How to Establish an NGO in India

By Grace Tate

Posted: 5th January 2015 09:24

The Indian government has long been wary of foreign political interference through the operation and funding of non-governmental organizations (NGOs). As a result, the current legislation affords regulatory discretion to the government by prohibiting foreign funding for political organizations and imposes onerous reporting requirements for all NGOs. Recent intelligence reports have sparked fears that these laws are undergoing government reform to further restrict NGO operation in India.
 
This article will examine the country’s current national policy and regulations for establishing NGOs. Next week, International Business Specialist Adam Pitman takes a closer look at the political and economic factors underpinning the reform.
 
The System
 
NGOs in India generally assume three legal forms: society, trust and limited company. These entities are heavily regulated by state and federal government agencies. At the state level, an NGO can be registered as a: society under the Registrar of Societies, a public trust via execution of a trust deed or a limited company under section 8 of the Companies Act 2013. At the federal level, the Income Tax Department and Ministry of Home Affairs (Home Ministry) regulate registration, and require all NGOs to file annual tax returns and audited account statements to their respective agencies.
 
Societies, trusts and limited companies are treated equally under the Income Tax Act. In order to be eligible for tax exemption, an NGO must be organized for a charitable purpose. Charitable purposes include ‘relief of the poor, education, medical relief, and the advancement of any other object of general public utility.’ Once a charitable purpose has been established, the organization is entitled to income exemptions and may apply for an 80G certificate to enable donors to claim tax rebates against their donations.
 
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Barriers to Foreign Funding
 
The Foreign Contribution (Regulation) Act 2011 (FCRA) prohibits foreign funding for organizations of a ‘political nature’ and imposes additional requirements for NGO receipt of foreign funding.
 
The definition of ‘political nature’ is vague and affords the Central Government much discretion with regard to its application. According to the 2011 Foreign Contribution (Regulation) Rules (FCRR), organizations are ‘political’ if they have ‘political objectives’, comment upon or participate in ‘political activities’, or employ various methods of political protest and civil resistance, among other criteria.
 
Under the FCRA, all NGOs wishing to accept foreign contributions must:
 
 - Register with the Central Government;
 - Agree to accept contributions through designated banks; and
 - Maintain separate books of accounts with regard to all receipts and disbursements of funds.
 
In addition, NGOs must report all foreign contributions to the Central Government within 30 days of receipt and file annual reports with the Home Ministry. The report must include: the amount of the foreign contribution, its source, the manner in which it was received, the purpose for which it was intended, and the manner in which it was used. Foreign contributions include currency, securities, and articles. The definition extends to funds collected by an Indian citizen in a foreign country on behalf of an NGO registered in India. Furthermore, funds received in India, from a foreign source, in Indian currency, are classified as foreign contributions.
 
Qualifying for Tax Exemption
 
Under the national Income Tax Act (1961) and the Finance Act (2014) NGOs may qualify for tax-exempt status if the following conditions are satisfied:
 
 - The organization must be a registered NGO according to Indian law;
 - The organization must be formed for religious or charitable purposes;
 - The organization must spend 85 percent of its income in any financial year on the objects of the organization;
 - Income or property of the organization must not be applied for the benefit of the founder, trustee, relatives of the founder or trustee or a person who has contributed in excess of IRS 50,000 to the organization in a financial year;
 - The organization’s income must be applied or accumulated in India. However, trust income may be applied outside India to promote international causes in which India has an interest, without being subject to income tax;
  - The organization must timely file its annual income return;
 - The organization must keep a basic record (name, address and telephone number) of all donors; and
 - The funds of the organization must be deposited as specified in Section 11(5) of the Income Tax Act.
 
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Tax Benefits
 
NGOs operating in India enjoy similar taxation benefits as in other Commonwealth countries. The general benefits available to NGOs include:
 
 - Income incidental to the charitable purpose is not subject to corporate income tax.
 - The sale of certain goods and services are subject to VAT, with most goods and services taxed at 12.5 percent. VAT liability arises only if the total turnover of sales is Indian Rupees (IRS) 500,000 (approximately US$8,000), or IRS 100,000 (approximately US$1,600) if the dealer is an importer.
 - Donors are entitled to a 50 percent deduction for donations to NGOs and a further 100 percent deduction for donations to listed charities.
 - NGOs involved in relief work and in the distribution of relief supplies to the needy are 100 percent exempt from Indian customs duty on the import of items such as food, medicine, clothing and blankets.
 
The current legislation has had far-reaching implications for the effectiveness and sustainability of civil society organizations in India. As a result, the debate is rife as to whether this structure reflects the makings of an autocratic rule over Indian civil society or critical democratic measures enlisted to aid growth and protect the country from inadvertently facilitating insurgent militants, terrorism and corruption.
 
In any case, the actions of the Indian government should not be viewed as a condemnation of foreign NGOs. NGOs seeking to register should not be deterred by the administrative burden and endeavor to forge closer relationships with state government agencies through diligent adherence to administrative procedures.
 
This article was first published on India Briefing.
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
For further details or to contact the firm, please email info@dezshira.com or visit www.dezshira.com.

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