Amit Chandra is the co-founder of ATE Chandra Foundation, one of India’s largest philanthropic foundations that focuses on social sector capacity building and sustainable rural development.

He has been a trustee of the Tata Trusts, a founder/board member of Ashoka University, a board member of Give India and The Akanksha Foundation. He also is the chairperson and founder of Bain Capital, India, and has served as a board member at Tata Sons, Genpact, L&T Finance, Emcure Pharmaceuticals, Piramal Enterprises, and Tata Investment Corporation.

In this wide-ranging conversation with India Development Review, Amit talks about the philanthropic values that matter to him, the challenges that donors face, the need for a community-centric approach to giving, and the lessons that failures teach.

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Know more

• Read this interview to learn more about the rise in strategic philanthropy.
• Read this article to find out more about philanthropy with an LGBTQIA+ lens.
• Read this article to understand why philanthropy must focus on systemic causes of exclusion.

Highlighted below are a few catalytic conditions that can make board governance more effective.

Mission alignment: Most board members are typically invited by the founder or existing board members because they are a good match, either personally or professionally. However, it is important that individuals that are invited to join a board align with the organisation’s mission. This will ensure that their contribution to the organisation is driven due to reasons beyond their relationship with other board members or founders.

Purpose: Where board members join with an intent to fulfil a personal purpose, they tend to be more proactive, agile, and willing to support the organisation’s needs at a given point in time. This approach also guarantees that individuals are comfortable stepping down if they realise they are unable to participate effectively, creating room for new talent to join the board when necessary. When individuals assume roles solely to offer their skills or expertise without a sense of personal purpose, other priorities often transform into obstacles.

Clarity of role: It is critical for all board members to be fully cognisant of both the board’s role as well as their own individual responsibilities. This awareness makes it possible to clarify and meet one another’s expectations as well as makes communication between the executive and the board seamless. It also enables the organisation to seek additional support from the board.

The extent to which a board can contribute significantly hinges on the level of eagerness displayed by the executive/founder to seek assistance. When the executive consistently and judiciously pursues this approach, the board gains the chance to ascertain not whether they can support the mission but how they can do so.

Structures and processes

In addition to this, it is imperative that the structures and processes put in place empower the board members to work to the best of their abilities.

1. Setting the agenda

A common concern voiced by both board members and executives is that the agenda is often not given the attention it deserves. This issue typically arises from either having an excessive number of topics to cover in a limited period of time or including less critical matters on the agenda that end up consuming valuable discussion time. Planning the agenda for the year in advance ensures preparedness on both the executive’s and the board’s end. It also creates greater ownership and accountability. For instance, allocating a board meeting for the approval of the strategic and financial plan, another for the mid-year progress review, and a third for self-evaluation presents a well-balanced distribution of critical matters requiring attention.

2. Scheduling the meeting

A good board will meet and ensure maximum participation at least thrice a year, ideally every quarter. One approach to guarantee this is by scheduling the meeting dates well in advance, at the start of each year, enabling participants to allocate time and synchronise their calendars accordingly. For instance, fixing the fourth Saturday of every fourth month is an easy and simple way to do this. Being consistent about this can be habit forming for the board. This gives enough time for preparation and also lowers the chances of anyone being absent. And if despite this board members struggle to make the time, it might be wise to double-check on their commitment and interest in serving the position.

3. Providing the required information

An informed board is an effective one. The information infrastructure predominantly consists of pre-reads and post-meeting materials (minutes). Sending board members regular updates reduces the need for preparing large documents ahead of the board meeting. The onus of reading the material is certainly on the board member. Another way to ensure that information is being shared accurately is to dedicate some time in the meeting for questions that board members may have. Encouraging preparedness by setting clear expectations often yields the best outcomes from the board.

It’s crucial that every board member leaves the meeting with a clear understanding of the next steps.

Prior to the meeting, it is important to disseminate information in a systematic and easy-to-understand manner. One way to go about this is to add updates, actions taken, and what needs to be done. This can be followed up with annexures that give out details of discussions as a reference. It is also useful to indicate what decisions have to be taken and outline the time allocation for these issues.

It’s crucial that every board member leaves the meeting with a clear understanding of the next steps. This could be achieved by setting milestones for the board and the executive. Sending out the minutes of the meeting within 48 hours is also important since the discussion is still fresh in everyone’s mind. This can follow the same template as the pre-reads with discussion details recorded as annexures. 

Interim board engagement

Sharing updates can be a very easy way to engage board members in between meetings. However, it’s useful to decide on the frequency of these updates with the board itself. If monthly, then updates need to be brief, with key highlights. Engaging individual board members for their expertise between board meetings will ensure that they are able to contribute optimally and feel a greater connect with the organisation as well. It’s also helpful to use the time in between to build greater knowledge about the cause or have interesting sessions with the stakeholders of the organisation, or conduct a visit to the community, an interaction with the recipients of the services, a meeting with a donor or the fieldworkers, and so on.

Creating personalised board engagement plans for each board member also enables the executive to maximise their contributions effectively.

Promoting self-reflection

Frequent self-reflection is essential for a successful board. The board must ascertain whether they are adding value to the organisation as well as fuelling their own growth. A few straightforward questions are sufficient to initiate self-reflection on their contributions:

1. What did we plan to do?
2. Did we have the right people on board to do what we wanted to?
3. Did individual members give the time and commitment that was expected of them?
4. If yes, what were the outcomes? Are we satisfied with the same?
5. If not, what were the reasons? How can those be addressed?
6. What do we want to do going forward?
7. How do we want the executive to support the delivery of our role?
8. Is being on the board adding value to us as individuals?
9. Do we feel confident that we know everything we need to as a board?

Engaging in self-reflection at the board level signals a commitment to purposeful service. Although not widely adopted in the social sector in India, there is a growing curiosity about embracing this method to cultivate a more robust and transparent performance culture.

Having a good board requires not only good people, but also supporting mechanisms that will inspire them to do their job well.

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Know more

• Read this article to learn more about building a strong board.
• Read this to learn more about engaging board members.  

Inter charity donations—Potential setback for grant making organisations

Inter charity donations (i.e. one tax exempt charitable trust or institution donating to another tax exempt charitable trust or institution) continues to be allowed but with various restrictions.

