Amendments to Finance
Act 2009
Note that these interviews are taken in the year 2009 when
tax amendment brief was announced.
Ila Dikshit Hukku
Director - Strategic Planning, Finance and Information Technology
Ila D. Hukku is the Director – Strategic Planning
for CRY-Child Rights & You. She is an alumnus of IIM Calcutta
and before joining CRY in 1998, has worked in the areas of Corporate
Planning and Finance in the Eicher Group’s Tractor, Corporate
and Consulting businesses, and in the Textile SBU of the Aditya
Vikram Birla Group. Ila joined CRY as the Manager Planning and in
’02 moved to heading the Development Support function where
she was responsible for the organisation’s grant making and
strategic alliance building work in the development sector. In Jan’09
Ila has moved back into Strategic Planning overseeing the formulation
and implementation of CRY’s long term strategy, as well as
the Finance and Information Technology functions.
What is the impact of recent amendment in Finance Act 2008 on the
activities of CRY?
An Amendment in the definition of “Charitable Purpose
has created difficulties for many NGOs including CRY. The major
issue that CRY face with it is that it opens up to the assessing
officers and places in his or her hands the great deal of power
to interpret what exactly of their commercial activities are incidental
to business which are not incidental to objects of the trust. The
focus of our work is on the children’s rights, their education,
health and their protection. In the context that the work we do,
has element which could be interpreted also as being of general
public utility. If someone wants to stretch upon, they will say
it is general public utility where CRY could continue arguing that
it is all about education, health of children and relief of poor.
CRY does not want to get into a kind of situation where they need
to spend a huge amount of time and energy behind sorting out these
issues only with income tax authorities. Unfortunately, the amendment
in the act has created that condition for many NGOs like CRY who
are actually doing genuine work and not doing any commercial activities
only for the sake of profit and to distribute among shareholders
or owners.
Are there any advocacy efforts by your side?
When this amendment came out, CRY spoke to many of the other organizations
who were similarly affected and trying to do something for this
and CRY gave their inputs to them. CRY did not directly front any
advocacy efforts but they have participated in advocacy which is
being done by other organisations. CRY also advised their partners
about how they might have to look in to their work so that they
should not get caught in to the tax net. One important thing is
that if we see the period in which amendment was done, was not enough
for NGOs to changeover and also to do the advocacy. The notification
was sent in May 2009, whereas it got implemented from April 2009.
Here in this case, normal grace period that would be granted to
such large change has not been actually offered.
Is there anything else to share which seems important for
whole sector?
The entire sector needs to be very aware about the direct
tax code that has just been circulated for public opinion. As a
sector we need to act together. We also need to articulate our voice
very clearly to the government. Because here again a set of provisions
which are likely to impact the NGOs that are actually doing genuine
work. So, through IndianNGOs.com, CRY’s appeal would be to
all organizations to actually read the bill. Practitioners in this
sector also need to meet up, to talk to tax advisors, to talk to
other organizations on advocacy front like Accountaid, VANI and
even IndianNGOs itself in terms of making entire sector aware of
the shortcomings of the current bill. It is also needed to articulate
what are the realities of the ground and the sector which is not
adequately being taken care of in the draft code bill.
Mathew Cherian
CEO - Help Age India
Mathew Cherian is an Engineer by training and has worked
in the voluntary sector for 25 years. He has been National Director
of Oxfam in India and founder Director of CAF in India and Founder
of Credibility Alliance and network on Human Rights. Presently serves
on the Steering Group of Indian Planning Commission, Govt of India
and on the National Human Rights Commission. Mathew is presently
the Chief Executive of HelpAge India, one of the leading Indian
NGO.
What is the impact of recent amendment in Finance Act 2008 on the
activities of NGO?
The impact is going to be very severe, because various
activities might be treated as commercial by our income tax authorities.
For example, our greeting cards operation would be considered as
commercial as there is a sale involved in it. There also would be
a problem for certain activities which we are carrying out through
contract. People ask us to advice on how to build an old age home,
how to deliver health care programmes, so we do consulting for this
purpose. Our other programmes will go as it is, except that additional
15% tax we have to pay on the balance.
What you have thought to minimize this impact?
We have decided to take the issue with ministry of finance
and concerned income tax officials, so that the voluntary sector
will have the better financial arrangement. The governments seem
to a completely negative towards NGOs. This reform will destroy
the voluntary sector. There will not be any change in ourselves
but we want government to change. We are involved in advocacy and
lobbying efforts to change the law so that NGOs will have a better
playing field. Always the law seems to be favoring with corporate
sector and those who make money and whereas social sector has been
never given a level playing field. But when the government meets
NGO sector, they ask us for various favours and various things to
be done which their own administrative machinery has never been
able to do.
Is there anything to share which will be beneficial for
other NGOs also?
