FCRA Compliance in India: How 24,000 NGOs Lost Their License

By Dezan Shira & Associates

Posted: 6th October 2017 08:15

Earlier this month, the Ministry of Home Affairs (MHA) cancelled licenses for 4,800 non-governmental organizations (NGOs) in India. The NGOs had not filed annual returns between 2011 and 2015 in accordance with the Foreign Contribution Regulation Act, 2010 (FCRA).
 
The MHA said some cancellations occurred because the NGO was not required to report foreign contributions, as is the case for some higher education institutions. The majority, however, had simply failed to complete their returns.
 
Many businesspeople in India will find it difficult to sympathize with affected NGOs. The MHA warned the NGOs, granted a one-time exemption, and recently announced a one-month extension.
According to an MHA public notice in May 2017, NGOs that had not filed their annual returns between 2011 and 2015 could make good by reporting their financials between May and June 2017. After more than 4,800 NGOs lost their licenses for failure to comply in September, the MHA gave them another month until October 18, 2017 to comply.
 
In this context, the NGO sector’s ambivalence to financial reporting appears shocking. What is perhaps more shocking, however, is the sheer number of NGOs that have lost their license since Narendra Modi took office – over 24,000 and counting.
 
Many in the sector defend themselves as victims of compliance creep; the Modi government has culled nearly two-thirds of the 33,000 NGOs it inherited from its books.
 
Foreign observers struggle to interpret the situation. Does the NGO sector suffer from a culture of non-compliance? Are NGO regulations broken? Does the government have dubious interests?
 
In India, one might call this a khichdi, or mixture, of all of the above.
 
NGOs in India are categorized under three legal categories: society, trust, and a limited company. They may be founded for a specific cultural, economic, educational, religious, or social purpose. These organizations are heavily regulated by respective state and federal government agencies.
 
At the state level, an NGO can be registered as any of the following:  
At the federal level, the Income Tax Department (IT Department) and MHA regulate registration, and require all NGOs to file annual tax returns and submit audited account statements to their respective agencies.
 
All types of NGOs are treated equally under the Income Tax Act of 1961.
 
In order to be eligible for tax exemption status, an NGO must be founded for a charitable purpose. As defined in India law, ‘charitable purposes’ include relief for the poor, education, medical relief, and the advancement of any other object of general public utility.
 
Once this status is established, charitable organizations can apply for an 80G certificate to enable donors to claim tax rebates against their donations.

The regulation of foreign funding of NGOs
 
The FCRA, 2010, the FCRA Rules, 2011, and FCRA Amendment Rules, 2015 were respectively enacted to regulate the inflow of foreign funds received by NGOs. The FCRA, 2010 replaces the erstwhile Foreign Contribution (Regulation) Act of 1976.
 
Key terms stipulated in the FCRA legislation state that an organization cannot receive funding from a foreign source, unless it is registered under the 2010 Act or has obtained special government approval for a specific project. In addition, registered NGOs have to comply with various post-registration requirements, as detailed in the provisions of the Act and its rules of enforcement.
 
The federal MHA is the nodal agency responsible for monitoring and implementing the FCRA rules.
 
Scope of the Act
 
The FCRA and its enforcement rules regulate “foreign contributions” received from “foreign sources”, whereby such ‘sources’ are entities established in a foreign territory.
 
The Act categorically defines ‘foreign contributions’ as a donation, delivery, or transfer made by a foreign source of:
   
Registration and prior approval
 
Once approved by the MHA, NGOs are legally entitled to accept foreign funds under the FCRA.
 
To obtain this eligibility, NGOs can either opt for special permission or go for a long-term registration that is valid for a period of five years.
 
In the case of the former, MHA approval must always be sought prior to receiving contributions. In the case of the latter, NGOs only have to apply for renewal six months prior to the ending of the registration period.
 
Foreign funding
 
NGOs have to open and maintain bank accounts, which will exclusively deal with the receipt and utilization of foreign contributions, as required under FCRA rules. A separate set of accounts and records must be maintained, exclusively for these transactions.
 
The FCRA also mandates that foreign contributions must be utilized only for the purpose for which they were received. Under Section 7 of the FCRA, the transfer of contributions is not allowed.
 
A person or entity is prohibited from transferring contributions to any other person, unless such transferee is authorized by the government to receive foreign contributions.
 