Under an earlier amendment one charitable organisation could donate to another charitable organisation but not from its ‘accumulated income’. As we are aware one of the key conditions for tax exemption given to charitable organisations is applying or spending at least eighty five per cent of the total income every financial year. If the organisation is unable to spend this minimum amount it has the option to accumulate the same for up to five years. However, this accumulated amount must be spent by the organisation on its own activities and cannot be donated to another charitable organisation.

Later, the Finance Act disallowed charitable organisations from giving donation to another charitable organisation, whether from its accumulated or current year’s income towards the corpus of another charitable organisation.

Now under Finance Bill 2023 it is proposed that in addition to the above restrictions, if one charitable organisation donates to another charitable organisation only eighty five per cent of such donations given will be considered as application of income for the donor charitable organisation. In other words if Trust A donates a sum of Rs. 100,000/- to Trust B, in the books of account of Trust A while Rs. 100,000 will reflect as given, only Rs. 85,000/- will qualify as ‘application of income for charitable purpose’.

This may prove to be a potential setback for purely grant making organisations unless of course they spend one hundred per cent of their total income every year and not avail benefit of stashing away fifteen per cent towards reserve after applying eighty five per cent of the income.

Application of corpus

Under an earlier amendment, if a charitable organisation decides to use its corpus or borrow by way of a loan, that amount would be considered as application of income only in the year the amount is put back into the corpus fund or the loan is repaid.

Under the Finance Bill 2023 it is proposed that application out of corpus or a loan before April 1, 2021 shall not to be allowed as application for charitable or religious purposes even when such amount is put back into corpus or the loan is repaid. This is in order to avoid double tax deduction.

Further, deduction shall be allowed only if the amount taken from the corpus is put back into corpus or the loan is repaid within five years from application out of the corpus or loan.

Date for filing Form 9A and 10 advanced

To reiterate, in every financial year a tax exempt charitable organisation is required to spend at least eighty five per cent of its total income. In case income is received late in the financial year the trust can exercise option under section 11(1) to use the income in the immediately following financial year by filing Form 9A or accumulate the unspent income u/s 11(2) for up to five years by filing Form 10.

Both Form 9A and Form 10 could earlier by filed by 31st October. However, Finance Bill 2023 has now proposed that Form 9A and Form 10 must be filed two months before the last date for filing the tax return in ITR 7.

As such, the last date for filing Annual Tax Return in ITR-7 is 31st October. Audit Report in Form 10B must be filed by 30th September and now Form 9A or Form 10 must be filed by 31^st August.

Timely filing of returns

It is proposed under Finance Bill 2023 that tax exemption under sections 10(23C) and 12AB shall be available only if the return of income is filed by the trust or institution within the time prescribed under section 139(1) [i.e. 31st October] or 139(4) of the Act.

This amendment will be applicable from Assessment year 2023-24 (Financial Year 2022-23) and onward.

Registration for tax exemption

Under Finance Act 2020 organisations enjoying tax exemption u/s 10(23C) or 12A / 12AA were required to re-validate their registration for tax exemption as also for tax deduction u/s 80G. Newly established organisations could apply for provisional tax exemption and tax deduction for a period of three years.

Under Finance Bill 2023 it has been proposed that trust and institutions that have not commenced activities can only apply for provisional registration under 10(23C) or 12AB and section 80G. Trust and institutions that have commenced activities can only apply for regular registration under 10(23C) or 12AB and section 80G.

Such applications shall be examined by the Principal Commissioner or Commissioner as per prescribed procedure and where the Principal Commissioner or Commissioner is satisfied about the objects and genuineness of the activities and compliance of other requirements provided in law, registration or approval in such cases shall be granted for three or five years.

Time frame for disposal

The Principal Commissioner or the Commissioner shall pass an order granting or rejecting such applications within six months calculated from the end of the month in which such application was received.

Powers to cancel registration

Provisional registration or re-registration granted on incomplete or incorrect applications shall be treated as ‘specified violation’ and such provisional registration or re-registration orders can be cancelled by Principal Commissioner or Commissioner after providing opportunity of being heard (applicable from Assessment year 2023-24 onward).

The above amendments will be applicable from 1^st October 2023.

Exit tax

Finance Bill 2023 has proposed an ‘Exit Tax’ under section 115TD of the Income tax Act if a trust or institution registered under section 10(23C) or 12A or 12AA has not applied for re-registration or does not apply for renewal after expiry of five years or the trust or institution registered provisionally does not apply for regular registration after expiry of three years.

The above amendment will be applicable from Assessment year 2023-24 (Financial Year 2022-23) and onward.

Benefit of section 80G withdrawn for three trusts

Benefit of tax deduction under section 80G has been withdrawn for contribution to Jawahar Lal Nehru Memorial Fund, Indira Gandhi Memorial Trust and Rajiv Gandhi Foundation.

This article was originally published on Centre for Advancement of Philanthropy.

While many had an inkling of this already, there was the occasional incorrigible optimist who thought that the court would take a more liberal view.

Background

The Government of India passed the Foreign Contribution Regulation Act in 1976 to prevent foreign agencies from interfering in Indian politics. In 1984, this was expanded to cover foreign donations received by nonprofits. In 2010, the law was revamped and repurposed to focus more on nonprofits than on electoral processes. This change was reflected in the new preamble, which dropped all references to democratic institutions, as well as in the main provisions, which are concerned more with the activities of nonprofits rather than politicians.¹

In 2020, the law was tightened even further, asking all nonprofits to:

• receive money first in a gateway account in the State Bank of India (SBI) in Delhi
• reduce the foreign contribution available for administration expenses
• stop re-granting FCRA funds to other nonprofits, regardless of whether or not they have FCRA clearance²

These disruptive changes, introduced without following due consultative processes, caused much heartburn among nonprofits. They were already suffering from a vilification campaign on social media and reeling from a set of fast-paced changes in laws affecting them, while grappling with the nationwide disruption caused by a pandemic. Some nonprofits saw this as a violation of their fundamental rights and knocked on the doors of the Supreme Court.