Tax free environment for NGOs should be liberalized. Most
of misuse of available provisions is being done by big hospitals
like Apollo and Max Hospitals. Therefore, there should be a separate
law for the NGOs who want to work genuinely and tax concessions
should be given to them. All the educational institutions run by
politicians and institutions set up by retired beaureocrats should
not get tax exemptions. Instead of this, the organisations working
for poor should get tax benefits.
Noshir Dadrawala
Executive Secretary - Centre for Advancement of Philanthropy
Mr. Noshir H. Dadrawala is CEO of the Mumbai based “Centre
for Advancement of Philanthropy” specializing in the area
of nonprofit law and good governance practices for nonprofits. He
is one of the Directors of the Asia Pacific Philanthropy Consortium
(APPC), member of the Coordinating Committee of Worldwide Initiatives
& Network of Grant-makers (WINGS), Fellow of the Centre for
Study of Philanthropy (New York) and member of the advisory council
of the U.S. based International Centre for Not-for-profit Law. He
has written several resource books on Successful Fund-Raising, Management
of Philanthropic Organizations, Laws Governing Voluntary Organizations
in India, Merchants of Philanthropy and FAQ on Trusts Act, Income
Tax & FCRA
What will be the impact of Amendment made in Finance Act
2008 on NGO sector?The current amendment has come in to
existence with retrospective effect from April 2008. Therefore income
tax with its new structure will be paid in current financial year
2009-10, although the budget has come recently. Those who are involved
in the relief of poverty, education, health care will not be affected
by this amendment. Only those who fall under the fourth limb of
“charitable purpose” such as the advancement of any
other object of general public utility will be affected. In this
regard also, if they are involved in any trade, commerce or business
activity, they will in trouble but otherwise for any other practical
purpose it will be treated as charitable purpose.
If NGOs are getting donations for their regular activity, then it
is fine but if you are carrying some trade or commercial activity
out of these donations, then there will be a problem. There will
be major impact on business activities and not necessarily on profit
making activities. In other words the activities like putting up
the show or renting out the hall will not be affected. Income from
consultancy will also not be affected.
How the NGOs should make themselves protected from this
amendment?
The NGOs should not indulge in to any business activities like selling
greeting cards etc. They will have to be dependent on the voluntary
donations and their regular charitable activities. This is the only
way out for them. Consultancy activities are not any trade or commercial
activities but if an intellectual content which comes in this purview,
therefore they might be affected by service tax. It has to be taken
in to notice that the whole income will be considered for charging
tax and not only the particular activity of trade or business. So
that total exemption on entire income will be lost. Let us say that
if there is profit of Rs. 10 out of business activities and Rs.
90 has come from donations, so the tax is not on that Rs. 10, but
it will be charged on the entire income.
What is the reason or motive behind this amendment?
Government has not made this amendment in order to control, but
this is the strategy to punish the organisations that are carrying
out activities with minimal taxes and only for profit making purpose
rather than social motives. The amendment has taken place because
of Gujarat Maritime Board which was enjoying lot of tax exemptions.
This amendment has been done mainly to secure the Board of Charities
of our Country.
What kind of Advocacy efforts are being made in this respect?
There are advocacy efforts from many NGOs from Delhi like VANI and
all others. These efforts are basically to stop the new tax code
which is going to come in the winter session of the parliament that
is going to complete overhaul Income Tax Act. It will come into
effect from next year. And such reforms will be applicable for all
charitable purposes including relief of poverty, education, health
services etc, wherein all will be suffered very badly. 35AC will
also become liable for taxation which we can say a major change
in tax structure. Therefore there will not be 100% deductibility
for donors if they donate for 35AC activities. There are more dangerous
clauses coming up in new tax code, where there will be 15% tax on
any surplus money carried forward by NGOs. There are far reaching
consequences on charities in development sector.
Dr. Rajesh Tandon
Chairperson VANI and founder PRIA
Dr. Rajesh Tandon is an internationally acclaimed leader
and practitioner of participatory research and development. He founded
the Society for Participatory Research in Asia (PRIA), a voluntary
organization providing support to grass roots initiatives in South
Asia, twenty-five years ago, and continues to be its Chief Functionary
since 1982.
What is the impact of amendment in Finance Act 2008 on
the NGO sector?