Reporting requirements
 
The most important reporting requirement under the FCRA is the submission of annual returns. All NGOs are required to submit their annual returns to the federal government within nine months from the closure of the previous financial year.
 
This return has to include all the details of the contributions received, namely:  
Given the recent actions taken by the government against several NGOs, it is imperative that all such entities that receive foreign funding review the updated FCRA norms and meet their compliance obligations meticulously.
 
Once under the government scanner for non-compliance, such organizations may face all manner of restrictions and regulatory obstacles.
 
New normal for foreign-funded NGOs in India?
 
FCRA compliance does not appear overly complicated. The FCRA, 2010, FCRA Rules, 2011, and FCRA Amendment Rules, 2015 are plain as day.
 
But most businesspeople in India can tell you that NGOs have more reporting compliance requirements and stipulations than private companies that receive foreign revenue or remittances.
 
While many industries in India are impacted by convoluted, and fluid, regulations, the FCRA is a unique challenge for NGOs precisely because it is designed to curb foreign financing.
 
In 1976, then Prime Minister Indira Gandhi’s government implemented the FCRA during ‘the Emergency’, which occurred between 1975 and 1977. She ruled by decree, suspended democratic exercises, and curbed civil liberties during this period. The FCRA was one law implemented during this time; it limited the agency of foreign financed NGOs in the country.
 
In 2010 and 2011, the Congress-led government overhauled the FCRA, increasing the MHA’s powers and the number of compliances for NGOs. Notably, the overhaul followed several high-profile protest campaigns supported by foreign funded NGOs against critical infrastructure projects, including the Kudankulam Nuclear Power Plant in Tamil Nadu state.
 
Given the number of NGOs that did not file returns between 2011 and 2015, it appears that not many foreign financed NGOs took notice of the 2010 reform. Perhaps these NGOs assumed that the reform would only affect NGOs that targeted government infrastructure projects.
 
They may have been right during the dog days of the Congress-led government, but anti-corruption was very much at the front and center of the 2014 national elections. Modi managed corruption differently than his opponents in that election: he promised transparency and ease of doing business.
 
Transparency translated into compliance once Modi formed a government. Modi has worked doggedly to foster a culture of compliance; the NGO sector was one of the first to feel the brunt of this campaign.  
 
In April 2015, the government placed the Ford Foundation, a charitable US-based organization, on a watch list allegedly funding groups acting against India’s national interests. This implicated the NGO of renowned civil rights activist Teesta Setalvad, which had received funds from the Ford Foundation, and was accused of creating ‘communal disharmony’ by the government of Gujarat for investigating the state’s communal riots in 2002.
 
Soon after, in September 2015, the MHA cancelled Greenpeace’s license and froze its bank accounts under the FCRA, alleging that the environmental group was working against “the country’s economic progress and public interest”. The MHA said the NGO violated laws when the NGO opened five bank accounts to use foreign donations without informing the concerned authorities.
 
Both NGOs were censured as part of larger FCRA dragnets in which thousands of NGOs lost their license. Then US Ambassador to India Richard Verma condemned the “potentially chilling effects of these regulatory steps focused on NGOs.”
 
By December 2015, the government notified FCRA Amendment Rules, 2015. The new rules moved most all NGO reporting requirements online, but perhaps more importantly, narrowed the scope and purpose for foreign financing, and increased the frequency of reporting it to every three months.
 
Over 24,000 NGOs have now lost their licenses. The MHA has cited various compliance failings, including the inability to meet reporting requirements and failure to file financial returns over long periods.
 
The MHA’s amnesty earlier this year – which granted a one-time exemption to organizations who were seeking NGO registration renewal under the FCRA, but had not uploaded their annual returns from 2011 to 2015 – suggested that the government had taken in interest in making compliance easier.
 
But the same week the subsequent suspensions were announced, the MHA sent a warning to 1,000 NGOs to validate the bank accounts they use for foreign contributions.
 
Those that fail can be prosecuted, while those that received foreign contributions into multiple bank accounts are also liable for censure. After clearing the deck of NGOs that failed to report their financials, the MHA is now after NGOs that may have violated FCRA stipulations for banking.
 
There is no easy way out for NGOs. Given the demanding regulatory environment, and the government’s interest in enforcing its difficult regulations, foreign financed NGOs can no longer afford to take compliance lightly.
 
This article was first published on India Briefing.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India, and ASEAN, we are your reliable partner for business expansion in this region and beyond.

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