Review of Legal and Fiscal Regulatory Mechanism of Voluntary Sector: A Seven Country Comparison

VOLUNTARY ACTION NETWORK INDIA (VANI) BB-5, 1st Floor, Greater Kailash Enclave - II New Delhi - 110048 Tel : +91-11-29226632, 29228127, 41435536 Fax : +91-11-41435535 E-mail: info@vaniindia.org Website: www.vaniindia.org

TABLE OF CONTENTS

Introduction Section 1: Registration Section 2: Taxation Section 3: Foreign Funding and Giving Conclusion

2-4 5 18 19 31 32 38 39 - 41

INTRODUCTION
In the developing world, voluntary Organisations (VO) have been and continue to be an important partner in identifying and meeting the needs of the have-nots, those who, for whatever reason are not able to adequately address their basic need. VOs come in all shapes and sizes from the large entities in the developed world extend varying forms of aid to the very small, but equally purposeful micro entities. Together and separately, these organizations are a part of the tapestry that provides assistance to those among us with the greatest need. By many of the worlds measures there has been little abatement in the needs that exist. In fact the needs are graver in many places. Economic development, the changes in our needs and how they are met have widened the gap between our richest and poorest people. If the needs are in fact greater, then there should be a redoubling of efforts and increased investment of resources. This has not been the case. What we have instead are cuts to programs and legislation that on the surface appears to restrict VO activity. In places where the need is greatest such as India, there is forecast of a contraction of the voluntary sector. The VOs in India are facing difficulties on a number of fronts. In the midst of a global recession, VOs are also facing mounting claims of corruption and are being saddled with new and far-reaching legislation aimed at a course correction. In what was an already chaotic environment, the new legislations are a cause for concern. Voluntary Organisations in India are facing a crisis of confidence. The public as well as the government expresses mistrust of organisations. As recent as August 2010, Consumer Court reported that there were 29 000 VOs on a blacklist for a variety of improprieties, most frequent offence being misappropriation of funds1. Transparency International, in its 2010 Global Corruption Barometer Report noted that Indias public perceives a high frequency of corruption. Seventy-four percent of Indians believed that the level of corruption increased in 20102. While not the seen as the worst offenders Indian NGOs scored 3.1 on a scale of 1-5 where 5 represented extreme corruption. The government claims, at least in part, to be responding to the levels of corruption within the Voluntary sector with the latest bevy of legislation. Opponents argue that the new legislation adds hurdles to the already difficult terrain that Indian VOs must navigate to bring vitally needed services to the most vulnerable among us. The new legislation is viewed as a clawing back of privileges secured by pioneers of the sector. In addition to addressing corruption, the government also claims that the new legislations are tools to address issues of National Security. In a post 9-11 world however, governments have a compelling ally national security. In the interest of national security; whether real or perceived, this phrase is driving a wave of legislation that is argued to have a negative impact on the ability of VOs to deliver on expectations.

1 2

http://www.consumercourt.in/product-services/25635-blacklisted-ngo.html Ibid

Since the 2001 terrorist attacks in the United States, there has been a serious contraction of the voluntary sector. All over the world, governments have sought to restrict the scope and reach of voluntary organisations for fear that funds intended to work for the benefit of the poor will finance the subversive activities of radical anarchist organisations. The International Centre for Not-forprofit Law (ICNL) has reported on a disturbingly large number of governments, principally but not exclusively authoritarian or hybrid regimes working to undermine voluntary organisations.3 While we have grown accustomed to seeing the heavy-handed approach of authoritarian regimes used to mute voluntary organisations around the world. ICNL finds more troubling the creep in otherwise democratic societies. To be fair, the nations being identified in the study are by and large former soviet fledgling democracies. There are however alarms being sounded about countries like Argentina, the United States of America and India the focus of this study.
In Argentina, for example, the law permits the termination of an NGO when it is necessary or in the best interests of the public, while in India, NGOs have protested that the proposed Foreign Contribution Management Control Bill (FCMC) would further burden foreign funding. Similarly, in the United States, civil liberties groups have challenged the recent use of secret, unchallenged evidence to close down charities purportedly associated with terrorists and criticized amendments to the Foreign Intelligence Surveillance Act which expand government authority to monitor private phone calls and emails without warrants if there is reasonable belief that one of the parties is overseas. (INCL &NED 2008)

There has been heightened rhetoric around the regulation of VOs in India over the last few years. The governments decision to reform and update the tax laws and the Foreign Contribution Regulation Act has sparked serious debates, which may have influenced the expression in the quote above. In the face, increasing claims of corruption, of declining confidence in the VOs, and potential terrorist threats, the Government of India has sought to establish new restrictions in the form of two major bills to the Direct Tax Code and the Foreign Contribution Regulation Act (FCRA)4. It is important at the beginning of any discussion to set the parameters of the discussion. This discussion will examine Indias regulatory regime for the voluntary sector. The dictionary defines regulation as a rule or directive made and maintained by an authority5 To that end the term regulatory regime in the context of this study is two fold. It first refers to the mechanisms in place that define the parameters in which VOs operate. Secondly, it refers to the ability to monitor, maintain in order to ensure adherence to the rules in place. This work examines Indias regulatory regime from a comparative perspective. It focuses on the claims made regarding Indias creep toward constricting the environment in which VOs operate. The earlier quote specifically identified FCR Bill, 2006, which was passed in the month of August of 2010 as the Foreign Contribution Regulation Act, 2010 (FCRA). In addition to looking at the FCRAs impact on VOs, this work will also review the pending Direct Taxes Code Bill, 2010, the potential impact of both on taxation and the flow of funds into and out of India, as well as its impact on local giving and registration.
3 4

INCL & NED. Defending volunteer, 2008 p10. The FCRA awaits implementation as of April 2011 5 Oxford Dictionary

As stated this work will employ a comparative approach, using a seven-country pool. We often look at countries like the Canada, UK and USA as the standard bearers for all things philanthropic. To be certain these countries have arguably some of the most progressive, permissive and supportive regulatory regime for VOs in the world. It is with this in mind that we will look at these countries, in the hope of deriving a set of best practices for regulating the sector. In addition to these countries, we have , from Asia, Japan and the Philippines, and from the African continent, South Africa. While we will do a general comparison of the regulatory regimes, special care is taken to address the areas that are highlighted in the Financial Management Service Foundation (FMSF) reviews of the new FCRA regulation and proposed changes in the Direct Taxes Code Bill (DTC).

