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Why NGOs are ending up on the wrong side of the law

Posted by: 2015-08-19 14:14:34 , By Business Standard

Since May last year, about 11,000 non-governmental organisations (NGOs) have found themselves on the wrong side of the Foreign Contribution (Regulation) Act, 2010, (FCRA). As such, their licences to accept foreign funds have been cancelled. Experts say most such NGOs are on a sticky wicket when it comes to compliance with various provisions governing them.

Laws governing NGOs
Primarily, India's NGOs are divided into three segments - societies, trusts and charitable companies.

Societies are either registered under the Centre's Societies Registration Act, 1860, or a state government's version of the law.

While private trusts are registered under the central government's Indian Trusts Act, 1882, public ones are registered under the state legislation concerned.

Charitable companies are set up according to section 8 of the Companies Act, 2013.

There is another cluster, religious institutions, which can be registered under laws such as the Wakf Act, 1995 and the Charitable and Religious Trust Act, 1920.

"Formation and registration of NGOs, either as trusts or societies, do not involve a lot of complexities. Small NGOs, too, are able to register themselves without any professional help under these Acts," says Aakanksha Joshi, associate partner, Economic Laws Practice. "However, registration as a section 8 company under the Companies Act, 2013, is more complex and time-consuming."

For charitable companies, "compliance requirements are high, as loans and advances are easily available to a charitable company, compared to a trust or a society", says Pratap Ray, general manager (finance and governance), Smile Foundation.

All such NGOs come under the purview of the Income Tax Act, 1961. While societies or trusts are liable to get their income (donation) exempted from tax, a charitable company has to pay taxes, according to the profits shown in its balance sheet. Also, depending upon the geography, various other laws also come into play.

Foreign funding
According to the FCRA, any NGO that accepts foreign contribution has to register with the central government. Such contributions can only be accepted through designated banks.

Further, the NGO has to report to the central government any foreign contribution within 30 days of its receipt, in addition to filing annual reports with the home ministry. It must also report the amount of foreign contribution, its source, how it was received, the purpose for which it was intended, and the manner in which it was utilised.

In case of non-compliance with provisions of the FCRA, the government can penalise an NGO and, subsequently, suspend or cancel its licence. If these NGOs don't file annual returns, the government can issue a show-cause notice and, subsequently, suspend or cancel their foreign funding licences, as it deems fit.

Common lapses
"Many NGOs don't have sophisticated finance and legal teams, nor do they have the funds to conduct audits," says Mohit Ab

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