clause (ii) to do scientific research or underclause (iii) to do research in social sciences or statistical research. Thedonation must be used for these purposes only.

36 Some of the priority donations under section 80G are not included while calculating the total donations for

this purpose.

37 Section 80GGA of the Income Tax Act.



Approval under this section is given by the Central Board of Direct Taxes,and the application goes through the local commissioner of income tax.Approval is not given for more than three years at a time, and may berenewed.

The NGO should maintain separate accounts for funds received in thisway. An annual return (with audit certificate, income and expenditureaccount and balance sheet) should also be filed. The donor has to itemiseand prove the donation to the Income Tax Department. For this a certifi-cate or a receipt from the NGO is needed. The certificate or receiptshould mention the date and number of notification under section 35.

Analysis

According to estimates from a government-appointed committee,38 theGovernment of India lost Rs. 1,100 (approximately US $240 million)crores in taxes during financial year 1999-2000 due to deductions offeredto taxpayers for charitable donations. If extrapolated, this would mean thatannual donations claimed by Indian taxpayers came to about Rs. 6,000crores (approximately US $1.3 billion). On the other hand, a survey39 bySampraadan (Indian Centre for Philanthropy) pegged total donations atRs. 811 crores (approximately US $177 million) for the same period.Which of these figures is likely to be more reliable?

Probably neither one. Some taxpayers lodge false claims for deductions byusing inflated or false receipts. Paper charities are set up for this purpose,and they also obtain income tax registration and tax-deductible status.Donations are given by cheque, with about 85-95% of the amountreturned in cash to the donor. This is particularly common in metropoli-tan areas. Very little visible effort is made by the government to curb this.This also gives a bad name to charities, and thus even genuine charities aresometimes viewed with suspicion by the public and regulatory authorities.

38 Parthasarthy Shome Committee Report, p. 114 (Final Report of the Advisory Group on Tax Policy and Tax

Administration for the Tenth Plan, May 2001).

39 Sampradaan--Indian Centre for Philanthropy, Giving and Fund Raising in India (New Delhi, 2000).


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At the same time, other taxpayers donate large amounts in cash or in kindat shrines, and do not claim any tax deduction at all. Donations to reli-gious charities are not eligible for deduction, except a limited purposededuction for renowned religious places under section 80G(2)(b) of theIncome Tax Act. One of the most famous temples in India (ShriThirupathi Devasthanam Trust) receives around Rs. 188 crores (approxi-mately US $41 million) annually in cash donations. In addition to this,pilgrims donate gold, jewelry and other valuables. The sale value of hairdonated by pilgrims comes to an additional Rs. 20 crores (approximatelyUS $4.36 million) annually. Mata Vaishno Devi Shrine in Jammu has anannual income of Rs. 75 crores (approximately US $16 million), mainlyfrom offerings by devotees. There are thousands of other temples, gurud-waras, dargahs (Muslim shrines), churches and other institutions across Indiathat receive significant donations.

How important are tax benefits for encouraging giving? Religious givingdoes not appear to be prompted by the motive of monetary rewards suchas tax benefits. Still, denial of tax-deductible status for donations to reli-gious charities is a thorny issue. Such denial is contrary to current interna-tional practice,40 and is a major disability for Indian religious sects. Thisapproach, perhaps based on a misconceived understanding of secularism,41

fails to recognize the philanthropic power of religious charity. It fuels pub-lic sentiment against sects that do not depend on Indian charity and thusenjoy better financial clout. It also creates an underground “economy” inreligious charity, as both the donor and the charity account for the dona-tions outside account books. Often it forces religious sects to set up shad-ow organisations for carrying out philanthropic work, resulting in reducedaccountability and increased complexity of accounting controls.

Indians are traditionally used to giving in kind, particularly in rural areaswhere money plays a smaller role. However, most of the rural populationdoes not pay income tax, as they are taxed through land revenue. Landrevenue is collected as a fixed sum per acre of land. Urban people are also

40 In both the U.K. and the U.S., religious organisations are also eligible for raising tax-deductible donations. In several

European countries, the government collects funds (as taxes) on behalf of approved religious denominations. Russia

amended its tax code in May 2002 to allow tax-deductions for donations to religious organisations.

41 Secularism, which essentially means separation of church and state, does not have an exact equivalent word in

Indian languages. It is, therefore, often translated loosely as “dharm nirpekshta,” meaning neutrality towards alterna-

tive religions.



rediscovering giving in kind — a significant emerging mechanism is thedonation of corporate shares to NGOs. Another traditional form of givinghas been the donation of land. However, neither the Income Tax Act northe Land Revenue Act (which varies from state to state) currently recog-nizes giving in kind.

Trusts also face a peculiar problem. Income tax deductions become avail-able only when a trust has been formed and then approved. This meansthat the initial contribution is not tax-deductible, as it occurs at the timeof formation, when the trust has not yet been approved. Most people,therefore, form a trust with a nominal corpus and supplement it laterwhen the trust is approved.

The Indian tax system is also geared for an economy where currentincomes are higher than accumulated disposable wealth. As a result,deductible donations are limited to current taxable income, and carryingforward is not allowed. This situation is changing — disposable wealthnow often exceeds current taxable income, particularly among middle-income groups. At the same time, the size of the family is being reduced.Soon a situation will emerge where a wealthy person dies without eligibleheirs. In such a situation, it may be necessary to recognize the fact thatsome people’s annual giving may exceed their current income.