1. Laying out the Conditions in India

Presently, India has one of the fastest growing economies in the world. The Indian economy is on course to surpass the United States within the next forty years. In spite of this growth however, India also has more than 300 million people that are food insecure. The world hunger index for 2010 indicated that India was home to 42% of the worlds under weight children. To be fair the index did record a decline in the number of Indias hungry over time. However, the rate is still alarmingly high6. According to the 2010 Human Development Index India is ranked as a middle level country in the bottom third at 119 of 169 countries on the human development index. The numbers are equally alarming when one looks at the numbers of people living in poverty and those that are income poor. More than 50% of Indians live in poverty, while better than 42% are income poor7. Voluntary organisations have been active partners in the fight to improve the livelihood of Indias poor for decades. It has been and continues to be a very difficult task. The numbers quoted show just how large a task it is. There is little dispute that the need in India is great. Instead of an increase in aid to match the magnitude of the need, what we are seeing is, as stated, a retreat of funding. For a number of reasons the funding available to the voluntary sector is shrinking the world over. The current global economic environment not withstanding, we are seeing a significant decline in the foreign sources of funding available to Indias voluntary organisations. This is troubling because we are not seeing a corresponding increase in local giving to fill the void. It is in this environment of substantial need and retreat of foreign capital that the government of India has introduced bills to replace the Income Tax Act, 1961 and the Foreign Contribution Regulation Act, 1976, with the Direct Taxes Code Bill, 2010 and the Foreign Contribution Regulation Act, 2010 . The new laws, in the eyes of many experts, tighten the noose around the neck of Indias much needed but obviously struggling VOs, more importantly if true it reduces the assistance to those most vulnerable and most in need.

2. Objectives

This work will assess the environment in which Indias Voluntary organisations operate, highlighting the difficulties from the perspective of leaders in the sector. The work will examine on Indias regulatory regime eliciting some best practices through comparing a few regulatory regimes around the world. As stated regulatory regime is defined here as the rules and monitoring for adherence to
6 7

http://www.ifpri.org/publication/2010-global-hunger-index The Real Wealth of Nation: Pathways to Human Development, HDRO-UNDP November 2010

said rules. The actual rules are numerous and varied; as a result this work will be limited to three independent but overlapping areas: registration, taxation (with a special look impact home grown philanthropy) and the flow of foreign contributions into and out of India. The paper is divided into three sections comparing all seven countries on the issues of registration, taxation and the Foreign Contribution Regulation Act. To start, this work will lay out in brief the registration environment in India et al. That will be followed with a comparative description of the tax and foreign fund environment in all seven countries. There is a review of the New Direct Tax Code and the Foreign Contribution Regulation Act embedded within the respective sections. Both are examined regarding their prospective impact on Indias civil service sector. Another area of special interest, Indias emerging role as a donor nation is examined in the contesxt of the tax laws. India as a donor is shown to be quite contradictory of its tax policy that all but prohibits use of privately collected Indian resources for charitable purposes outside of India. Each section is followed by a brief observation that shapes the argument in a collective, comparative observation.

SECTION 1 REGISTRATION
1. Registration in India
Our examination of the regulatory regime begins with the process of registration. Registration in India in the eyes of many has not changed much over time. Two of the three major avenues for registration for public benefit VOs predate Indias 1947 independence. The Societies Registration Act, 1860 and The Indian Trust Act, 1882 are 19th century laws passed while India was under British rule. The single fact that these acts were created to serve the interest of a colonial dependency does not diminish their worth. On the contrary the endurance could be seen to speak volumes about the soundness of the legislation. Some argue that the antiquated laws are not robust enough to deal with the needs of the sector today. It can also be argued that these acts are federal laws, which given the States right to regulate VOs within their jurisdiction, merely serves as a guideline for a minimum requirement for VOs to operate. This view is supported by the fact that regulating VOs is a state responsibility. We see also that many states have started with the federal law and added tweaks to strengthen the laws. The Central government for their part has refrained from modifying
1.1 Registration Laws in India

There are three avenues to establishing a VO in India, they are: The Societies Registration Act, 1860 The Indian Trusts Act 1882, The Bombay Public Trusts Act, 1950 The Indian Companies Act, 1956 (Section 25)
1.1.1 The Societies Registration Act, 1860

The Societies Registration Act came into force in 1860, two years after the Revolt of 1857 was put down. After Independence, this Act was adopted as the law in the new nation as a federal provision. Given that administration of VOs falls under the providence of state governments, States in some instances have set up entirely new registration requirements for societies, using the federal regulation as a mere guideline. In other cases they add small tweak and in yet other states the Act is administered as is. According to section 20 of the Act, the types of societies that may be registered under the Act include, but are not limited to, the following: Charitable societies, Societies established for the promotion of science, literature, education, or the fine arts; and Public art museums and galleries, and certain other types of museums. Individuals or institutions or both may be members of a society. Finally, societies may be dissolved. It should be noted that upon dissolution, and after settlement of all debts and liabilities, the funds and property of the society must be given or transferred to some other society; there is an expressed preference that the resources go to one with similar objects as the dissolved entity.

1.1.2 The Indian Trusts Act, 1882

The Indian Trusts Act, 1882, is the federal vehicle for registration of a private trust. The act is a template for the country as a whole, except in the States of Jammu and Kashmir and the Andaman and Nicobar Islands. There is also an exception for locations where there are no actual offices of the Charity Commission; in that case entities will register with the Registrar of Societies or other Nominated authorities. The Indian Trust Act applies only to private trusts. Some states have separate acts governing the administration of charitable institutions and endowments. Generally, a charitable trust must register with the office of the Charity commissioner of the state in which the trustees register the trust in order to be eligible to apply for tax-exemption. In general, trusts may register for one or more of the following purposes: Relief of poverty or distress; Education; Medical relief; Provision of facilities for recreation or other leisure-time occupation (including assistance for such provision), if the facilities are provided in the interest of social welfare and public benefit; and the advancement of any other object of general public utility, excluding purposes which relate exclusively to religious teaching or worship. Indian public charitable trusts are generally irrevocable. If a trust becomes inactive due to the negligence of its trustees, the Charity Commissioner may take steps to revive the trust. Furthermore, if it becomes too difficult to carry out the objectives of a trust, the doctrine of cy pres, meaning "as near as possible," may be applied to change the objects of the trust.
1.1.3 The Companies Act, 1956

The Indian Companies Act, 1956, which principally governs for-profit entities, permits certain companies to obtain not-for-profit status as "section 25 companies." A section 25 company is formed for "promoting commerce, art, science, religion, charity or any other useful object." A section 25 company is required to apply its profits, if any, or other income to the promotion of its objectives, and should not pay dividend to its members. A minimum of three individuals is necessary to form a section 25 company. The founders or promoters of a section 25 company must submit application materials to the Regional Director of the Company Law Board. The application must include copies of the memorandum and articles of association, as well as a number of other documents, including a statement of assets and a brief description of the organisational objectives. The governing structure of a section 25 company is similar to that of a society. It generally has members and is governed by directors or a managing committee or a governing council elected by its members. A section 25 company can be dissolved. Upon dissolution and after settlement of all debts and liabilities, the funds and property of the company may not be distributed among the members of the company. Rather, the remaining funds and property must be given or transferred to some other section 25 company, preferably one having similar objects as the dissolved entity.
1.2 Grievance Redress Mechanisms Appeals 1.2.1 Society

The Societies Registration Act at the central level and its state level variations do not make any provisions for grievance redress or appeals. The only recourse possible is through the civil courts.