The issues

Petitioners including Jeevan Jyothi Charitable Trust, Thiruvananthapuram, objected to the gateway account requirement. Noel Harper of Care and Share Charitable Trust, Vijayawada, and National Worker Welfare Trust, Secunderabad, believed that the direction to open an FCRA gateway account in SBI’s New Delhi Main Branch (NDMB) was arbitrary and smacked of bureaucratic high-handedness. It would cause a lot of hardship to nonprofits across the country, not least because the account needed to be opened in a particular branch in New Delhi. Further, the restriction on re-granting was unjustified and would make it difficult for nonprofits to collaborate with one another. It therefore violated the fundamental right to association enshrined in Article 19. The need to present Aadhaar by all trustees to acquire the registration was seen as a violation of an earlier Supreme Court decision.³ The group requested the court to restore status quo that allowed nonprofits to keep their main FCRA account in any of the approved banks, and regrant funds to others who had FCRA registrations.

The government stated that no one, be it an individual or an organisation, had the fundamental right to receive foreign contribution.

The government emphasised that foreign contribution could be inimical to national interests and therefore its utilisation had to be monitored strictly. Despite the strict provisions, foreign contribution had been rising constantly over the years. Transferring funds to other nonprofits made it difficult to audit their allocation. Additionally, it increased the proportion being spent on administrative activities of transferees rather than on the welfare of people. The government also stated that there was widespread non-compliance, with more than 19,000 nonprofits losing their licenses due to defaults. To facilitate this transition, the SBI had made adequate arrangements so that people could open their accounts from afar, and most had indeed succeeded in doing so. The government also claimed that some nonprofits were involved in the routing of funds only, thereby creating a principal–client relationship with other nonprofits. Finally, the government stated that no one, be it an individual or an organisation, had the fundamental right to receive foreign contribution and that legislature was competent to prohibit it completely or permit it partially under supervision.

The verdict

The court’s verdict endorsed the stand taken by the government. It held that the SBI had made sufficient arrangements to help people set up the gateway accounts, and the requirement itself was a reasonable one. It also stated that there was a need to protect the sovereignty of India from undue foreign influence and that the legislature’s move to regulate foreign contribution could not be faulted. Moreover, it did not find any merit in the argument that the change violated the fundamental rights of association, speech, and livelihood, or that the requirements were arbitrary. The only minor relaxation given by the court was that a trustee could now provide their passport instead of Aadhaar number as identification for FCRA registration.

The myths

Apart from the legal arguments, the 132-page order includes a number of additional comments, based entirely on the government’s submissions in court, such as:

• foreign contribution having doubled over ten years
• large-scale violations by nonprofits
• there being sufficient funds in India for charitable activities
• charitable activity being a business

The government’s assertions give a completely misleading picture of the nonprofit sector, which has helped millions of poor and vulnerable Indians over the last 50 years or more. Let’s look at these falsehoods a little more closely.

1. Foreign contributions have grown considerably in recent years

According to government data, foreign contribution grew from INR 10,292 crore in 2009–10 to INR 16,457 crore in 2018–19. That’s 1.6 times in 10 years. The average annual growth rate is just 5.4 percent, lower than the annual rate of inflation. If these figures are adjusted for inflation (using the government’s index), then the foreign contribution has actually dropped over the last 10 years in real terms.

2. There have been large-scale violations of FCRA by nonprofits

The large-scale ‘violations’ by nonprofits refer to non-filing of FCRA returns, mostly by defunct nonprofits or those that don’t receive any money. As a result, about 19,000 nonprofits lost their FCRA registration certificates. Real violations involving misuse, diversion, or anti-national activities have been few—the Ministry of Home Affair’s FCRA website lists only a dozen cases where an organisation’s FCRA has been suspended or cancelled for such violations.

3. There are enough funds available locally

The majority of private charitable funds in India tend to go to simple welfare and relief (for instance, feeding the poor and rescue and rehabilitation post disasters). Government funds to nonprofits are meant for providing services that the government itself does not want to provide directly. CSR funding is again restricted to a narrow list of activities found in Schedule VII. All this leaves a large segment of critical and complex issues, such as climate change, human rights, research, empowerment, and conflict resolution, without any domestic support. These are issues where India needs to develop understanding and intellectual rigour to keep pace with international developments. This is the reason many nonprofits working on such issues depend on cross-border flows from Europe and USA.

4. Charitable activity is a business

Charitable entities are prohibited from accepting more than 20 percent of their revenue from sales or fees. Additionally, they can take up such work only when the business activity is closely connected to their charitable purpose. Therefore, it is difficult to treat charitable entities as businesses.

5. There are plenty of nonprofits—more than 3 million—in the country

Another major myth associated with the sector (though not referred to in the judgement) is about the number of nonprofits in India, which is often said to be 3.17 million. This figure is based on a 2009 report by the Central Statistical Organisation,⁴ which listed all registered societies and trusts, irrespective of whether they were active or defunct. The Income Tax Portal figure of 2,20,225 tax-exempt charitable and religious entities, which covers all tax-exempt entities (including schools and hospitals), is closer to reality. Out of these, as per the government’s NGO Darpan portal, there are only 1,39,097 entities that can be called ‘nonprofits’ in any sense of the term. These include organisations that have FCRA (16,888) as well as those that do not (1,22,209). The real number of nonprofits is therefore probably between 5–10 percent of the 3.3 million figure.

The future

When thinking about the real takeaway from this judgement, we must consider: If it is the government’s rajadharma to discourage foreign contribution, then it should start taking positive and meaningful steps to encourage domestic charity. That would be a real win-win for all: the doers, the donors, and the deprived.

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Footnotes:

1. A related regulation (Electoral Bond Scheme, 2018) has no safeguards to prevent foreign companies from donating to political parties through their subsidiaries in India.
2. Many organisations with an FCRA license have historically collaborated with other smaller nonprofits in remote areas through sub-granting foreign funds received from other international agencies. This funding has been crucial for these organisations, as they often do not have the networks and wherewithal to fundraise from international donor agencies. With the new change, this is now prohibited, even if the smaller nonprofits have FCRA licenses themselves.
3. K.S. Puttaswamy (Retired) & Anr (AADHAAR) vs Union of India & Anr, (2019) 1 SCC 1 (paras 490 and 494). 
4. Compilation of Accounts for Nonprofit Institutions in India in the Framework of System of National Accounts (Report of Phase-1 of the Survey), National Accounts Division, Central Statistical Organisation, Ministry of Statistics and Programme Implementation, Government of India.

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Know more

• View this presentation on the 2020 FCRA amendments.
• Read this to understand how the 2020 FCRA amendments affect nonprofits.
• Read this explainer on the history and consequences of the FCRA amendments in 2022.

