A question of trusts

The govt errs on the side of excessive regulation

In the past seven months, more than 100 non-governmental organisations (NGOs) lost their licences under the Foreign Contribution Regulation Act (FCRA), closing a major source of funding for them. The government has tightened disclosure norms and provided a framework for fund usage. The Central Board of Direct Taxes has notified, with effect from October 1, changes in reporting rules, stipulating that NGOs declare whether their activities are of a charitable or religious nature (or both) to claim tax exemption. At the same time, in April 2023, the Income Tax Department sent 8,000 notices to large donors on grounds that the donations appeared to be in the nature of tax evasion. The impetus for this renewed crackdown has been a 2022 report from the Comptroller & Auditor General (CAG), stating that some 21,000 unregistered charitable trusts took tax breaks between 2014-15 and 2017-18, which may have cost the exchequer Rs 18,800 crore. In its zeal to punish offenders, however, the government appears to be erring on the side of regulatory overkill. The arbitrary nature of the FCRA-linked cancellations appears to raise questions about the organisations’ ideological alignments, or lack thereof. In 2014, an Intelligence Bureau report said some NGOs were negatively impacting economic development to the tune of 2-3 per cent of gross domestic product (GDP), a remarkable assessment considering there is no data on the economic contribution of NGOs to India’s GDP.

The entire sector is paying the price for poor monitoring by the tax authorities. Though punitive action on dodgy trusts is justified, the pressure being brought to bear on the voluntary sector is counter-productive. For one, NGOs or trusts are a key institutional mechanism for channelling private funds for development in a country where the government’s record on this score is patchy. Much of this money is of a far more disinterested nature than legally mandated corporate social responsibility (CSR) spending. With exceptions, corporations rarely extend their activities beyond the ambit of their operations and leverage such campaigns to burnish their image. Individuals may well be donating large sums to NGOs to gain tax benefits, but these breaks are legitimate. If money laundering is suspected, the tax department has plenty of tools to detect such flows. FCRA funding is the voluntary sector equivalent of foreign direct investment (FDI) in commercial activity, and would be as useful as FDI in mobile phones or semiconductor factories. The sector is also a major job creator, accounting for over five million jobs, according to the government data, often playing a key role in linking young people to the grassroots.

Given the confusion over NGO activities, a streamlined law is called for. Current laws allow exemptions for charitable and religious purposes, which can be extended to unregistered trusts too. It may help if the concept of charitable work is as clearly defined as it is under CSR laws. This narrow rule would eliminate elements that disturb the political dispensation, such as advocacy. Equally, it would eliminate such wealthy institutions as the Board of Control for Cricket in India from the purview of tax breaks. Discouraging a sector that delivers development is hardly a constructive way to promote the cause of India’s challenged human development indicators.