1.2.2 Trusts

If any trustee or beneficiary is dissatisfied and disputes any action of the trustees he can lodge a complaint with the Charity Commission. In case of disputes related to property the complaint has to be filed under Sec 18, which is managed by the Deputy Charity Commissioner. If the parties are not satisfied with his judgment they can appeal to the Charity Commissioner, who gives directions for removal of cause of complaint. However, if the case is not resolved at this level appeals can be made to the civil courts.
1.2.3 Section 25

Indian Companies Act does not make any provisions for grievance redress or appeals. The absents of a grievance mechanism all but ensures that disputes end up winding through the Indian court system.

2. Registration in Other Countries

2.1 Canada

The registration process in Canada is determined by the objectives of the organisation. Organisations established for the benefit of a limited group or its members exclusively are deemed to be regular VO and are subjected to a different set of regulations from organisations developed to service the society as whole, considered charities. The primary definition of a non-profit organisation is: "a club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1). The term "club, society or association" includes corporations and trusts. The limiting condition is that the VO must not pursue profit. This does not mean that activities generating a profit are forbidden, so long as the motive for the activity is not the generation of profit. Also, because the Income Tax Act does not require registration of VOs; in essence, they self-assess their status. The Canada Revenue Agency distinguishes between charitable organisations, public foundations and private foundations based on the entity's structure, source of funding, and mode of operation. As a practical matter, charitable organisations are operational charities, while foundations are almost always grant makers8.
2.1.a Charitable Organisations

A registered charity is designated as a charitable organisation if: a) it devotes its resources mainly to charitable activities conducted by itself; and b) more than 50% of its directors/trustees deal with each other at arms length (i.e., individuals not related by blood, marriage, common law relationships, or close business ties).
2.1.b Public Foundations

A registered charity is a "public foundation" if: a) it is constituted and operated exclusively for charitable purposes; and b) it is a corporation or a trust. A public foundation must also meet condition b) for charitable organisations. [5]

ICNL

2.1.c Private Foundations

A registered charity is a "private foundation" if: a) it is constituted and operated exclusively for charitable purposes; b) it is a corporation or trust; and c) it is not a charitable organisation or public foundation. A private foundation is one where more than 50% of the board is not at arm's length with each other. With the exception of federal incorporation, the creation of any organisation is subject to the applicable provincial law, which varies somewhat, but seldom substantially, from province to province. This is a function of federalism where in the state has the constitutional jurisdiction for the regulation of entities operating within its jurisdiction. The federal provisions for the regulation of a charity serve as a guideline except for a charity that operates in multiple provinces where it will supersedes the provincial regulations.
2.2 Monitoring

The Charities Directorate is responsible for ensuring that charities comply with the Income Tax Act and with the rules that have been established for charities. All charities must file an annual information return with the Charities Directorate. This form contains information about what the charity has done in the previous year as well as financial information. A copy of this return can be made available to any member of the public on request. The charity must also include a copy of its full financial statements with its return, but those statements are only made available to the public if the charity agrees. The Charities Directorate conducts between 500 and 600 audits each year. An auditor visits the charity and reviews its books and records to ensure that the organisation still complies with the laws and procedures. Some organisations are selected at random for an audit; others are selected because of information the Charities Directorate has received or because it has decided to pay particular attention to a certain type of charity. Under the law, the Charities Directorate cannot tell anyone other than the charity involved about an audit. It cannot even confirm whether an audit has taken place. However, if a charitys registration is revoked, the Directorates letter setting out the reasons for the revocation is publicly available.
2.2.1 Sanctions

If a charity does not comply with the law, the Charities Directorate has only one penalty readily available to it deregistration, removing the organisations status as a registered charity. About 2,500 charities are deregistered each year. About 66% of those de-registrations are because the charity has not filed its annual return with the Charities Directorate. Another 30% are made at the charitys request because it has decided to stop operating. In the last five years, very few have been deregistered for cause for some serious violation of the rules governing charities. It is important to note that deregistration has an added disincentive for VOs. Being deregistered will have a negative impact on the credibility of an organisation and may jeopardize the fund raising ability.

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2.2.2 Appeals

If an organisation feels it has been unfairly denied charitable registration, or had its charitable registration revoked, it may ask the courts to overturn the decision. In that case, the organisation takes an appeal to the Federal Court of Appeal. A panel of three judges hears arguments and considers the documents and information that the Charities Directorate used in coming to its decision. Some of this material comes from the application for registration, or from documents obtained during an audit. The Charities Directorate as a result of its own research gathers other material. This is called an appeal on the record. There is no witness testimony at the appeal. A further appeal can be taken to the Supreme Court of Canada, if that court grants permission. These appeals help clarify the law about what is charitable in Canada. Since there is no legislated definition of charity, it is these court decisions that must be used by the Charities Directorate in considering future applications. Over the last 25 years, there has been an average of only one court decision on charity law each year. Decisions from provincial courts and courts in other countries can sometimes be helpful, but are not binding on the Charities Directorate.
2.3 Self-regulatory efforts

The self-regulatory initiative in Canada has been lead by Code of ethics of Canadian Council for International cooperation (CCIC) The process does have some shortcomings in that the enforcement mechanism relies on self-assessment, and the beneficiary accountability is merely aspirational. See table three for a side-by-side comparison of the self-regulatory efforts of the countries in this study.

3. United States of America

The designations in the USA are very similar to that of Canada. American non-profit organisations fall into two broad groups: charities and other public benefit non-profits and mutual benefit nonprofits. The traditional common law definition of charities as derived from English law, speaks of four charitable purposes: The relief of poverty; The advancement of religion; The advancement of education; or Other purposes beneficial to the public and analogous (or similar) to purposes,

In the modern era however, the traditional definition in the United States has been largely superseded by the tax definition of charity that is, by the definition of an organisation that pays no tax on its income and whose donors derive tax benefits as a result of their donations. This formula simplifies the process for the monitoring and of VOs in the Canada and the USA. The explosion in the number of VOs in the USA in particular would make the maintenance aspect of the regulatory mechanism very difficult. According to the International Center for Not-for-Profit Law the number of VOs in the USA has grown 20 fold from the 1950s, 50k to well over a million today9. Monitoring of charities in the USA is largely achieved through the use of the tax laws

ICNL

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3.1 State Law

In most states, the Attorney General is empowered to supervise and regulate charities. Charities are required to file annual reports regarding their activities and finances to the office of the Attorney General. In most states, the Attorney General has powers to inspect and review a charitys books and records to safeguard the interests in charitable assets. The public also may inspect any of these reports, which are available on request. The members of the charitys governing body owe a fiduciary duty to the charity. If a director breaches the duty, the state attorney general has powers to compel the director to repair any damage that the charity suffered as a result. This approach is not novel, organizations come together partly to shield individuals from personal liability. This approach pushes back against that norm. It also does not specifically target aid funds as a remedy, ultimately ensuring that funds are not diverted from those for whom it was intended.
3.2 Federal Law