Organisations are expected to set up boards to guide and steer them strategically and with accountability to their stakeholders. This is the group that oversees governance, be it founder-centric or organisation-centric. Therefore, the boards ideally comprise members who are competent, objective, and work in the best interest of the organisation.

The nonprofit sector in India is largely founder-centric. There is nothing wrong with that; although some may argue otherwise. Lack of substantial data to prove that non-founder-run organisations function more sustainably and are better aligned to the original mission begs the question: Is founder-centred governance—where the founder stays at the helm of all affairs—really a deterrent to achieving the mission of the organisation?

Given that many founders do not want to let go easily, can good governance be attained with them remaining at the centre of determining the board’s role? Some of this depends on the life stage of the organisation and the specific nature and personality of the founder. These notwithstanding, what are some realities that we need to be cognizant of in the context of good governance?

Relationships matter

In the two decades that I’ve spent working closely with nonprofit leadership and their boards, I’ve seen that the non-compliance-related functions of a board are greatly influenced by the chemistry and personal relationships that form among board members and often between the board and the founder. This is why most founders will look at composition from the point of who knows them and whom they know reasonably well on a personal level.

Board decisions for the most part tend to factor in ‘get alongability’ as a desired outcome in the dynamic. This is fine when done in the best interests of the organisation. However, it sometimes supersedes the objectivity required to make a decision, despite the fact that the decision may be hurtful to the founder or a few board members. Therefore, boards will often disengage and distance themselves from such engagement. For instance, if a board finds that a founder is consistently closed to suggestions for changes, members may be more likely to distance themselves rather than confront the situation. Exceptions do exist, but are not easily found.

Providing support as sought

One of the biggest laments of founders is that when boards evolve or when founders have attempted to create boards that comprise people who don’t know them well enough personally, the support they receive is not as useful as it can be. Board responses range from backslapping the executive to deferential distance that keeps them from getting more deeply involved. Conflict and/or indifference arises when the founder’s expectations and the board’s own understanding of its role are misaligned.

The role of the board needs to be flexible to factor in the evolving nature of the organisation, its team, and its readiness.

In an ideal world, the board’s role largely is to derive accountability from the organisation’s senior leadership, and steer the organisation’s mission with authority, beyond the fiduciary. As organisations evolve, founders will begin to seek support in various ways. A board that is not able to provide the advice or support in the manner it is sought, but instead believes its role to be different, will struggle to engage. The reality is that the founder’s need for specific support will change and evolve, and this requires a board to be agile. Often founders fail to have this open conversation for the fear of alienating the board or jeopardising the relationships they have with the board members. The role of the board needs to be flexible to factor in the evolving nature of the organisation, its team, and its readiness.

Founder preparedness

Establishing whether a founder actually needs a board to do anything beyond basic compliance is critical. Boards and founders spend a lot of time pandering to one another’s perception of what is considered good practice. Founder preparedness can often be discerned by the actions that a founder takes in engaging with the board.

If a board is able to serve the aspirations and needs of a founder, greater trust is built.

Frequent and open communication, proactively seeking out support, acting on suggestions and providing feedback, and being open to diverse perspectives are some signs that indicate how prepared the founder is to engage with an active board. In turn, this requires the board to respond efficiently to the founder when they reach out. There is nothing wrong in boards simply providing compliance support. To conclude that such boards compromise on mission achievement or influence the organisation’s sustainability is erroneous. Founders who would like to retain greater entrepreneurial freedom may instead seek support from advisers, volunteers, and other acquaintances or friends.

Organisation readiness

It is not enough for the founder alone to be prepared to engage an involved board. The organisation must be equally ready and resourced to be able to translate the inputs shared by the board. This means ensuring the presence of a competent management team. Often the sector struggles with the availability of talent at a price that it can afford, which renders board translation of insights more challenging in most organisations.

A board could therefore invest some preliminary time with the founder to establish the execution capability available and possible before providing insights and guidance. Alternatively, the founder could first establish a team that can ‘absorb’ the board inputs adequately. The role of the board needs to be flexible to factor in the evolving nature of the organisation, its team, and its readiness.

The board–organisation relationship is a hierarchical one. However, if a board is able to serve the aspirations and needs of a founder (within the framework of compliance and fiduciary responsibilities), greater trust is built. This allows the board to then exercise its powers more easily for the overall mission fulfilment of the organisation, despite a founder, if need be.

As a sector, we are a long way off from that.

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Know more

• Learn more about succession planning and how you can prepare for it.
• This is what you need to know when building your nonprofit board.

For a change we are pleased to state that while what is proposed in the bill seems verbose, intimidating, complex and confusing, it is not so bad!

Here’s why we think the proposed amendments are not so bad:

Cancellation of tax exemption

It is proposed that the Principal Commissioner may, after giving adequate opportunity of being heard, cancel the registration of an approved charitable institution (for tax exemption) if it is found to have violated any of the following conditions:

• The income is applied towards objects other than for which it is established;
• It has earned profits from a business which is not incidental to the attainment of its objects;
• It has not maintained separate books of account for a business activity which is incidental to the attainment of its objects;
• It has applied any part of its income for the benefit of any particular religious community or caste;
• It has undertaken any activity that is not genuine or has not adhered to the conditions subject to which it was registered.

In our opinion, this amendment is not so bad as it only clarifies the violations for which the Principal Commissioner may, after giving adequate opportunity to the institution of being heard, cancel the registration granted under section 12AB (earlier 12AA).

What part of income would be taxed if tax exemption is denied?

Professionals were often in doubt whether Income tax authorities would tax the total income of a trust or institution, as reduced by expenses or otherwise, in case tax exemption is denied in any assessment year on account of violation of some provision of the Income tax Act 1961. This ambiguity has now been cleared and clarified.

For example, an institution enjoying tax exemption but falling under the category “any other object of general public utility” has business income in excess of twenty per cent of its income and is therefore denied tax exemption for that particular assessment year, would the tax be on the total income without allowing for expenses incurred during that year by the institution on advancing or furthering the objects? This doubt has now been cleared.

It is proposed that in case tax exemption is denied, the taxable income of the institution shall be its income as reduced by expenses provided such expenditure:

• is not a capital expenditure;
• is not paid from the opening balance in the corpus account;
• is not funded by any loan or borrowing;
• is not in the form of any contribution or donation.