There are certain changes that the government wants to
reinforce through amendment; one is the redefinition of charitable
purpose which was done through Finance Act 2008 and the second change
which has been introduced in last month is the proposal for modification
of Direct Tax Code. The real impact of both these amendments is
going to be very severe, because in these amendments the definition
of charitable purpose will be now decided by government on case
by case basis. It is called permitted welfare activities so now
onwards income tax department will decide whether your activities
are permitted welfare activities or not. This will give enormous
discretionary power to officials and clerks and baboos and it will
be a subject to harassment, corruption and manipulation. Secondly
on 31st March at the end of the fiscal year, if you have Rs. 100
left because of late receipt of your grants and your activity could
not be completed and if you wanted to carry it forward, there will
be 15% tax on whatever money was left on 31st March, which means
you can not carry forward any activity even if any grant or government
grant comes later. You are liable to spend it, hide it or do some
manipulation otherwise you have to pay 15% tax. Third implication
is writing i.e.book keeping on cash basis. Now most accounting standards
including senior Chartered Accountants recommend good accounting
practices on accrual basis. It is good only for the people who get
gross receipts and does not differentiate between revenue and capital.
As a result, once again the Non Profit Organizations will be maintaining
books of accounts which will not allow them to differentiate between
assets and liabilities on the one hand and revenue and expenses
on the other. So, on the whole, as per my view, it is triangulation
and almost slow death of voluntary sector in India.
What steps should NGOs take in this regard?
For the changes in Direct Tax Code, there is a proposal
from Finance ministry. They have invited comments till end of September
in this year and they will then present this in the winter session
of parliament in November. NGOs therefore have some time. Therefore
I suggest them to do three things. Firstly they should visit the
website of Finance ministry and present the problem that they will
face, describe how it will affect them, infact describe that the
grant they get from government or somebody else will also be taxed.
Government departments and international donors will give grants
and income tax department will tax it. None of these donors would
like it to be taxed. So they should do that. If government gets
ten thousand stories of problems, then only it will have an impact.
Secondly the NGOs should go to parliament and speak to MPs from
their constituencies and try to convince them. Most politicians
themselves run NGOs, they know the problem of NGOs. And thirdly
they should communicate this with other NGOs who are unaware about
the change, even corporate foundations will be covered in this.
Many semi religious, and semi charitable organisations will also
be covered. So large size of people working is this sector should
be made aware of this. But all it is needed to do very fast, in
the period of next two months.
What kinds of advocacy efforts are being taken in this
issue?
VANI as you know is a national platform which works on protecting
and advancing a legal and political space for voluntary actions
in India from last few years. VANI has already started a campaign
of disseminating information. It is sending a memorandum to finance
minister, planning commission and members of parliamentary committee
attached to finance ministry and to the media. So, all those who
are involved in this issue now can write to finance ministry and
keep sending a copy to VANI on its website which is www.vaniindia.org
Sanjay Agarwal
Honorary Advisor - Accountaid
Shri Sanjay Agarwal, proprietor of Sanjay Aditya &
Associates, New Delhi, is practicing as a CA since 1986. He is engaged
in providing services to the non - profit sector at national and
regional level. He undertakes audits of NGOs on behalf of donor
agencies as also systems reviews and financial evaluations. He facilitates
workshops on Accounting and Financial Management in India as well
as in Asia - Pacific region. These are aimed at capacity building
of NGOs, grant-makers, and auditors. He provides advice to the NGO
Sector on various fiscal and legal issues. He has also developed
Risk Management Systems for grant-makers as well as Grant Monitoring
Tools and Accounting Manuals for the non - profit sector. He is
currently developing a risk-based auditing model for non-profit
sector.
He has also been served as member of various committees set up by
the Planning Commission of India, to review the regulations and
policies affecting the voluntary sector. He also writes on accounting
and regulatory issues affecting the non – profit sector.
How the amendment in Finance Act 2008 will impact on the
NGOs falling in fourth category?
This amendment was designed to ensure that organisations in the
general category are not able to undertake business-like activities.
The impact on the NGOs has varied from one to another, depending
on the level of their business-like activities. In terms of numbers,
most have remain unaffected, some have been inconvenienced, whereas
a number of NGOs have had to reorganise their affairs or give up
some of their activities.
Certain NGOs would be affected who functions particularly
in the domain of research, training, micro credit etc. How they
can keep themselves secured from this effect?
NGOs in the micro-credit category may be able to emphasise that
they are working for the relief of the poor. This would mean that
they are not affected by the amendment. However, this would depend
on facts of a particular case. Others which focus on research and
training would be affected where they are charging fees. However,
if they are doing research and training from grant funds, they would
remain unaffected.
Does the government mean to control the activities of NGOs
who basically aspire for high profits rather than social motive?
I think the general idea is to prevent leakage of tax revenue in
cases where a profit-oriented organisation tries to use a shelter
designed for genuine non-profit organisations.
There is a line of thought in development sector that if
they undertake businesslike activities, they can sustain themselves
successfully. Therefore some NGOs may have opinion that government
intentionally do not want to make the NGOs sustainable through controlling
their activities. What is your opinion about this?