The Internal Revenue Service supervises the operations of charities in three ways: Through the information provided in the annual returns; Through its power to audit the finances and operations of charities; and Through its power to assess penalties and fines and in extreme cases to revoke a charitys exempt status for abuses and violations of the law.
3.3 Annual Returns

Public charities other than churches, with an annual gross receipt of over $ 25,000 must file an annual information return on IRS Form 990. Private foundations must file Form 990-PF, a longer version of the earlier form. If a charity has unrelated business taxable income it must file Form 990T and pay tax. Form 990 and its variations require detailed information about many aspects of a charitys finances and operations, including: Revenues and expenses for the year covered by the return, by specific categories; Compensation (both current and deferred) and benefits provided to directors, officers, key employees and the five most highly paid employees and independent contractors of the charity. Compensation paid to these people through related organisations (both for profit and not for profit) must also be reported. Financial transactions that involve insiders either directly or indirectly, focusing on Section 4841s self dealing role for private foundations and on section 4958s excess benefit ban for public charities but not limited to transactions that fall within the scope of these statutes. A schedule of grants and other charitable distribution, including any relationship between the grantee and an insider in the charity Deals of any loans between the charity and its officers, directors, trustees, and key employees. Fundraising expenses, accounting fees, legal fees, and similar payments to outside professionals. Information on taxable subsidiaries and transactions with related organisations. Description of charitys major programme areas.
3.4 IRS Audits

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Federal tax law gives the IRS the authority to audit the books and records of charities and other non-profit organisations, subject to procedural protections designed to prevent government abuses. An audit may be triggered by information provided in form 990, by information from a disgruntled employee or former supporter, or by the press coverage of the apparent abuses by a charity or its managers. From time to time the IRS decides that it must audit a particular segment of the nonprofit sector because of widespread concern about legal compliance. In recent years, the IRS has focused on audit of hospitals and health care systems and on large colleges and universities. An organisation under audit has an opportunity to confer with the IRS auditor to provide information to support its position and to appeal the auditors conclusions. If the auditor concludes that the charity has complied with the applicable laws, the IRS confirms the fact in a no change letter. However, if the audit discloses problems the IRS assesses applicable taxes and penalties. If the charity pays a fine it has to be reported on Form 990 of the year in which the fine was paid.
3.5 Fines and Penalties

The ultimate penalty is the revocation of an organisations tax-exempt status. However, this sanction is rarely applied. More often the charity agrees to correct the problem and pay a fine. Section 4958s ban on excess benefit transaction of public charities, which is enforced by penalties imposed on the wrongdoer rather than the charity itself, gives the IRS an effective weapon against abuses. The objective being to insulate the charity from potential damaging public perceptions, the real winners are the intended beneficiaries who wont bare the costs of the abuse.
3.6 Mechanisms for Appeal

In the United States, all applications to the Internal Revenue Service for tax-exempt status are handled centrally. An organisation that receives an initial adverse determination of tax-exemption (or a letter proposing to revoke an existing exemption) may seek recourse from a separate branch of the Internal Revenue Service (the Appeals Office), by filing a protest within 30 days. The protest letter must include details such as the aspects of the original decision the organisation disagrees with, the facts supporting its position, and the law or authority on which it is relying. If requested, a conference can be held, but otherwise the procedure can be conducted by correspondence or telephone. Appeals Office staff can only determine cases according to established precedents and policy. Where there are no established precedents and policy, the matter is referred to head office in Washington. The organisation also has the option of having the file referred directly to Washington. In addition, organisations can go directly to court, rather than using the Appeals Office, or they can go to court if they disagree with the decision of either the Appeals Office or head office. If the court finds the organisation to be the prevailing party, it can recover its administrative and litigation costs.
3.7 Mechanisms for Public Accountability

A charity is obliged by law to provide a copy of its tax-exempt application and its three most recent tax returns, together with all attachments except the donor list to anyone requesting them, immediately if the request is made in person and within 30 days if the request is made in writing. The organisational test of Section 501 (C) (3) requires a charity to state, in its governing document, that its assets are irrevocably dedicated to charitable purposes and that if the charity ceases to exist, its remaining assets (after payment of its debts) will be distributed for charitable purposes. In 13

practice, the responsibility for ensuring that the charitable assets remain devoted to charitable purposes when a charity ceases to exist, its future rests with the states, specifically with the office of the Attorney General.
3.8 Self-regulatory efforts

There are several self-regulatory initiatives at work in the USA. Three of the four listed in this work have all the criteria of an effective effort10, in that they have in place three criteria deemed essential to an effective regulatory mechanism. The odd institution, Independent Sector Statement of Values and Code of Ethics for Non-Profit Org, does not meet any of the criteria save having a code of conduct. .

4. England and Wales (UK)

The registration requirements in the UK also run along similar lines as the previous countries. It is important to note that reference to the United Kingdom in this work is limited to England and Wales. Both share a single approach to NGO regulation, while Scotland and Northern Ireland employ different schemes. As is the case with Canada and the USA, VOs organized for the benefit of its members are not required to register. A key difference is that in the UK such VOs do not receive the benefit of a tax exemption granted to its counterparts in the Canada and the USA. The charities in UK are registered, monitored, and facilitated through a Charity Commission. The Charity Commission has been established by law as the regulator and registrar for charities in England and Wales. The Charities Commission aims to provide the best possible regulation of charities, in order to increase their efficiency, effectiveness and public confidence and trust in charities. The Charity Commission has the following roles: To secure compliance with charity law, and deal with abuse and poor practice; To enable charities to work better within an effective legal, accounting and governance framework, keeping pace with developments in society, the economy and the law; and To promote sound governance and accountability All charities in England and Wales, which are not specifically exempt or excepted from registration, are required to register with the Charity Commission. Exempt charities are charities that Parliament has specifically decided do not need to be supervised by the Charity Commission, typically because other arrangements already exist to supervise and regulate them. An excepted charity is a charity which is exempted from the duty to register either by Regulations made by Ministers or by an Order made by the Commissioners. A charity is also exempted from registration if it has neither: any permanent endowment; nor the use or occupation of any land (including buildings); nor an annual income from all sources of more than 1,000.
10

Robert Lloyd Ensuring Credibility and Effectiveness 2010

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The Charity Commission is required to register any institution, which is a charity (unless is exempted). The procedure for applying for registration as a charity, the gateway procedure for registration, requires applicants to provide, in addition to their constitutional documents, a range of information about their actual or proposed activities, plans for funding and trading, and trustees. The gateway process was developed in response to suggestions from the Public Accounts Committee that greater scrutiny of charities was required at the time of registration. However, this process has been criticized by charities for taking into account the viability of an organisation when deciding whether or not to register it. The critics argue that the Commission is not legally entitled to do this; and applies an activities test by looking at an applicants actual or proposed activities as an aid to interpreting the purposes stated in the applicants constitution. Some critics are of the view that this process is making it more difficult for charities to register; in fact this procedure is onerous for very small organisations. Registration means that while the organisation remains on the Public Register of Charities it will be legally presumed to be a charity and must be accepted as a charity by other bodies such as the Inland Revenue. Although registration does not necessarily indicate approval of the management of the charity, it does mean that it is subject to supervision by the charity commission and that information about it, including its governing document and accounts, is open to examination by the public. Once a charity is registered, the trustees must inform the charity commission about any change to the charitys registered details. The organisations have to submit their annual accounts to the charity commission and may be asked periodically to complete a return or supply additional information.