In our opinion, this amendment has brought it clarity on this vexed issue.

Penalty for unreasonable benefit

As we are aware Section 13 of the Income tax Act disallows benefit to specified persons such as founders, trustees and their relatives from deriving benefit.

If founders, trustees or their relatives derive any ‘unreasonable benefit’, they would be penalised one hundred per cent of the amount of the benefit.

Now after 1^st April 2022, if any specified persons such as founders, trustees or their relatives derives any ‘unreasonable benefit’, the offence would attract a penalty which would be one hundred per cent of the amount of unreasonable benefit passed on to the specified person where the violation is noticed in a financial year for the first time and two hundred per cent of the amount of unreasonable benefit passed on to the specified person where the violation is noticed in any subsequent financial year.

In our opinion, this amendment is not so bad either.

Tax liability in case exemption is denied

In case of violation of any provision of the income tax as applicable to a tax-exempt institution (e.g., investing funds in modes not specified u/s 11(5) or a trustee deriving unreasonable benefit etc.) the tax would be restricted only to:

• The amount of funds not invested in modes specified u/s 11(5) of income tax (e.g., investing the institution’s funds in shares or stocks);
• The amount of unreasonable benefit provided to specified persons (e.g., a trustee or a trustee’s relative);

This amendment, in our opinion is not bad at all!

Tax on accumulated income

To begin with let us understand what is accumulated income.

In any given financial year, the tax-exempt institution must apply at least eighty-five per cent of its total income. The balance fifteen per cent is unfettered and may be booked as a reserve fund and this would not be considered as accumulated income.

However, in case the institution is unable to spend at least eighty-five percent of its income, it has the option to file online Form No. 10 and accumulate the unspent income for up to five years. Such accumulation must be for a specified charitable purpose.

The amendment under Finance Bill 2022 proposes that on failure to apply such accumulated income for the purpose for which it is accumulated within the period of five years, would make the institution liable to pay tax on such unapplied amount in the fifth year.

This amendment, in our opinion, is not so bad!

Follow cash system of accounting

To reiterate, tax-exempt institutions are required to apply at least eighty-five per cent of the total income during any fiscal year. However, the method of such application is not defined under the act and accordingly, it is determined on the method of accounting i.e., cash or accrual system followed by the institution.

The amendment proposes that ‘application of income’ for the purpose of the Income tax Act shall mean actual payment following cash system of accounting and shall not include expenses accrued but not paid during the year.

This amendment, in our opinion is reasonable and not so bad!

Maintaining ‘books of Account’

It is proposed that from 1st April 2022, charitable trusts and institutions shall be required to maintain books of account as may be prescribed (later under the Income Tax Rules).

While accounts of charitable trusts and institutions are audited there is no specific provision under the act to maintain ‘books of account’. The income tax rules will soon prescribe these and how these should be maintained.

This amendment, in our opinion, is not so bad!

This article was originally published on Centre for Advancement of Philanthropy.

The reason the act has been in the news lately is that on January 1, 2022, the government revoked the FCRA license of almost 6,000 nonprofits, including prominent entities like Mother Teresa’s Missionaries of Charity, Oxfam India, Delhi University, IIT Delhi, and Jamia Millia University. This was followed by a huge furore in the media, strong responses from leading politicians, and international attention. Possibly as a consequence, some of these licenses were restored.

How did we get here?

In 2010, when the FCRA was amended, one of the things that changed was the validity of an organisation’s license. Previously, such registrations were open-ended, authorising indefinite permission to receive foreign funds. The 2010 amendment, however, required organisations to renew their license every five years. As a result, every five years since then, there have been approximately 20,000 organisations that need to get their FCRAs renewed.

This year was no different—with almost 20,000 licenses up for renewal—and, as best we know (because the information is sparse), almost 6,000 applications lapsed. This means that it was not the government revoking all 6,000 licenses; it could have been nonprofits that decided they no longer wished to have the license.

It’s still not clear who all have lost their FCRAs or why they have lost them.

However, 179 of these licenses were actual cancellations by the government, where the nonprofit concerned was refused permission despite having applied for renewal. It is estimated that of these 179, 83 entities later had their licenses restored. Neither the reasons for denial nor subsequent reversal of the decision is apparent. (On DevelopAid you can find a menu of organisations and their FCRA status that ranges from ‘approved’, ‘denied’, and ‘on hold’ to ‘clarifications required’, ‘in process’, and, of course, the ubiquitous ‘others’.) About 12,000 organisations, whose applications the ministry is yet to process, have had their registrations extended till March 31, 2022 and will remain on tenterhooks till they are informed as to their status.

This is the current situation. Unfortunately, it’s still not clear who all have lost their FCRAs or why they have lost them.

What are the consequences?

The most immediate consequence of the changing FCRA regulations is that the compliance burden on nonprofits is now untenable. Between FCRA, Income Tax, and all the numerous regulatory authorities with which they are required to comply, it’s practically impossible even for large, well-resourced organisations to keep track of, and ensure compliance with, all the different requirements.

The second, and most critical, consequence is that it has a chilling effect on the sector as a whole. An organisation that has had its FCRA status revoked does not only lose the ability to receive foreign money, but also stands to have all the assets created using FCRA funds seized by the government. This is such a humongous consequence that it would deter anyone from doing anything that might even remotely attract negative attention. In addition, the situation invariably affects domestic donors, who begin to worry about being viewed as ‘guilty by association’.

The third consequence is that since certain kinds of organisations (such as think tanks, research organisations, and advocacy organisations) depend disproportionately on foreign funding, their operations get disproportionately affected. This is because domestic philanthropy, which leans towards supporting direct service delivery, is not yet prone to funding entities like them.

And, finally, grassroots organisations that used to depend on onward grants from FCRA-licensed intermediary organisations now find themselves completely frozen out because they don’t have the wherewithal to approach international donors directly.

Altogether this threatens the very roots of our democracy, because a civil society that is muzzled, timid, and afraid to venture into certain areas is not able to play the roles it is required to. It cannot hold the government, business, and media accountable, amplify voices at the margins, or ensure that policies are inclusive and democratic.

Why is this happening?

First, it has been alleged that nonprofits are somehow vulnerable to being used to fund terror or to launder money. We need to push back on this. As far as I know, in the past 45 years that this law has been around, there has not been more than one case where the government has successfully prosecuted a nonprofit for indulging in these kinds of activities. This means that the law is not only unconstitutional, but it’s also ineffective.