The present system also encourages more giving at higher levels of income.A person giving Rs. 1,000 at a slab (bracket) of 10% under section80GGA may get a tax benefit of Rs. 100. The same amount, when donat-ed by a richer taxpayer (occupying the 30% slab) would increase the taxbenefit to Rs. 300. For other deductions, there has been a gradual move-ment to change these to deductions from tax (at a standard rate) ratherthan deductions from income. So far this treatment has not been appliedto donations, and with good reason. Giving, in absolute terms, increases athigher levels of income. This is also in line with the concept that an indi-vidual is a trustee for the wealth he or she holds, and should use it wisely,for the benefit of the larger society.42

42 See Pravir Malik, The Flowering of Management (Sri Aurobindo Institute of Research in Social Sciences, Pondicherry,

1999). The concept is deeply embedded in the Indian social and religious practices whereby Vaishya community

(producers of wealth through agriculture, cattle and trade) was traditionally expected to practise “daan” regularly.


India • 155

Donations by business groups or corporate houses under section 80G aredeductible in the same way as a donation by an individual donor (50% inmost cases). This means that most businesses would prefer to show dona-tions as a business expense and get a 100% benefit instead of claiming adeduction and getting only 50%. In order to qualify it as a businessexpense, often the corporation projects donations as a corporate imagebuilding exercise, instead of pure philanthropy. There is a view that, in thelong run, this may distort corporate philanthropy, bringing it closer to abusiness transaction rather than to charity.

Recommendations

The Indian tax system is by and large fairly generous, balanced, and welldesigned when it comes to deductions for donations. Still, some of thechanges that may be considered are:

• Reinforcing provisions related to the claiming of false donations.These would apply only to charities that obtain approval for tax-deductible donations. Steps may include (1) public notification ofcharities approved under section 80G; (2) public reporting of fundsraised by each approved charity, including the duty to provide infor-mation requested by prospective individual donors; (3) special auditsof charities approved for tax-deductible donations on a random basis;(4) stipulation that donations above Rs. 10,000 be given only byaccount payee cheque or bank draft; and (5) closer scrutiny of chari-ties when applying for approval for tax-deductible donations.

• Imposing higher penalties for taxpayers who claim false donations;• Recognising religious charity on the same footing as social charity;• Introducing a mechanism for allowing deductions for giving in kind,

where the donation can be valued and title transferred (motor vehi-cles, land, shares, etc.);

• Removing provisions which limit deductible giving to a percentage oftaxable income;

• Allowing carry-forward of donations not covered by the current year’sincome.



Resource Mobilization and Capital Formation Issues (including Funding)

Capital FormationThere are no minimum capital norms for forming or running a nonprofitorganisation in India. Capital formation is enabled through a mechanismcalled “corpus donations” from external sources. These donations areexempt from the minimum expenditure norms specified in the IncomeTax Act for tax exemption. Funds can also be set aside for specific purpos-es or programs for up to a maximum of five years.

Surplus can also be ploughed back as corpus, provided the minimumexpenditure norms, currently 85% of total income, are met. Effectively,this means that a nonprofit cannot set aside its own surpluses in excess of15% as corpus.

The Income Tax Act also places limits on the mode of investing surplus oridle funds. Funds can be kept in scheduled banks, or invested in fixedassets or equipment. Funds can also be invested in specified securities(mostly government bonds), mutual funds and other approved bonds. Ingeneral, funds cannot be invested in the private sector or in the stock mar-ket. The objective of this provision appears to be two-fold: to prevent theformation of shadow charities by corporate groups which are reallydesigned for investment in their own businesses; and to protect charitiesfrom losing money in the stock market.

Additional limits also apply in Gujarat and Maharashtra under theBombay Public Trusts Act, 1950. While the overall thrust of the law is thesame, the list of approved securities differs somewhat. The provisions ofBombay Public Trusts Act apply only to trusts and societies based in thesestates.

Resource MobilizationThere are no constraints on domestic fundraising anywhere in India,except in Maharashtra and Gujarat, where a fee must be paid to the


India • 157

Charity Commissioner on funds raised by trusts and societies based inthese states. The fee goes towards meeting the administrative costs of theCharity Commissioner’s office, and ranges from zero percent some years toa maximum of five percent under the Act. In practice, however, it general-ly amounts to two percent of the amount raised. Some exemptions anddeductions (i.e., for education) are also available under this scheme.

Nonprofit organisations raising or receiving funds regularly (in currency,in kind or as securities) from foreign sources43 must register themselvesunder the Foreign Contribution (Regulation) Act, 1976. Registration takesup to nine months, once the organisation has established itself and has atrack record of at least three years. Once registered, no quantitative limitsor program constraints apply except for the following: FCRA-registeredorganisations may not get involved in electoral politics, publish a newspa-per containing public news, or pass on funds to other nonprofit organisa-tions unless they also have FCRA registration.

Apart from this, there are some procedural restrictions, such as the require-ment of a separate bank account, separate account books, and an annualfinancial report with audited accounts. The act also provides powers to thegovernment to suspend or cancel FCRA registration,44 levy penalties forviolation of these conditions and undertake inspections. There is a right ofappeal against such government decisions. Once granted, registration israrely revoked. Most of the revocations take place when an NGO becomesdormant and stops filing the annual return of foreign contribution.45

Currently, there are around 25,000 organisations that have FCRA registra-tion. Out of these, only about 70% file the return regularly.

Nonprofit organisations that do not intend to receive funds regularly fromabroad can seek specific permission (termed “prior permission”) when theywant to receive funds. Processing of this form of approval generally takesthree or four months. In order to obtain this permission, NGOs have tosubmit a form FC-1A, along with a copy of the donor’s approval, a copyof the donor-approved project proposal, and copies of financial statements

43 United Nations and related organisations are not treated as a foreign source for this purpose.

44 As distinct from the basic or income tax registration.

45 So far only 10 NGOs have had their FCRA registration cancelled for other, more serious reasons.



for the previous three years. To minimize delays in processing, the rulesprovide that a decision must be taken on an application within 90-120days.