4.1 Annual Monitoring of Charities

Statutory power to monitor charities, through a compulsory annual return, was given to the Charity Commission in 1996, when the relevant Charities Act 1993 provision came into force. The annual monitoring system makes greater demands on charities, and subjects them to greater scrutiny, as their size, and the risk of harm that could result from their failure, increases. Around 50,000 charities those with an income or expenditure over 10,000 are monitored annually. The statutory accounting, reporting and auditing requirements are similarly graduated. A charity, which is not a company, must have its accounts for a particular financial year professionally audited (i.e. audited by a person registered as an auditor under the Companies Act 1989) if either: Its gross income or total expenditure exceeded 250,000 in that financial year; or Its gross income or total expenditure exceeded 250,000 in either of the two years preceding that financial year.

A charity, which is a company, must have its accounts for a particular financial year professionally audited if its gross income is over 250,000 in that year.

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Experts feel that these rules are unnecessarily complicated and impose a professional audit requirement at too low a level. The charity threshold should be raised to 1 million. Below that level (down to an income threshold of 10,000) charities should continue to be required to have their accounts examined by a competent independent person.
4.1.1 Assistance on Legal, Governance and Administrative Issues

This function, which the Charity Commission calls Charity Support, consists of modernizing the purposes, governance and administrative arrangements in charities constitutions, advising on legal and regulatory requirements, and authorizing actions and transactions which charities would not otherwise have the legal power to carry out. The Commissions primary function is a regulatory one and the bulk of its resources are rightly dedicated to this function. However, it is also part of the Commissions function to give charity trustees information and advice on any matter affecting the charity. This clearly allows the Commission not only to tell charities what their legal obligations are, but also to adopt a wider advisory role on good practice. The Commission on the Future of the Voluntary Sector, an independent review, examined the tensions that have sometimes arisen out of this dual role of regulator and adviser.
4.2 Self-regulatory efforts

The UK does not have an active self-regulatory initiative at work at this time.

5. Philippines
In the Philippines there are legal and operational distinctions made between registration and accreditation. Registration is an official legal recognition issued to a person, corporation, entity or organisation after having met certain basic requirements under Philippines law. As is the case with the western democracies above registration is not a requirement for existence of a voluntary association. It is however a requirement for the attainment of a legal personality. To qualify for accreditation, a non-stock, non-profit corporation must be organized for one or more of the following purposes: religious; charitable; scientific; athletic; cultural; rehabilitation of veterans; or social welfare. (Section 1(a), Revenue Regulation No. 13-98). Further, no part of the net income or assets of the accredited organisation may belong to or inure to the benefit of any member, organizer, officer, or specific person (Tax Code sec 30 (E), Section 1(a), Revenue Regulation No. 13-98). To qualify for accreditation as a voluntary organisation, a VO must be organized and operated exclusively for one or more of the following purposes: scientific; research; educational; characterbuilding; youth and sports development; health; social welfare; cultural; or charitable purposes. (Section 34(H)(2)(c)(1), Tax Code) Further, no part of the net income may inure to the benefit of any private individual (Section 34(H)(2)(c)(1)), Tax Code and Section (1)(b), Revenue Regulation No. 13-98). Accredited VOs are also subject to other requirements, including restrictions on the amount of administrative expenses that can be incurred (limited to 30% of total expenses) and

16

limitations on the distribution of assets upon the organisations dissolution (Section 1(b), Revenue Regulation No. 13-98). 5.1 Annual Monitoring of Charities NGOs are required to regularly report and disclose information in relation to their operations. For each donation received, a certificate of donation must be submitted to the donor, and the Bureau of Internal Revenue. In addition, and the Securities Exchange Commission (SEC) requires that organisations annually submit audited financial statements as well as a general statement of activities. Organisations must also submit a General Information Sheet that includes the specific present address of the NPO, telephone and contact numbers, names of officers, trustees and members, their addresses and contributions and number of staff. The self-regulatory effort in the Philippines is well developed and often cited as a success story. The Philippines Council for NGO Certification (PCNC), the leading self-regulatory agency in the Philippines is effectively a conglomerate of six NGOs. An ambitious attempt at self-regulation, the PCNC entered a partnership with the Department of Finance in 1998. In January 1998 PCNC entered into an agreement with the department of Finance, officially recognizing the PCNC as the official vehicle for registration and monitoring of the VOs, wishing to qualify as a donee organization11. While there is still room for improvement we see that the PCNC is headed in the right direction with an enforcement mechanism and sanctions in place. The beneficiary accountability is however merely aspirational.

6. Japan
In Japan registration for a VO can be done in one of five legal forms. There are some recent changes to the Japanese regulatory machinery. In December 2008, a set of laws was enacted ushered in significant changes for Japanese VOs. New laws include the Association and Foundation Law, that Law on Recognizing Organisations as Public Interest, and the Law to Consolidate Relevant Laws. Under the Association and Foundation Law, citizens can form an association or foundation even if the organisation's activities are not in the public interest.
6.1 Associations and Foundations of Public Interest

The Law on Recognizing Organisations as Public Interest delineates a range of requirements for associations and foundations to be recognized as those of public interest. The Committee for Public Interest Organisations, which is comprised of experts from various fields, screens applications from organisations and authorizes or rejects the public interest status of each. The committee seeks to determine if an organisation satisfies the requirements of the new law, including: 1. The organisation's public purpose activities shall fall under the categories specified by the law; 2. The operation of the organisation shall be focused mainly on the pursuit of public purpose activities; 3. The organisation shall be capable of undertaking proper accounting and managing its projects;
11

NPO Sector Assessment Philippine Report 2008

17

4. Revenues earned from its public purpose activities shall not exceed the expenses for these activities; 5. The expenses for public purpose activities shall be more than half of its total expenses for overall activities; 6. The balance of the organisation shall be expected not to exceed the designated amount; 7. Less than a third of the board members or auditors shall come from a given family or a given company; 8. The honorarium for the board members shall not be unfoundedly expensive; 9. The organisation does not possess financial resources that would allow the organisation to influence over other entities. A committee summoned by the national government will screen organisations operating on a nationwide scope while committees established by prefectural governments will review organisations whose activities take place in given prefectures.
6.2 Special Non-profit Corporations (SNCs)