The second reason is the government’s use of the Financial Action Task Force (FATF). FATF is the inter-governmental agency that tries to prevent funding of terrorism and money laundering. Over the years the government has repeatedly said that their actions are to meet FATF requirements, when, in fact, the FATF has explicitly advised governments to ensure that their regulations or controls are proportionate to the risks and compliant with international human rights obligations. However, since we don’t have any measure of the threat, we can’t say whether the tightening of restrictions is proportionate or not.

What we need to change is to bring in independent regulators (like we have for microfinance, telecom, etc.) who are responsible for registering, de-registering, and, most importantly, facilitating nonprofits’ ability to register and be compliant. Instead, we currently have the Home Ministry, and sometimes the Finance Ministry, playing judge, jury, and executioner for nonprofits in the country. And neither of them invests a single rupee in actually enabling nonprofits to comply.

Why should people care?

If you have been in India during the pandemic, you would have witnessed the role nonprofits play in ensuring people have access to services, especially when the government abandons us to our own mercies.

In addition, it’s important to see the FCRA regulations as part of this constellation of regulations with which nonprofits must comply. This includes the new CSR rules and the new renewals required under the Income Tax Act. When you put them all together, you realise that this doesn’t just affect 20,000 nonprofits; it affects every nonprofit in the country as well as the communities they serve.

We need civil society and philanthropy to function at their full capacity.

India was already falling behind on achieving its Sustainable Development Goals (SDGs); the pandemic has exacerbated this. We have seen a precipitous increase in inequality, unemployment, malnutrition, and child marriage. If we want to address these gaps, we need civil society and philanthropy to function at their full capacity.

And, lastly, there’s the question of our democratic rights. Whether it’s for people from minority communities or lower castes, women, or people living in particular geographic areas, we know that our democracy is functioning far below where we would like it to be. And without civil society to amplify these voices, to hold government institutions accountable for their responsibilities, we will find that more and more Indians are being left out of democracy and development.

What can people do?

My first appeal would be to civil society itself. We need to double down on paying attention to these issues. Despite everything that’s happened over the last few years, I still find a number of CEOs and board members who don’t know what’s going on with their audit, or who haven’t sat with their auditor to understand or review compliance requirements. While the regulations must be challenged, we also need to be doing everything we can to ensure that we are dotting the ‘i’s and crossing the ‘t’s to the best of our ability.

Second, we need business and philanthropy to speak up. They are currently outsourcing the battle for India’s democracy to the people with the least power to fight it. And that is both appalling and scary. We need strong messaging from chambers of commerce and business associations, as well as advocacy by people who have direct access to the PMO, Home Ministry, or Finance Ministry, saying ‘this doesn’t end well’.

The media has already stepped up to the challenge. This is in part, of course, because media organisations recognise that they are confronting a similar clampdown. Nonetheless, it is heartwarming to see even mainstream media platforms beginning to cover civil society issues in terms of policy and regulation, instead of just human-interest stories.

We need greater solidarity within the sector, so that we can collectively build perspective among the public at large.

Finally, I’ll come back to civil society. We need greater solidarity within the sector, so that we can collectively build perspective among the public at large. People need to understand the value of civil society—there is not a citizen in our country who’s not been the beneficiary of some form of civil society, be it schools, colleges, hospitals, consumer organisations, or trade unions, or sweeping changes via MGNREGA, Right to Information, Right to Education, Right to Food, and Right to Work. We really need to start telling this story, so people understand all the roles that civil society plays.

This article is based on an Instagram Live that Ingrid Srinath did with IDR. You can watch the live here.

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Know more

• Read about how the FCRA Act inhibits giving to India.
• From self-help groups to MGNREGA, here’s how some of India’s biggest innovations are rooted in civil society.

I have often wondered what the reasons for this malaise might be and, more importantly, what can be done about it. 

1. Changing expectations

As organisations and founders/CEOs evolve, expectations from their boards begin to change too. An organisation that has historically ‘allowed’ a certain type of response from its board members will find it difficult to adapt if there is a sudden change in the desired output. When a board member has never been ‘pushed’ to deliver on their role they are unlikely to better their performance. Expectations are determined by the actions taken, or not taken, on each side. Growing organisations will necessarily have varying demands from their boards, and a group that came together to support the founder initially may not be best suited to deliver in the long run. 

2. Joining a board for the wrong reasons

Sometimes, board members join or stay on purely due to a personal relationship with or as a favour to the founder or another board member. In these cases, it is unlikely that they will be eager and able to contribute and participate after a while. Other reasons for a decline in interest may include not anticipating the extent of work that needs to be done, misalignment with personal motivations, and lack of competence. 

3. Not letting go at the right time

Relationships with board members may extend beyond the professional realm which could make it awkward to confront non-performance. When this happens, an inactive board member stays on, with neither side taking the initiative to let go of the other. This is unfair on the rest of the board as some members have to compensate for others and take on additional responsibilities. Over time, such members might also feel burdened and reduce their participation.

Strategies to deal with non-contributing board members

1. Initiate a board plan

This essentially means getting the board to agree on a board plan—a set of expected actions from board members that will help the executive deliver on the organisation’s strategic plan. This takes the individuals out of the discussion and focusses on the role that the board as a whole can play, alongside specific roles that individual members can take up. This is a good opportunity to ‘weed out’ board members who cannot participate in the plan.

2. Create a rotation policy

A rotation policy is a mechanism that allows for the board and the founder/CEO to replace board members at a mutually agreed upon frequency. This is done for two reasons:

• To rejuvenate the board composition and align it with the current needs of the organisation.
• To replace non-contributing board members.

Most organisations with a rotation policy tend to have continuing terms for their boards. If the continuance is contingent on contributions or plans that have been agreed upon, then the decision to let someone go can be made objectively. 

3. Invite active advisory council members

Creating a strong council of advisers and inviting them to participate in board meetings automatically creates higher expectations from board members. Engaging with these advisers could help board members see the value that others are creating and they will have strong role models to emulate. When a board member is unable to do the same they are more likely to step down.

4. Devise individual engagement plans

It is quite likely that some board members will simply play a compliance role. This should be stated transparently so there is clarity that nothing more is expected of them. There may be others more willing and able to contribute.