The permission is specific as to recipient, source, amount and programactivities. This means that the permission is non-transferable, and has tobe revalidated if the source or program objectives change. There is no limiton the number of approvals that can be granted concurrently to an organi-sation. Also, in theory, there is no limit on the value of contribution thatmay be allowed under a specific permission. In practice, however, most ofthe permissions tend to be below Rs. 10 lakhs (approx. US $21,000),though there are cases where an NGO has been granted permission toreceive Rs. 2 crores also (approx. US $ 435,000).

The prior permission route appears to be used as a pressure release mecha-nism, and even serves as a confidence-building measure between theFCRA department and a particular NGO. However, it is also a majorhandicap for the smaller NGOs who find the process mysterious anduncertain. Also, it makes it difficult for such NGOs to raise smaller dona-tions from individuals. NGOs that are politically active or are connectedwith political parties cannot get FCRA registration. They can only receivefunds with specific prior permission, by applying in form FC-1A.

FCRA provisions do not allow the transfer of funds by the recipient NGOto another NGO, unless the other NGO also has FCRA registration orprior permission. The objective of this provision is obvious: to ensure thatthe ultimate user of funds is approved by the government. While this is afairly strict provision, in practice, many NGOs pass on funds to others,either deliberately or out of ignorance. In most of these cases, the FCRADepartment lets them off with a warning, although in theory, this can leadto cancellation of FCRA registration and imprisonment.

NGOs receiving foreign funds also have to file an annual financial returnwith the Ministry of Home Affairs, giving details of the funds or other


India • 159

contributions they have received and spent in a financial year. The reportis required to be audited by a public accountant. The ministry also receivesinformation from the Reserve Bank of India regarding the flow of fundsinto various registered bank accounts. This information is used to crosscheck the filed reports in sensitive cases.

These annual returns are also used to compile a report giving an overviewof the funds received in a year by the NGO sector. The report is tabled inParliament and is a public document. It does not give detailed informationof the receipts of each NGO, but provides fairly useful information onoverall flows. Curiously, this is the only reliable statistical report on theflow of funds to Indian NGOs.

The Ministry of Home Affairs has also started providing some of thisinformation on its website, http://www.mha.nic.in. It has also recently putup a complete list of the approximately 24,000 NGOs permitted toreceive foreign contributions, along with their addresses. Such sharing ofinformation can be very helpful in developing statistical information onthe NGO sector in India.

The FCRA Department has a fairly limited infrastructure and resourcesunder its direct control, with a staff of only around thirty. However, itworks in close cooperation with the other intelligence agencies, andappears to be highly effective in its information gathering and analysis.

Analysis

The minimum expenditure requirements under the Income Tax Act wereenhanced from 75% to 85% in 2002. Some restrictions were also placedon deductibility of grants (for income tax calculations) made out of fundsbrought forward. This provision appears to be making financial manage-ment extremely difficult for emerging grantmaking NGOs in India.



The Foreign Contribution (Regulation) Act (FCRA) was originallydesigned in the mid-seventies to restrict foreign interference in India’s elec-tions, and is similar in intent to legislation existing in many other coun-tries.46 The initial requirement from nonprofits was for reporting only, butthis was extended to include registration after the Kudal Commission wasset up by the government in 1982, based on the view that political partiesmay set up shadow nonprofit organisations to channel foreign funds.

Over the years, as the voluntary sector in India has grown, the act hasacquired a larger-than-life image. As of November 2001, 24,204 organisa-tions were registered under the FCRA. This includes universities, religiousorganisations, donor agencies, and development-oriented nonprofit organi-sations. In some ways, the FCRA has distorted the growth of nonprofits inIndia. Many nonprofit organisations are almost totally dependent on for-eign aid for their work. Difficulty in getting FCRA registration has result-ed in a situation where most of the funds only reach a limited number ofestablished organisations. Foreign funds are also comparatively easier toraise than domestic funds, and this has also stunted the growth of domes-tic philanthropy to some extent.

In recent years, there has been some criticism over the dependence of theIndian voluntary sector on foreign donations. Some of this is related to theperceived involvement of some missionary and religious organisations inproselytisation, which is sometimes seen as giving rise to conflict withincommunities. The government has also indicated that it is planning tobring in new legislation47 to respond to the changing profile of the volun-tary sector. The draft legislation is not public yet, but it is expected toimpose stricter accounting and record-keeping norms, involve state-levelofficials in screening NGOs more closely, and place some further restric-tions on quasi-political or proselytisation activities. The likelihood ofstricter legislation has increased with greater international attention on theperceived use of shell charities for laundering terror funds.48

46 They include Albania, Algeria, Brazil, Canada (partial ban), Egypt, France, Germany (partial ban), Israel (partial ban),

Japan, Jordan, Malaysia, Moldova, Poland, Romania, Russia, Spain, Taiwan, Turkey, Ukraine, United Kingdom, United

States, and Yemen.

47 Expected to be called the Foreign Contribution Management Act (FCMA).

48 Combating the Abuse of Nonprofit Organisations is available at www1.oecd.org/fatf. See also the FATF Report on

Money Laundering Typologies 2000-01 (February 2001), available at the same site, and AccountAid Capsules 54,

66, 126, 127, 129, www.AccountAid.net.


India • 161

However, as the Indian economy grows stronger, the dependence of non-profits on foreign funds is also likely to be reduced. A richer India wouldmean that international donors would not need to raise funds abroad andbring these into India. Already several international organisations havestarted raising funds within India. These trends may mean that over thenext couple of decades, foreign contribution flows may become relativelyless significant.