This not-for-profit organisational form was created under the Law to Promote Specified Non-profit Activities (SNC Law), which went into effect in 1998 and was last amended in 2003. The purpose of the law was to alleviate the legal hurdles of creating Public Interest Legal Persons or PILPs under Article 34 of Japan's Civil Code. The Japanese government initially envisioned that SNCs would be covered by the recently enacted laws, but abandoned the idea in the face of opposition from SNCs12. The purpose of an SNC, or tokutei hieiri katsudo hojin, cannot be the generation of profits, and it cannot propagate religious teachings, perform religious ceremonies, or educate or foster religious believers (SNC Law, Article 2). It must have at least 10 members, and its "provisions regarding acquisition and loss of qualifications for membership [must not be] unreasonable" (SNC Law, Articles 2, 10, 28). A SNC must have at least three directors and at least one auditor as an officer (SNC Law, Article 15). It may engage only in those activities (as its primary non-profit activities) specified in the Schedule to Article 2 of the law (SNC Law, Article 2). The enumerated activities include health care, environmental work, disaster relief, youth activities, and international cooperation (the full list appears in Section III-B, below). 6.3 Organisations Established Under Special Laws Arising Under Civil Code Article 34 The following are among the principal subtypes of Organisations Established under Special Laws Arising under Civil Code Article 34. These organisations are subject to different rules regarding operations and tax treatment from those governing associations, foundations, and SNCs. Specifically: Social Welfare Organisations provide services for social advancement, including services for the elderly, children, and the handicapped, among other activities. Educational Organisations (Private School Corporations) operate private schools. Religious Corporations engage in religious or evangelical activities. Medical Corporations establish hospitals and clinics in which doctors or dentists provide regular services, or facilities for the health and welfare of the elderly. Under Japanese law, only not-for- profit entities are permitted to provide medical treatment, creating a prominent role in this field for not-for-profit organisations. However, except for the small category of Special Medical Corporations, most Medical Corporations are not accorded the same
12

ICNL

18

treatment as PILPs. This is reflected, for example, in tax treatment: Medical Corporations are taxed in the same manner as ordinary corporations. Relief and Rehabilitation Enterprises (sometimes called "Regeneration and Protection Corporations") assist those who are imprisoned to rehabilitate and integrate them back into society. 6.4 Public Interest Legal Persons or PILPs (Tokurei Houjin) As a direct result of the 2008 changes to the legal framework as it relates to VOs, the PILP became a transitional organisational form in Japan. The new laws effectively abolished Article 34 of Japan's Civil Code, and all PILPs established there under can maintain their legal status for 5 years, after which time their legal status will be automatically cancelled. These organisations are expected to change their status by becoming an association or foundation (Ippan Shadan or Zaidan), an SNC, an organisation authorized by special laws arising under civil code article 34, or a profit-seeking entity. Alternatively, a PILP may seek to obtain public interest status or dissolve. Existing PILPs advance the public interest through "rites, religion, charity, academic activities, arts and crafts, or [an objective] otherwise relating to the public interest and not having for its object acquisition of profit."
6.5 Self-regulatory efforts

Japan does not have an active self-regulatory initiative at work at this time.

7. South Africa
Voluntary Organisations in South Africa are registered under three legal forms: Voluntary Associations Non-Profit Trusts Section 21 Companies.

7.1 Voluntary Associations

The voluntary association is the most common legal form for not-for-profit organisations in South Africa. No office of registry exists for voluntary associations. Forming a voluntary association requires only that three or more people agree to achieve a common objective, primarily other than making profits. The agreement may be oral or written, though it is customary for the agreement to take the form of a written constitution. Voluntary associations are a product of the common law and are not regulated by statute. This can be confusing, because the common law is not easily accessible and sometimes is conflicting. Voluntary associations may be classified as follows: Corporate bodies under the common law, known as universitas; Bodies that remains unincorporated at common law, known as "non-corporate associations." When deciding classification of a voluntary association, the court will consider the organisation's constitution as well as its nature, objectives, and activities. There are three requirements in order to be classified a universitas:

19

i. The entity is structured to continue as an entity notwithstanding a change in membership; ii. It must be able to hold property distinct from its members; iii. Members have no rights, based on membership, to the property of the association. If all of these requirements are met, the organisation will be deemed a universitas with legal personality. Otherwise it is a non-corporate association without a legal personality.
7.2 Non-Profit Trusts

Trusts in South Africa are governed under The Trust Properties Control Act. A trust can be established for private benefit or for a charitable purpose. In order to determine whether a trust qualifies as a charitable trust under South African law, a grant-maker must look to the trust deed. A trust is created when property is transferred by a trust deed; the trustee then manages the property for the benefit of others or for the achievement of a particular goal. The property can only be transferred by written agreement, testamentary writing, or court order. The person who administers the trust property is called a trustee13. A court official, called a Master of the High Court, has jurisdiction over a trust if the majority of the trust property is situated in his or her jurisdiction14. The Master holds the trust instruments, oversees the appointment of trustees, and polices the trustees' performance with respect to the trust property15. A trust does not have separate legal personality, but trustees still enjoy limited liability. All rights and responsibilities vest collectively in the Trustees. 7.3 Section 21 Companies The South African Companies Act provides for an association not for gain in terms of Section 2116. Such an organisation, commonly called a Section 21 Company, must have at least seven members, each of whom makes a guaranteed commitment in the event of the institution's financial failure (although such commitment may be purely nominal). The primary purpose of a Section 21 Company must be to promote religion, the arts, science, education, charity, recreation, any other cultural or social activity, or communal or group interests17. A Section 21 Company must register with the Registrar of Companies18. The records of the Registrar are open to the public. Section 21 Companies have legal personality and therefore offer limited liability to their members and directors. They can enter into contracts and sue and be sued in their own name. Branches of foreign not-for-profits in South Africa can be registered under Section 21A of the Companies Act. 7.4 Annual Monitoring of Charities The monitoring of public benefit organisations in the South Africa is carried out by multiple agencies. There are four state agencies, the NPO Directorate Department of Social Development; Tax exemption Unit South African Revenue Services; Companies Registrar Department of Trade and Industry; District Master of Court Office Department of Justice.

13 14 15 16 17 18

[TPCA 1] [TPCA 3] [TPCA 4; 6-7; 16-20] [Companies Act 21] [Companies Act 21(1)(b)] [Companies Act 63(1)]

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The requirements for compliance are much the same, in that organisations are required to make regular reports regarding the disposition of finances moving through the respective reporting agency. The Non-Profit Organisations Act requires organisations registered with the NPO Directorate submit annual accounts and narrative reports. Accounts have to be approved by an Accounting Officer regardless of the size of the VO. These annual reports and accounts must be filed within nine months of the end of the financial year. Failure to do this will result in deregistration. Section 21 Companies are required to submit accounts and reports to the Companies Registrar. Public Benefit Organisations are required to submit accounts and reports to the revenue department for tax exemption purposes. 7.5 Self-regulatory Efforts There is also an attempt at self-regulation afoot in South Africa, the most prominent South African NGO Coalition (SANGOCO), has developed a code of ethics, which function as a guide for member organizations. There are however, no enforcement mechanisms or sanctions in place to encourage compliance. On the positive side there are some standards for beneficiary accountability.