Understanding the motivations of individual board members and devising an engagement plan that facilitates the same through their participation is important. 

It is imperative for a board to have members who are fully invested in the organisation’s mission. Not having such people is a disservice to its objective. In a nation of a billion people it is not difficult to replace those who do not add value. The sector needs newer people to support it, and these people are out there.

The burden of compliance is now shifting on to charitable organisations. Apart from the re-validation of 12A and 80G (read more about it here), a charitable organisation having an 80G approval needs to file a statement of donations in Form 10BD by May 31st in the immediately following financial year. This is effective from AY 2022-23 ie. from April 1st, 2021. Read more about the amendment here.

What is the impact of this amendment?

If we dive deeper, this amendment has far-reaching effects, beyond compliance. Let’s study a case and understand the situation pre-amendment and how it has changed post the amendment. 

Assume Donor A is a regular contributor to XYZ Foundation. They donate a sum every year and love the impact that XYZ Foundation is creating. They are also happy they get a tax benefit along with the change they are helping to bring to society.

In Figure 1, you can see that pre-amendment, the process to avail the 80G deduction for a donor was quite simple. All that XYZ Foundation had to do was ensure a donation receipt was issued to Donor A with a valid 80G certificate. While filing their income tax returns, Donor A could easily avail 80G deduction for the donation given. XYZ Foundation had no other obligations to fulfill to ensure that Donor A was eligible to claim the benefit of 80G deduction.

Now, let us evaluate Figure 2. It depicts how post-amendment, the 80G deduction will only be available if XYZ Foundation reports the correct information about Donor A to the Income Tax department via Form 10BD and then issues a certificate (Form 10BE) to Donor A. The deduction will be pre-filled in the donor’s Income Tax Return, similar to how TDS is retrieved, provided the deductor has filed a TDS return with appropriate particulars.

Pre-amendment, for every contribution made by Donor A, they were easily able to avail 80G deduction while filing their income tax returns year on year. All they needed was a valid receipt from XYZ Foundation. It was of no consequence whether XYZ Foundation maintained donor information or not. There was no direct way for the Income Tax department to match the contributions captured in the books of XYZ Foundation and 80G deductions claimed by various donors.

Post-amendment, ie. from April 1st, 2021 (AY 2022-23), XYZ Foundation has to report all the donations received by them (which are eligible for 80G deduction) to the Income Tax department in the notified Form 10BD. This form requires the following information:

• Donor name
• Donor address
• Donor unique ID number (PAN, Aadhaar, Tax Identification Number, Passport, others)
• Donation type (whether corpus, specific grant, others)
• Payment (mode whether cash, kind, electronic modes including cheque, others)
• Amount (in INR)

But how does this affect your fundraising?

Well, you need to file Form 10BD which would lead to the generation of Form 10BE. Form 10BE is a certificate that would ensure that the 80G deduction is available for the donor. Think of Form 10BE as a TDS certificate issued by the deducting organisation for its vendors. Without this, the benefit isn’t passed on. If XYZ Foundation fails to generate this in time or has incorrect or no information about its donors, loyal donors may lose faith in XYZ Foundation. First-time donors may reconsider giving again if claiming an 80G deduction is a hassle.

Act now and gear up to meet this important compliance requirement.

With crowdfunding on the rise, each charitable organisation must take the onus to ensure that all the essential donor information is being captured and maintained to meet compliance requirements, failing which the donor’s deduction could be jeopardised. This could affect the future fundraising capacity of the charitable organisation.

Additionally, not collecting some of this information could also have adverse consequences as they may be considered ‘anonymous donations’ under section 115BBC of the Income Tax Act.

There are penal provisions for not filing Form 10BD by May 31st of each year. Delayed submission of Form 10BD and/or Form 10BE will attract late fees under section 234G of the Income Tax Act at the rate of INR 200 per day and a penalty (ranging from INR 10,000 to INR 1,00,000) will be levied under section 271K of the Income Tax Act.

Act now

This is a daunting task. Act now and gear up to meet this important compliance requirement. Whether you are a charitable organisation with an INR 20 lakh budget or an INR 200 crore budget, whether you are funded by corporates or individuals or a mix of both, whether you receive funds from foreign or domestic sources you will need to file Form 10BD. Don’t lose out on funding because of compliance.

This is an edited version of an article that was originally published on Aria Advisory’s website. 

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Know more

• Read the notification and learn more about Forms 10BD and 10BE here. 

Do more

• Visit ERP4Impact.com, a donations management platform to automate compliance processes related to donors and donations. 

However, despite concerns about succession planning in the social sector, in our experience, little is being done to deal with the difficulties inherent in the process. Tasks such as formalising the succession process, developing in-house talent, and involving the board and external stakeholders all require considerable effort, funding, and funder participation.

As a wealth-advisory firm for family businesses, Waterfield (where I work) has been privy to many successful intergenerational and intragenerational transitions in businesses. In our experience, there are lessons and best practices from corporate India that can be tailored to support leadership transitions in the social sector.

Related article: Exit right: Nonprofit founders must plan their transition well

A succession plan ensures stability and accountability

In India, the rules and regulations governing corporate bodies are relatively standardised. Regulation in the corporate world permeates down to every aspect of business—including succession planning. For example, The Securities and Exchange Board of India (SEBI) has mandated that a company’s board must have a proper succession plan or policy in place. This is one of the most significant attempts to ensure that investors do not suffer due to sudden or unplanned gaps in leadership. The general objectives of a company’s succession policy include identifying and nominating suitable candidates for the board’s approval, identifying the competencies of key positions and developing those through planned efforts, and identifying key people in senior management roles who might be close to retiring or moving on.

In short, a succession policy ensures the stability and accountability of the organisation by preparing for an eventual permanent change in leadership. Thus, due in some part to regulatory pressures, most large corporate entities consider succession planning as part of the normal business continuity process.

In nonprofits, putting in place a strong succession policy and adaptable system becomes particularly important, as the founder’s exit can leave a massive leadership vacuum.

Unfortunately, for the social sector, there is no mandate that requires organisations to have such a policy in place. In our view, most nonprofits tend to operate more like smaller family businesses, rather than large corporate entities. Much like family businesses, nonprofit management tends to have a more top-down approach to governance, where the organisation’s founder holds much of the decision-making power (often due to resource constraints). In such organisations, putting in place a strong succession policy and adaptable system becomes particularly important, as the founder’s exit can leave a massive leadership vacuum. Thankfully, there are lessons we can draw upon from small family businesses that have managed to do this well.