A practical problem which many nonprofits in India face is due to theFCRA provisions that require only one bank account to be used for FCRAfunds. In real life, this makes it difficult for nonprofits to transfer funds tothe field level or to their branch offices, after receiving the funds in themain FCRA bank account.

Recommendations

Nonprofits should be allowed to build up capital through ploughing backof their own surpluses to a greater extent.

Nonprofits should be allowed to transfer FCRA funds to subsidiaryaccounts after the funds are credited to the main FCRA-registeredaccount.

Governance and Accountability

Statutory (Legally Mandated) Governance

The following reflect general statutory (legally-mandated) governanceaspects of trusts, societies and other nonprofit organisations. Specific statutory features may differ in specific states; this overview is intended to



provide a general picture of the situation.

TrustsThe law is silent with regard to the minimum number of trustees requiredto establish and manage a trust. It is argued that a trust can be settled byjust one settlor who may in turn be the sole trustee. However, it is general-ly considered desirable by various registering authorities for two or moretrustees to manage a trust. The charter or trust deed generally specifies theminimum and maximum number of trustees the trust may have. Unlessspecified in the trust deed, the trustees may remain trustees for life.

Trusts generally do not have a general body of members and as such, thereis no statutory necessity for annual general meetings or annual reports formembers or periodic elections.

Trustees may leave office by merely submitting a resignation letter to theboard. The surviving trustees may appoint new trustees by invitation.

The management of a trust or, rather, who manages the trust (i.e., mem-bers of one particular family) does not determine the public nature of atrust. What is essential is whether it inures to the benefit of the public, notwho controls it. All the properties (movable and immovable) of the trustlegally vest in the trustees, and all trustees are jointly and severallyresponsible.

The board of trustees generally meets as often as required. Ideally, theboard may meet four to six times a year. However, this is not statutorilyrequired and may vary. Often, procedures for calling and conductingmeetings are laid down in the trust deed. Fifteen days prior notice is generally adequate. The chairman presides over all meetings of the boardand usually may vote.

A trustee must not, in any way, make use of the trust property or of hisposition as a trustee for his own interest or private advantage, nor may he


India • 163

enter into engagements in which he has or can have a personal interestwhich conflicts or possibly may conflict with the interest of those whomhe is bound to protect.

A trustee may not delegate any of his duties, functions and powers to a co-trustee or any other person — though as a general rule, executive acts maybe delegated. However, where a trustee has to exercise discretion, he mustexercise the discretion personally and cannot delegate it.

In principle, a trustee cannot buy the property of the trust himself and hecannot sell any of his properties to the trust either — the mischief in boththe cases being the likelihood of a conflict between his interest and hisduties as a trustee. Trustees as a general rule, must administer the trust gra-tuitously — voluntary service being the foundation underlying all trustee-ship.

SocietiesSeven or more members of the managing committee or governing councilmay manage a society. A society is structurally more democratic than atrust in as much as a society must have a general body of members withthe power to vote at general body meetings, elect members of the manag-ing committee or remove them if their performance is unsatisfactory, callfor special meetings, and demand examination of accounts and otherrecords.

Members of the managing committee may hold office for such period oftime as may be specified under the by-laws of the society. They may alsostand for reelection.

Members of the managing committee may meet as often as required andthey must call a general body meeting once a year. Procedures regardingmeetings are generally specified in the society’s by-laws.

Members of the managing committee generally serve in a fiduciary capaci-



ty and usually appoint among themselves a president, secretary and treas-urer. The by-laws of a society may be amended from time to time by themembers of the general body.

CompaniesTwo (private companies) or seven (public companies) or more directorsmay manage a Section 25 company. The internal governance of a Section25 company is more or less similar to that of a society.

CooperativesThe general body of members of a cooperative has the ultimate authoritywith respect to the management of the institution, and the law requiresregular election of committees. Further legal requirements include stipula-tions regarding general meetings, annual audits and accounting proce-dures. Cooperative societies are allowed to transfer liabilities and assets toother such societies or to split themselves into two or more societies. Theregistrar of societies and a majority (generally two-thirds or three-fifths) ofthe members, however, must approve such a decision.

The registrar also has powers to direct amalgamation, division, or reorgani-sation of a cooperative in the public interest. The registrar also has theright to supersede elected committees, order new elections, and appointone or more administrators who must be remunerated from the funds ofthe committee. The act limits annual net profit to 5% which, in addition,must be used for the cooperative’s educational purposes. Finally, the actprohibits a cooperative from providing loans to persons other than itsmembers.

Trade UnionsUnder their bylaws, trade unions maintain a list of members of the tradeunion and facilities for the inspection thereof by all members. All mem-bers generally pay a membership fee and there are periodic elections ofoffice-bearers. If a trade union has more than 500 members, its annualaccounts must be audited by a chartered accountant.


India • 165

Personal Benefit RestrictionsA trustee, member of the managing committee, or director of a nonprofitorganisation in India must not, in any way, make use of the property ofthe organisation or of his position for his own interest or private advan-tage; nor may he enter into engagements in which he has or can have apersonal interest which conflicts or possibly may conflict with the interestsof those whom he is bound to protect.

It is a general rule of equity that a trustee should administer the trust gra-tuitously, and this rule applies even though the completion of his under-taking involves considerable loss of time and much personal inconven-ience. Even a solicitor-trustee is not entitled to charge for non-contentiousbusiness, except costs out of pocket.

Voluntary service is the foundation underlying all trusteeship, and the lawprecludes a trustee from making a profit or acquiring a benefit from hisoffice as trustee.

In case a trustee desires to be remunerated for contribution of his time,energy, experience and skill, it would be advisable for him to first resign asa trustee/member of the managing committee and, if the remaining mem-bers of the board so desire, he may be appointed to the post of chief exec-utive, programme director or executive secretary and receive a regularsalary or honorarium, with or without other allowances and benefits.