I empathise with the concerned NGOs who really have some serious
difficulties in making their work financially self-sustaining. At
the same time, the Government does have a genuine problem of revenue
leakage. This has happened because it is becoming increasing difficult
to distinguish between for-profit and not-for-profit organisations
legislatively. Many organisations in both sectors are often using
common terminology, though their motivation is different. This means
that a non-charitable organisation may be able to successfully argue
that it is an NPO, and courts might even accept their claim.
Now the NGOs are enjoying the tax exemption under sec 11,
10(23C) only if they accomplish certain conditions. Now Besides
that, 15% interest has been put on the surplus carried forward,
what is the motive behind bringing this reform by government and
how it will be taken by NGOs or how it will affect on NGOs?
I believe you are referring to the new draft tax code put
up for discussion on 12th August 2009. This code contains both positive
changes as well as negative ones. If this goes through without modification,
it will definitely be a major financial setback for the Indian voluntary
sector, particularly at this stage, when many NPOs are looking actively
at making their work self-sustaining. Grant making foundations will
be particularly hard-hit. Religious NPOs may also face difficulties
in selling religious literature etc.
The Government has not clarified its thinking on the motivation
for these changes, apart from a general statement on contentious
issues.
AccountAid has put up an AccountAble (#144) on this at their web-site
(www.Accountaid.net).
Is there anything else which you feel important to share?
The changes coming through the tax laws, are mainly designed to
prevent loss of revenue. However, often these force NPOs to adapt
structures or ruses which may be fiscally damaging. Possibly the
NPO sector and the Government need to have a more constructive dialogue
and build mutual understanding and trust. In the long run, this
will be beneficial to the entire society.
SANJAY PATRA
Executive Director - Financial Management Service Foundation
Mr. Sanjay Patra is working for more than 20 years for the capability
building of voluntary sector in Asia. He is an Executive Director
of Financial Management Service Foundation (FMSF) which is working
for financial monitoring & capacity building of development
organizations in South Asia (India, Nepal, Bangladesh, Srilanka
& Pakistan). It has a wide network of over 200 development organizations
in South Asia. He has also been a Resource Person in many National
as well as International Workshops specializing in the areas of
Financial Management, Governance and Legal aspects of the Voluntary
Sector. Mr. Patra has authored several books on financial audit
& has written several articles as well. He is also a visiting
faculty at Haggai Institute, Singapore & Hawaii, U.S.A. He has
also undertaken various evaluation assignments of development projects
across the world. Mr. Patra is involved in many national as well
as international organizations and renders his services to them
in various ways.
What is the opinion about the recent amendment in Finance
Act 2008?
There are two things which we should look upon. One is that, the
amendment in the existing Act which is in effect from April 2008.
It speaks about amendment in section 2(15) of Income Tax Act where
the definition of “Charitable Purpose” has been given.
Under this amendment, the entire income will become liable for tax,
if there is any trade and business activity being carried out in
the fourth category of charitable purpose. Now onwards, NGOs undertaking
such kind of activities are ceased to remain charitable.
Another part of amendment is that, the additional three categories
have been added to this fourth category from current financial year.
So, henceforth there will be seven categories in the last limb of
charitable purpose. These categories are environment, reservation
for historical monuments etc. In India, there are many organisations
that are doing multiple activities. Many of the organisations are
pursuing activities which have mixed purposes. Those activities
with mixed purposes will be affected. This is a step which has pushed
NGO sector backward. The issues involved in Direct Tax code are
being analyzed by FMSF.
Direct Tax code speaks about the total income that will be charged
to tax. On the prima-facie, allowable expenditure can be adjusted
against the total income and the surplus carried forward will be
charged to tax. The objectives designed for the activities of fourth
category needs to be examined by NGOs. If there are any profit making
issues involved in these objectives, then it needs to be changed
by them.
Whether there is any task force set up by government to
take care of these critical issues?
There is no any such kind of task force set up by government.
NGOs should consult with their auditors who can guide them on the
various issues involved in it. NGOs should think that how they will
handle their profit making activities, otherwise they will be affected
by the amendment.
What is government motive behind this amendment?
The government has been raising the issue of accountability of NGO
sector for many years. But the amendment is not going to help in
raising the accountability of NGOs. Infact this will shrink the
space of voluntary sector and sustaining operations would be an
issue for NGOs which will be affected by this amendment.
How the NGOs can make them safe from this amendment?
As far as direct tax code is concerned, it has not yet come. It
is just a discussion paper which has been released. This would require
further discussion and lobbying with government authorities.
How the NGO sector can be awakened regarding all the issues?
Awareness is the major agenda which needs to be taken immediately
in our hands. Legal issues are non negotiable so, once if it comes,
there is no scope to modify it again. Practitioners in NGO sector
should remain very careful in complying with new amendments. Apart
from this, strong efforts for advocacy will be needed. organisations
like VANI have already taken it up and we need to join hands together
for the overall security of NGOs sector. |