All the key stakeholders play an important role in succession planning

The founder’s role in finding and grooming a successor is probably the most important aspect of succession planning. This is because nobody knows an organisation better than the person who built it from the ground up. Unfortunately, for a founder, succession planning means handing over the reins, and it is often the most difficult part of the entrepreneurship journey. One way in which the founder can make the transition easier, is by identifying next steps for themselves. Some may want to set up new organisations, others may want to work with the government on policy, while a smaller lot may even want to get into the for-profit space, or even just retire altogether. Often, the most successful corporate entrepreneurs are those who set up enterprises with the clear goal of building successful businesses and then moving to the next big project.

Ideally, the planning process for a handover should begin as soon as an organisation is up and running—succession planning needs to take into account the fact that the hand-over process might happen sooner than expected. Illness, injury, or a change in life goals are just some of the ‘unplanned’ events that make it necessary for succession planning to avoid being reserved as an ‘end’ project. Furthermore, by starting early, founders can avoid the hassle and cost that comes with a hurried, unplanned transition.

Another aspect to consider is building in-house talent. Successful second-generation business people usually understand every aspect of their business as they have had an opportunity to develop expertise by working at every level of the business. For nonprofits, this form of bottom-up growth can build layers of efficient management, as employees work their way up through the organisation. It can also help build a strong second line of leadership that is well-versed with the organisation’s operations, donor base, and the leader’s thought process.

A succession policy ensures the stability and accountability of the organisation by preparing for an eventual permanent change in leadership. | Picture courtesy: Pixabay

PRADAN’s model of democratic leadership has been built around this idea that organisational sustainability requires every employee to have a sense of ownership. When the organisation was first set up by Vijay Mahajan and Deep Joshi in 1983, they put in a mandate that the executive director (ED) would be replaced every five years. The leader stepping down would then return to their previous role, if they desired to do so. Mr Mahajan served as the executive director of the organisation for five years, post which Mr Joshi took his place. After this, Mr Mahajan went for a year’s fellowship to Princeton University, and when he returned, he worked in the organisation for a year in various non-leadership roles. Over time, both founders moved on from PRADAN to start separate ventures. Every subsequent ED has been a long-time employee of the organisation and has worked their way up the ranks. PRADAN is now led by Mr Narendranath Damodaran (the 8th ED of the organisation) who has worked at all levels. Mr Damodaran, like the EDs before him, was voted into the leadership by PRADAN’s ‘general council’, which includes every single employee of PRADAN who has been there for more than five years. Based on the council’s decision, PRADAN’s board takes the final call. In this way, PRADAN has ensured that homegrown talent is constantly being developed, and every employee is involved in leadership development.

As the founder prepares to transition, the funder’s support is essential. Working together, funders and founders can not only identify the skills and characteristics required to efficiently run the organisation, but also determine the resources needed. Similarly, funders can also play a role in supporting the founder’s next steps, either through seed funding for new ventures or by leveraging their networks.

By funding salaries and employee training, funders can help retain quality staff, and also ensure that these employees grow within the organisation.

Funders also play a pivotal role in developing in-house talent, long before the start of the succession planning process. By funding salaries and employee training, funders can help retain quality staff, and also ensure that these employees grow within the organisation. Increasingly, corporate social responsibility (CSR) teams are also working with their companies’ talent acquisition teams to help their nonprofit partners develop tailor-made succession plans and find good talent. For example, the Great Eastern CSR Foundation, a consistent proponent of organisation development, has often provided a component of unrestricted funding to nonprofit partners, including volunteering the time and expertise of their own human resources (HR) and legal teams.

When Liz and Sunil Mehta, the founders of Muktangan (an education-focused nonprofit), reached retirement age, they recognised the importance of system strengthening in ensuring a smooth leadership transition. So, they approached their funders for support in the form of human resources guidance and administrative expertise, so they could build robust internal systems. Muktangan eventually went on to create a cadre of efficient leadership built on the back of efficient systems and processes—all through collaboration with their funders.

Related article: How to successfully navigate organisational change

The board also needs to play a significant role in developing leadership and ensuring succession planning. A number of family businesses have diversified their boards to include numerous independent directors who are neither part of the family nor too close to it. These directors are increasingly being elevated to active stewards of CEO and C-suite succession management, involved in all aspects of the process. One of India’s majority promoter-owned Fast Moving Consumer Goods (FMCG) companies has a board comprised primarily of independent directors. It also has a clear charter outlining the board’s role, which also includes succession planning. Board members informally mentor the CEO and certain management team members, drawing on their own expertise. The success of this model was evident when the founder of the company decided to step down and worked closely with the board to hire the right external talent to replace him.

In a similar manner, nonprofits also must include their boards in the succession planning process. As a first step, the succession policy needs to clearly outline the board’s role, which includes assessing potential talent, mitigating risk, and ensuring that the current leadership sticks to the policy.

For any organisation, be it a business or a nonprofit, the exit of key personnel creates considerable upheaval. To smoothen the transition, once the founder has finalised their decision to move and communicated this to the board, the news should be shared with every employee—ideally much before the transition period begins.

It is vital that the founder informs all key stakeholders—including well-wishers, potential funders, and relevant government agencies—as soon as a suitable replacement has been confirmed. This is an important aspect of maintaining relationships and serves to reinforce the organisation’s professionalism and ability to evolve in the face of change. A well-worded communication piece from the founder goes a long way in explaining the rationale behind the move and the capabilities of the next in line.

Recently, one of India’s leading philanthropic foundations underwent a leadership change. The founder was elevating her second-in-command to an overarching leadership role. This transition was communicated to all stakeholders through a succinct email that outlined the new leader’s capabilities and achievements. It served to not only introduce the new leader to the foundation’s network but also reinforce stakeholders’ faith in the capabilities of the organisation and its leadership team.

The above examples serve as reminders that succession planning in the sector need not be ‘the big, bad problem’ it is often considered to be. However, for any succession plan to result in an effective transition and organisational growth, there needs to be active participation of funders, not just as providers of capital, but also as advisors and true partners.

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Know more

• Learn more about succession planning and why it is important for nonprofits.
• Understand the importance of the board’s involvement in leadership transitions.