Obligations to the PublicAll registered nonprofit organisations must file their annual returns a) atthe state level to the charity commissioner/registrar of societies/registrar ofcompanies, b) at the federal level to the income tax commissioner and c)the Ministry for Home Affairs (only if the organisation is registered underthe Foreign Contribution (Regulation) Act).

Nonprofit organisations (except trusts) must call general body meetingsonce a year, hold periodic elections and circulate annual report and



accounts among members.

Any change in address, management board, etc., should be reported with-in the stipulated time to the registering authority.

Prior permission of the charity commissioner is required for buying or sell-ing immovable property of the trust or when seeking loans.

As far as property (movable and immovable) of any nonprofit organisationis concerned, it is the duty of a trustee to take such care as an ordinary,prudent man would take if he were to manage his own property.

Other Funding RestrictionsOrganisations which are registered under either the Trusts Act, theSocieties Act or the Companies Act need not seek any special permissionto raise funds, provided the manner in which funds are raised is lawful. Itis also important for such organisations to be registered with the incometax authorities in order that the funds raised and forming part of theincome of the organisation may be exempt from tax. Having an 80G cer-tificate or exemption under certain subsections of section 35 also providesan incentive (tax rebate) to donors.

All nonprofit organisations who receive foreign contributions or evendonations in Indian currency in India from a “foreign source” must regis-ter under the Foreign Contribution (Regulation) Act or seek prior permis-sion under the act to receive funds (as discussed above).

Funds received from a foreign source must be deposited only in an exclu-sive and specified bank account and a separate set of accounts and recordsmust be maintained exclusively for foreign contributions received andutilised. A return should be filed with the Ministry of Home Affairs within120 days of the closure of the financial year.


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Accountability

Accountability is currently viewed by the nonprofit sector as a multifac-eted concept. We discuss here only the generally accepted view of account-ability, in terms of reporting to regulatory authorities and to the generalpublic.

All nonprofit organisations exempt from income tax, and with grossreceipts of over Rs. 50,000 (approximately US $1,000) are required to filean income tax return annually with the Income Tax Department. Alongwith this, income and expenditure accounts and a balance sheet arerequired, as well as a report in form 10B from the auditor. Form 10Bincludes information on payments to and transactions with trustees or keypersons, use of trust property for personal purpose, investment of funds inassociated concerns, and related issues. The Income Tax Department thenreviews the information and passes an assessment order. It is estimated thatonly about 10-20% of nonprofit organisations are registered with theIncome Tax Department and file their return of income annually. Theaccounts and information provided to the Income Tax Department are notopen to the public.

Organisations which receive foreign assistance are required under Rule 8 ofthe Foreign Contribution (Regulation) Rules, 1976 to file an annualreturn called FC-3 with the Ministry of Home Affairs by July 31 of eachyear (covering the April to March period). This return contains informa-tion on foreign assistance received and used during the year, as well as thebalance in hand at the end of the year. An audit report is also required;along with audited receipts, payments, and balance sheets for foreign con-tributions. The return is reviewed by the FCRA section in the Ministry ofHome Affairs to ensure that funds are not used for political or anti-nation-al activities. The accounts and the return are not open to the public,though the ministry tables a report containing some statistics related toforeign contribution annually in Parliament.



Finally there are requirements to file audited accounts with the govern-ment registrar or commissioner under the registering statute. The law gov-erning nonprofit companies is a central law — all nonprofit companies arerequired to file income and expenditure accounts and their balance sheet,along with an annual return, with the Registrar of Companies in the homestate. In the case of public companies, all three are open to public forinspection on payment of a nominal fee. In the case of private companies,only the annual return and balance sheet are open to the public.

In the case of public trusts and societies, filing requirements depend onthe provisions of the governing statute and vary from state to state. This isshown in the table below.

State Trust SocietyAndhra Pradesh

Telangana Area No requirement No requirementAndhra/Rayalaseema Region No requirement No requirement

Arunanchal Pradesh No requirement No requirementAssam No requirement Balance sheet49 and

audit report to be filed

Bihar No requirement Audited figures of receipts and expendi-ture and annual activity report

Chhattisgarh No requirement Audited balance sheet, income & expenditure report, audit report and report on financial activities to be filed

Delhi No requirement No requirement

49 Income and expenditure account not to be filed.


India • 169

State Trust SocietyGujarat Audited accounts and Audited accounts to

audit report to be filed be filed along with audit report

Goa, Daman and Diu No requirement Audit report to be filed

Haryana No requirement No requirementHimachal Pradesh No requirement No requirementJammu & Kashmir No requirement No requirementJharkhand No requirement Audited figures of

receipts and expendi-ture and annual activity report

Karnataka No requirement Audited accounts andaudit report to be filed

KeralaMalabar Region No requirement No requirementRest of Kerala No requirement Audited accounts to

be filedMadhya Pradesh No requirement Audited balance

sheet, income & expenditure report, audit report and report on financial activities to be filed

Maharashtra Audited accounts and Audited balance audit report to be filed sheet, income &

expenditure report, audit report to be filed

Manipur No requirement Not knownMeghalaya No requirement Balance Sheet, finan-

cial report and audit report to be filed



Accounts, where filed with the registrars, are generally open to publicinspection on payment of a nominal fee. However, this is often quite diffi-cult in practice due to poor filing facilities at the registrar’s office.

Currently, there is no requirement for publishing accounts or for providingcopies of accounts to the public on request. However, some nonprofitorganisations voluntarily include either full financial statements or extractsfrom these in their annual reports. These are circulated among donors andother interested people.