8. Observations
There is not much that distinguishes the registration process across the countries within this study. There are differences in the number of categories and labels and categories employed distinguish among voluntary organisations. However, at the core there are three fundamental designations. Non-profits serving the interest of its members, Non profits/public benefit organisations/charities serving the interest of the society at large and not for profit companies which are essentially companies that return the proceeds to the further the objective of the organization, e.g. hospitals or cooperatives. A look at the countries within the study reveals that despite the differences in categories the requirements for registering VOs are very similar. The variations in rules of operation for charitable doers versus charitable donors transcend labels. For example, a charitable trust in India is similar to a public or private foundation under Canadian labeling. The differences as they exist regarding the governing structures are inconsequential to the functions of the organisations. One problem that has been highlighted here in India related to registration is the variations in rules across states. The Argument is that the rules for registration of a society may be different in Delhi than it is in Rajasthan and still different that what exist in Tamil Nadu. A look at other federalist states reveals similar pattern. This is a feature of federalism and is not as many have argued a flaw exclusive to India. As insightful is the fact that the remedy for multi-state VOs here in India is the same as a multi state VOs in Canada or the USA. Federal registration supersedes state registration and allows the organisation to operate in all regions. By registering federally, multi state VOs will standardize the requirements for registration regardless of how many states they choose to operate. This feature of federalism is argued to be beneficial, because it allows for

21

experimentation at the state level, the development best practices from lessons learned, and ultimately a stronger more sound central policy. All things considered the processes for registration are very similar in structure and guidelines for operation. Given the democratic principles that recognize freedom of association regulation of voluntary organizations can be very tricky. There are limits to the kind of enforcement measures that are available to the state. The registration process is first step. A regulating authority is then charged with monitoring to ensure adherence. Here to we see some significant differences and similarities. There are four common models for regulating VOs (1) State model-multiple/single agency; (2) Certification model; (3) Courts based model; and (4) tax based model. As often happens there is significant over lap that may show some aspects of one or more of these models present in any country. Most specifically though we would argue that countries in this study fall into the categories as follows. The Tax model is applied most clearly in Canada and the USA; the court-based model is employed in the England and Wales (UK for the purpose of this work). The certification model is used In the Philippines, while the rest of the countries within the study fall into the first model of state multi or single agency regulation19. The examination shows that the countries within the study are pretty consistent, be it government or sector initiatives. When it comes to the monitoring, some differences start to emerge. On paper governments furnish clear requirements and penalties for failures to meet them. It is not clear however that the government regulators are actively monitoring and administering penalties where necessary. Table 2 shows that in Canada there are between 500 and 600 audits conducted each year. In the USA the audits are targeted, triggered by complaints. At the time of writing the data from other countries was not complete. This is an area where extensive research is necessary. Follow-up is strongly recommended. Anecdotal evidence of Indias efforts at monitoring reveals that monitoring is especially problematic. One needs only to look to the fact that all of the registrants under the Societies Act of 1860 are still deemed registered despite failure to comply with requirements, which have as a penalty de-registration. The Indian government in parliamentary debate cited the fact that organisations that have never filed a tax return were still receiving foreign funds, that despite the fact that failure to file timely returns is listed as a reason for revocation of charitable status20. It is argued later in this work that instead of monitoring and administering laws in place, the Government of India opts for crafting duplicate legislation. The assessment of the capacity of the state to monitor is an extremely completed exercise. This work does not adequately address the issue of monitoring because it requires more resources and a more lengthy engagement that the current time permits. In the area of self-regulation, regulatory bodies are in a bind because, as Lloyd point out his article, they must find a balance; the must be incentives to comply but not so costly as to deter membership. The risks are great here because without high standards the entities that would drag down he imitative will be admitted, while extremely high standards may prevent widespread acceptance21.
19 20

see appendix 1 for a description of the various models. Rajya Sabha 2010 FCRA debate 21 Ensuring Credibility and Effectiveness Robert Lloyd et al (2010)

22

The models not withstanding, filing of tax returns is the most popular instrument for monitoring VOs. The fact that most governments use tax benefits as an incentive to encourage registration, restricting or otherwise changing that relationship has emerged as an effective regulatory tool. In most instances failure to comply is met with some form of suspension of tax privileges or a fine. Misuse of funds and other forms of VOs misconduct might attract a suspension or deregistration on paper. In reality there are either precious few violations or poor monitoring and enforcement. The prevailing public and government sentiment would lend credence to the latter. That condition and stepped up government efforts to regulate the sector has given rise to a number of self-regulatory efforts. According to the One World Trust, there are over 350 self-regulatory initiatives at various stage of existence around the world22. Voluntary organizations are becoming pro-active in trying to shape the image of the sector, and preempt governments, set on introducing their own regulatory measures. The literature has laid out some basic standards for establishing an effective selfregulatory scheme. Lloyd et al (2010) argue that self-regulatory efforts need to address the issue of optional membership, and ensuring compliance with set standards. The most basic standard that or having some set of principles around which organizations should operate, a code of conduct if you will is largely met. Lloyd notes that todays self-regulatory efforts fall into one of here categories. a. aspirational codes of principles/ethics that signatories strive to achieve; b. codes of conduct in which more defined standards are set; c. certification schemes where compliance with clear standards are verified by a third party23. To really be effective a selfregulatory mechanism must also include some form of enforcements. Lloyd and Casas argue too often organizations underestimate or give too little thought to, what is needed to comply with the code. without an enforcement mechanism compliance may occur only among those most committed to the code. Of the seven countries in this study, five have self-regulatory initiatives in place24. The odd countries out are Japan and the United Kingdom. Among the countries with initiatives, India and South Africa are the ones without sanctions, though South Africa gets an edge because they have some standards for beneficiary accountability where there is none in India. There are multiple efforts in the Philippines (2) and the USA (4) with one effort in both countries that has no sanctions associated with an initiative. In all but one of the countries self-regulation is a private initiative with little teeth. Presently, self-regulatory measures have fall woefully short of what is necessary to adequately regulate the Voluntary sector. Lloyd et al argue that only 47% of todays volunteer organizations have in place a compliance system. They found further, that where the regulatory system mechanism was a stated code of conduct less, 27% have and associated compliance mechanism25. There is not a lot available in the toolkit of the would-be monitoring and compliance initiative. In most instances the each tool comes with its own set of pros and cons. To get organizations to become members, often standards are watered down, and sanctions either eliminated or not enforced.
22 23

Ensuring Credibility and Effectiveness Robert Lloyd et al (2010) Lloyd, Robert; de las Casas, Lucy NGO self-regulation: enforcing and balancing accountability 24 See table 3 25 ibid

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SECTION 2 TAXATION
As is the case in India, the voluntary sector in countries the world over makes a valuable contribution to the development and sustainability of the society. One needs only look at the relationship that exists between the institutions and the government to see the important role being played. Volunteer organizations have in many parts of the world become the exclusive providers of certain services, whether as a government contractor or through privately funded initiatives. We also see that governments of developed countries look to partner with VOs in developing regions, because they see them as reliable agents. By and large governments have placed great value on the sector as a legitimate partner for sustaining the development principles of empowerment and education among others. At home, the governments of most developed countries have traditionally sought to empower local NGOs, whether they work locally or overseas. While not as helpful as it might be in all instances, the tax regime of western democracies tends to promote this enabling environment for VOs. In the developing world we see similar relationships; governments provide grants to Voluntary organisations and they implement and run projects in communities. Accordingly, governments have worked to enhance the effectiveness of these organisations through an intricate network of tax benefits. In this section we take a comparative look at the tax regimes, starting with our subject nation.