State Trust SocietyMizoram No requirement No requirementNagaland No requirement No requirementOrissa No requirement No requirementPondicherry No requirement Audited balance sheet

and receipts & expen-diture statement to be filed

Punjab No requirement No requirementRajasthan No requirement No requirementSikkim No requirement No requirementTamil Nadu No requirement Audited balance

sheet, receipts & expenditure state-ment and audit report to be filed

Tripura No requirement No requirementUttar Pradesh No requirement Balance sheet to be

filedUttaranchal No requirement Balance sheet to be

filedWest Bengal No requirement Balance sheet and

audit report to be filed


India • 171

Analysis

Concerns about accountability and transparency of the nonprofit sectorhave increased over the years, as the sector has corporatised and grown insize and complexity. The current transnational presence of many organisa-tions, and the sector’s interest in sensitive issues such as human rights andadvocacy has also generated fears about national security and interferencein internal affairs. In some cases, nonprofit organisations have been impli-cated in financial scandals or have faced charges of misuse of funds.

In response to this, many countries have evolved mechanisms to enforceaccountability. For instance, in the United States, all nonprofit organisa-tions (except churches, temples, mosques, and other religious institutions)are required to make their income tax return public. This happened after aseries of high-profile scandals involving several nonprofits became publicin the early 1990s.

Fortunately, Indian nonprofits have not had to go through such trauma sofar. While there have been isolated cases of misuse of funds, these have notattracted much public attention. Yet the need to prevent something likethe American experience remains urgent.

Over the last two decades, there have been sporadic attempts in India tomake the nonprofit sector more transparent in terms of financial affairs.Several organisations are encouraging this on a voluntary basis. There hasalso been some discussion about enforcing this through legislative changes.This has also raised some concerns among development organisations thatfear that this may be used by the government to persecute selected organi-sations.

In 2001, a proposal was made to amend the Income Tax Act, requiringnonprofits (with annual receipts exceeding Rs. 1,000,000) to publish theiraccounts in a local newspaper. The cut-off limit was later enhanced to Rs.10,000,000 in view of concerns expressed by some organisations regarding



expenditures on advertising. In 2002, the provision was withdrawn alto-gether, as some organisations expressed the apprehension that publishingsuch information may lead to their receiving extortion demands.

In private discussions, many organisations feel reasonably comfortablewith publishing accounts or making them available to the public.However, there is also the feeling that there is no need to do so unlessmandated by law.

While the above may give an impression that Indian NGOs are not veryserious about accountability, this is not quite correct. Perhaps here we needto distinguish between accountability and public disclosure. Nonprofitsfeel naturally accountable to their donors, whether these are institutionaldonors or individuals. But the sense of accountability to the general publicis not an automatic response. From this perspective, Indian NGOs areoffering a high degree of accountability to the donor agencies from whichthey receive funds. Organisations that have started raising funds from theIndian public also clearly see the need to disclose financial informationand to be seen as accountable. The enthusiastic response of NGOs to theinitiative of the Credibility Alliance (set up recently) is a clear indicationthat Indian NGOs will become more open on the question of public dis-closure, as they become more serious about raising funds from within thecountry.

The situation varies in the filing of accounts with regulatory authorities,depending on the type of organisation. Public company accounting is rela-tively opaque. Accounting by nonprofit companies is the most transparent.In the case of societies, it varies from state to state: about half the states donot ask societies to file any accounts at all. Filing of accounts with theIncome Tax Department is also limited only to 10-20% of charities, andthese are not open to public inspection. Considering the fact that publiccharities are essentially dealing with public funds, this is not a healthy situ-ation.


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A related question is that of accounting standards and disclosure. TheInstitute of Chartered Accountants of India (ICAI) is the standard-settingand regulatory body for the public accounting profession in India. Whileit has issued standards for commercial organisations, none have been for-mulated or issued for the nonprofit sector. Even the general accountingstandards issued for commercial and other organisations do not apply tononprofit sector (unless the charity is engaged in any income-generatingactivity). This has resulted in a general lack of uniformity and comparabili-ty of information in financial statements in the nonprofit sector.

This situation has been partly remedied by the ICAI’s release of theTechnical Guide on Accounting and Auditing in Not-for-ProfitOrganisations in February 2003. Most of the guide addresses the issue ofapplying existing accounting and auditing standards designed for the for-profit sector to the not-for-profit sector. The guide also provides some use-ful materials on other accounting issues facing NGOs. Because the insti-tute is a highly regarded professional body, a guide issued under its signa-ture will help settle many controversies. The guide has already started aserious debate on the issue of nonprofit accounting and auditing standardsin the voluntary sector and professional circles. There is also an expecta-tion that this debate could eventually lead to the development of standardsdesigned specifically for Indian NGOs.

However, presently, the overall situation is one in which there is relativelylittle public oversight of the nonprofit sector in India. Increased publicscrutiny and access to information can be expected to strengthen the sectorby increasing public trust and enhancing fiscal responsibility.

Recommendations

In order to enhance transparency and accountability, the following infor-mation should be made public by the Income Tax Department through anamendment in the Income Tax Act, 1961: (1) the name, address, and



other relevant particulars of charities approved for tax-deductibility underSections 80G, 35AC, or 35(1)(iii) of the Income Tax Act, 1961; and (2)the amount of funds reported as raised annually by each of these organisa-tions under the relevant tax-deductibility provisions.

In addition, the Income Tax Act should be amended so that charities offer-ing tax-deductibility to donors and raising funds from the public will berequired to publish summary accounts on the internet or in newspapers,and also provide copies of full audited accounting statements on request.

Rules and procedures should be framed under the FCRA to make publicbrief information regarding foreign contributions received and utilised byeach organisation registered under the FCRA.

The Companies Act, 1956 should be amended to allow public access tocomplete audited accounting statements and annual returns of privatecompanies given nonprofit licenses.

The Societies Registration Act, 1860 and its equivalents in various statesshould be amended to require registered societies to file audited financialstatements (balance sheet, receipts & payments account, and income &expenditure account, along with an audit report) with the registrar.

The application of the Indian Trusts Act, 1882 should be extended topublic charitable trusts, and the act should provide for filing of annualaudited financial statements with the Registrar of Societies. Alternatively,the application of Societies Registration Act, 1860 and its equivalents indifferent states should be extended to bring public charitable trusts withinits purview.

The Preface to the Statements of Accounting Standards issued by the Instituteof Chartered Accountants of India should be revised to extend the applica-tion of these standards to the nonprofit sector as well.


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Self-Regulation

A self-regulating framework built by the nonprofit sector (from within thesector) that allows for the establishment of norms; their promotion andadoption; and, more importantly, the certification or validation that thenonprofit organisation concerned meets these norms; can go a long way torestoring confidence among all stakeholders. In recent years, a number ofself-regulation experiments and initiatives have emerged in India, one ofthe most active areas in Asia for these kinds of processes.50

The “Credibility Alliance” is such a voluntary initiative (so far it is not aformal registered body) with representatives from various national non-profits which has recommended “minimum norms” for enhancing thecredibility of the voluntary sector’. The minimum norms cover three areas:identity (the organisation should exist and be registered); vision andimpact (the organisation should state what it aims to do and state achieve-ments related to its aims); and governance (the organisation should becommitted to and practice good governance especially because voluntaryorganisations draw upon public funds). Some organisations have alreadybegun to implement these norms and guidelines, though compliance isstrictly voluntary.

Recently the Ministry of Health and Family Welfare, Government of Indiarequested that the Society for Services to Voluntary Agencies (SOSVA)carry out a feasibility study for creating a National Evaluation andMonitoring Agency (NEMA) for the voluntary sector. It is proposed thatNEMA would evaluate nonprofits with the object of certifying the gen-uineness of the organisation based on certain minimum norms. NEMAwill essentially focus on “validation” rather than “ratings.”

In like manner, the Charities Aid Foundation (CAF) India together withthe Planning Commission has undertaken efforts toward validation of vol-untary organisations, including a large national project. IndianNGOs.comhas also begun a similar exercise.

50 For further information on self-regulation initiatives and experiments in India, see also Mark Sidel, Trends in Nonprofit

Self-regulation in the Asia-Pacific Region: Initial Data on Initiatives, Experiments and Models in Seventeen Countries

(Paper prepared for the Asia Pacific Philanthropy Consortium, August 2003, available at

www.asianphilanthropy.org/staging/about/NonprofitSelfRegulation.pdf).



One of the strongest arguments in favour of good self-governance isenhanced public credibility. And this confidence usually translates intogreater public support, both moral and financial. The greater the trans-parency and accountability; the greater the general public visibility, confi-dence and support.

There are several issues concerning self-regulation in India. Conflict ofinterest, remuneration to board members, and frequency of meetings andtheir quality and content are among the key issues. Conflict of interestrefers to the large numbers of nonprofits in India that are controlled bymembers of the same family. The remuneration issue arises because theIncome Tax Act allows “reasonable remuneration” to board members with-out defining the term “reasonable.” Board members of a large number ofnonprofits in India work on a remunerative basis. These are areas thatwould certainly benefit from greater self-regulation in the Indian nonprofitsector.

Self-Regulation and BoardsContrary to popular opinion and belief in India the role of a board oftrustees or directors is complex and demanding. Some of the legal require-ments as well as the rights and duties of a board in India are:

• the funds, properties and assets of the organisation legally vest in theboard of trustees;

• the board should be acquainted with and endeavour to advance the“aims and objects” of the organisation;

• the board should operate the organisation within the framework ofthe organisation’s own charter and the statutes governing the organisa-tion;

• board members should not derive any personal benefit from theorganisation;

• the board is jointly and severally responsible; • the board should oversee administration and accounts;


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• and it should set policy through process of periodic meetings and res-olutions.

More generally, the major stakeholders, who include donors and benefici-aries, expect boards to provide leadership and vision; give the organisationa sense of direction; set policy; take responsibility; hold the organisationtogether; motivate staff; mobilize resources; build and nurture an ethical,sensitive, and motivated and responsible team; and discourage exaggeratedor misleading claims.

The statutes do not lay down the minimum number of times board mem-bers must meet. It would be beneficial if nonprofits laid down guidelinesor bylaws for the organisation in terms of the minimum number of meet-ings. Nor does the law provide the qualifications required of a board mem-ber. The law in India is not even clear as to whether a foreigner can serveon the board of a nonprofit. Under company law a person is restricted injoining as a director of only a specified number of companies. There is norestriction with regard to nonprofits and it is not difficult to find individu-als who simultaneously serve on the board of fifty trusts. Whether theindividual is simply lending his or her name to the organisation withoutany substantial contribution or aspiring to “earn name and fame” withsuch a boast is debatable. But some restriction in this regard is necessary,and if statutory law will not provide this then perhaps self-regulation canplay a useful role.

Conclusions and Recommendations

Legal Status, Registration and Purposes

Registration procedures often drag on for months. The Public Trusts Actsapplicable in various states lay down the procedures for registration,including a checklist for the registering officer. What it fails to stipulate is



the maximum timeframe within which the application for registrationshould be disposed, and the law should mandate this.

Under the Foreign Contribution (Regulation) Act (FCRA) an applicationfor “prior permission” to receive foreign funds should be disposed of with-in 90 days. However there is no timeframe given with regard to “registra-tion” under the act. Organisations that are less than three years old arerefused FCRA registration. Even “prior permission” to receive foreignfunds is often denied without reason.

In India, while it is permissible to create a valid nonprofit organisation forthe exclusive benefit of a particular community or religious denomination,the organisation would not be entitled to the various tax exemptions avail-able to secular nonprofit organisations. While it is quite understandablethat the Constitution of India has established a secular state and hasattempted to do away with all distinctions of caste, colour and creed,many feel that the tax law is rather unfair with regard to nonprofit organi-sations seeking to work at a more focussed level.

It is recommended that there should be “single window clearance” withregard to registration of nonprofits. The system of dual registration forsocieties in states like Maharastra and Gujarat should be done away with.A suitable timeframe should be legislated for processing applications forregistration. The term “nonprofit” or “not-for-profit” should be properlydefined and incorporated in Indian law books. Even terms like NGO,PVO etc., are used colloquially and not recognized or incorporated inIndian law books.

Registering officers should be given clear guidelines by the Ministry ofFinance regarding the definition of “charitable purpose,” and acquaint allregistering officers with some of the new development terminology.Central law should prevail over state laws, with respect to such matters.

Perhaps, it may be worth considering the idea of scrapping all the present


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choices available for legal status (trust, society, company) and introducinga single, new, comprehensive, federal “Indian Not-for-Profit Act” whichwould be uniformly applicable to all nonprofits throughout India. Tosecure uniformity and to avoid irreconcilable conflict of laws on the sub-ject, many feel it is advisable to have a central law with respect to “chari-ties” or “nonprofits” enacted by Parliament for the whole of India or anyparts thereof. Article 245 of the Constitution of India empowersParliament to make laws for the whole or any part of the territory of Indiaand the legislature of a state to make laws for the whole or any part of thestate. Parliament, alone, is thus competent to make laws applicable toIndia or one or more states, including Union territories.

The Fiscal Regime: Tax Exemptions and Deductibility

• Certain information should be made public by statutory mandate inorder to enhance the accountability of the nonprofit sector. Thisincludes (1) The name, address, and other relevant particulars of char-ities granted tax-exempt status under sections 10(23C) and 12A of theIncome Tax Act, 1961; and (2) an annual statistical report on the totalnumber of exempt charities, returns filed, income and funds.

• In addition, exempted charities should be directed to fulfil publicrequests for financial information, such as audited accounts.

• Grantmaking agencies should be permitted to make tax-deductiblegrants to other charities from accumulated funds.

• The structure of the Income Tax Act should be revamped so far as itdeals with nonprofit organisations, recognising the changes in thestructure of the sector over the last three decades.

• Clearer tests should be established for distinguishing between public-benefit organisations and commercial organisations using a nonprofitshell or associate as a cover.

• Charities should be exempted from collecting and paying service tax.• Procedures relating to sales tax exemption for charities should be sim-

plified.



• Provisions to combat the claiming of false donations and deductionsshould be strengthened. These would apply only to charities thatobtain approval for tax-deductible donations. Steps may include (1)public notification of charities approved under section 80G; (2) publicreporting of funds raised by each approved charity, including the dutyto provide information requested by prospective individual donors; (3)special audits of charities approved for tax-deductible donations on arandom basis; (4) stipulation that donations above Rs. 10,000 are tobe given only by account payee cheque or bank draft; and (5) closerscrutiny of charities when applying for approval for tax-deductibledonations

• Higher penalties should be imposed on taxpayers found claiming falsedonations.

• Religious charities should be recognized on the same footing as socialcharities.

• A mechanism should be introduced to allow deductions for giving inkind, where the donation can be valued and title transferred (motorvehicles, land, shares, etc.).

• Provisions limiting deductible giving to a percentage of taxableincome should be removed.

• Carry-forward of donations not covered by current year’s incomeshould be allowed.

• Nonprofits should be allowed to build up capital through ploughingback of their own surpluses to a greater extent.

• Nonprofits should be allowed to transfer FCRA funds to subsidiaryaccounts after the funds are credited to the main FCRA-registeredaccount.

Governance, Accountability and Self-Regulation

• In order to enhance transparency and accountability, the followinginformation should be made public by the Income Tax Departmentthrough an amendment in the Income Tax Act, 1961: (1) the name,


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address, and other relevant particulars of charities approved for tax-deductibility under Sections 80G, 35AC, or 35(1)(iii) of the IncomeTax Act, 1961; and (2) the amount of funds reported as raised annual-ly by each of these organisations under the relevant tax-deductibilityprovisions.

• In addition, the Income Tax Act should be amended so that charitiesoffering tax-deductibility to donors and raising funds from the publicwill be required to publish summary accounts on the internet or innewspapers, and also provide copies of full audited accounting state-ments on request.

• Rules and procedures should be framed under the FCRA to makepublic brief information regarding foreign contribution received andutilised by each organisation registered under the FCRA.

• The Companies Act, 1956 should be amended to allow public accessto complete audited accounting statements and annual return of pri-vate companies given nonprofit licenses.

• The Societies Registration Act, 1860 and its equivalents in variousstates should be amended to require registered societies to file auditedfinancial statements (balance sheet, receipts and payments accountand income and expenditure account, along with audit report) withthe registrar.

• The application of the Indian Trusts Act, 1882 should be extended topublic charitable trusts, and the act should provide for filing of annualaudited financial statements with the Registrar of Societies.Alternatively, the application of Societies Registration Act, 1860 andits equivalents in different states should be extended to bring publiccharitable trusts within its purview.

• The Preface to the Statements of Accounting Standards issued by the Institute of Chartered Accountants of India should be revised toextend the application of these standards to the nonprofit sector as well.