1. General Scheme in India

The Income Tax Act, 1961, which is a national all India Act, governs tax exemption of not-for-profit entities. Organisations may qualify for tax-exempt status if the following conditions are met: The organisation must be organized for religious or charitable purposes; The organisation must spend 85% of its income in any financial year (April 1st to March 31st) on the objects of the organisation. The organisation has until 12 months following the end of the financial year to comply with this requirement26. Surplus income may be accumulated for specific projects for a period ranging from 1 to 5 years; The funds of the organisation must be deposited as specified in section 11(5) of the Income Tax Act; No part of the income or property of the organisation may be used or applied directly or indirectly for the benefit of the founder, trustee, relatives of the founder or trustee or a person who has contributed in excess of Rs.50,000 to the organisation in a financial year; The organisation must timely file its annual income return; The organisation's income must be applied or accumulated in India. However, trust income may be applied outside India to promote international causes in which India has an interest, without being subject to income tax; and

26

May change if the DTC is passed in its current iteration.

24

The organisation must keep a basic record (name, address and telephone number) of all donors. According to section 115BBC, introduced with the Finance Act, 2006, all anonymous donations to charitable organisations are taxable at the maximum marginal rate of 30%. Finance (No. 2) Act, 2009, however, carves out the following exception: anonymous donations aggregating up to 5% of the total income of the organisation or a sum of Rs.100,000, whichever is higher, will not be taxed. Additionally, religious organisations (temples, churches, mosques) are exempt from the provisions of this section.

1.1 Capital Contributions

Capital contributions or donations to an endowment should not be included when computing the total income of the organisation.
1.2 Business Income

Under amendments to Section 11(4A) of the Income Tax Act 1961, a not-for-profit organisation is not taxed on income from a business that it operates that is incidental to the attainment of the objects of the not-for-profit organisation, provided the entity maintains separate books and accounts with respect to the business. Furthermore, certain activities resulting in profit, such as renting out auditoriums, are not treated as income from a business.
1.3 Tax Exemption in India

The income of certain VOs carrying out specific types of activities is exempt from corporate income tax, with the caveat that unrelated business income is subject to tax under certain circumstances. Currently there are no restrictions on an Indian VO's business/commercial/economic activities provided the VO is established for and primarily runs programs for relief of poverty or distress, education, or medical relief27. However, profits must be applied fully towards charitable objects. If this is not done, then the VO will lose its income tax exemption and its income will be liable to tax at the maximum marginal rate (30%). Further the VO must maintain separate books of account for the business/commercial/economic activities. [Income Tax Act, 1961 (seventh provision to section 10(23C); section 11, subsection 4 and 4A)] This situation will change if the proposed Direct Tax Code Bill makes it through the legislative process in the current form.
1.4 Disqualification from Exemption

The following groups are ineligible for tax exemption: all private religious trusts; and charitable trusts or organisations created after April 1, 1962; and charitable trusts established for the benefit of any particular religious community or caste. Note, however, that a trust or organisation established for the benefit of "Scheduled Castes, backward classes, Scheduled Tribes or women and children" is an exception; such a trust or organisation is not disqualified, and its income is exempt from taxation

2. Tax Systems and Exemptions Elsewhere

27

It should be noted that if the Direct Tax Code receives assent in its current form then this will change and all incidental business activity will be subject to a tax. The only exemption is for business activity that is a component of the charitable exercise.

25

In the majority of western democracies, there is a general practice of extending income tax exemption to registered VOs. As was done in the previous section, a comparative outline of the tax regimes will be presented for the pool of countries. The segment is then tied together with observations. The British, Canadians and Americans are very supportive of their voluntary sector, in that they permit exemptions on - most forms, (in the case of England) and all forms (in the case of Canada and the USA) of direct income. In England, charities are exempted from taxes on income received from foreign sources. As stated earlier, references to UK will be a reference to England and Wales exclusively, as Scotland and Northern Ireland have separate legal and tax systems and have in place different rules for VOs operating in those regions.
2.1 United Kingdom

Within England and Wales there are four forms for VOs. They are namely Companies Limited by Guarantee, Unincorporated Associations, Trusts and Industrial and Provident Societies; Charitable Incorporated Organisations is a new category that was added at the end of 2010. A VO from any of these categories can qualify as a charity, while the new category will be exclusively charitable organisations. As stated the scope of the study has been limited to exclude Churches Political Parties and Trade Unions. In the case of Britain also exempted is the Community Interest Company28 (CIC). Only registered charities receive income tax exemptions. In Addition, grants and donations, regardless of the source are exempted. Membership subscriptions29 that are not in effect donations attract a tax.
2.2 Canada

Canadians are very supportive of their voluntary sector. With the mentioned exceptions, churches, political parties and trade unions, not with standing, there are three legal forms for VOs in Canada. They are namely Non-share, Trusts and Unincorporated organisations or Associations. Entities from any of the groups may register as a charity if the meet the requirements. While charities are granted additional tax benefits the basic benefit of income tax exemption is available to all legitimate VOs on direct income from any source.
2.3 United States of America

The Americans dispense with the multiple categories and have two general classifications, 501 (c)(3) or 509 (a). In the US all tax exempted VOs are 501 (c)(3). A 501(c)(3) is considered a "private foundation". In addition to the 501 (c)(3) the Internal Revenue Service (IRS) also recognizes the 509 (a) by virtue of their qualification under rules of the IRS as a public charity. It is important to note that some public charities are grant makers. In the USA, whether 501 (c)(3) or 509 (a), there is not complete exemption from income taxes regardless of the source of the income. Charities are required to pay federal taxes on income that is not related to their exempted purpose30.
2.4 Philippines

The Tax exemptions in the Philippines with some notable exceptions are similar to that of the western democracies examined. Within the three broad classification of VOs: Non Stock Corporations, Accredited Non-stock Non profit corporations and Accredited NGOs only
28

CIC is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximize profit for shareholders and owners. 29 Subscriptions that entitle the giver to services or other benefits, it is considered a trade and is taxable. 30 Special rules for unrelated business incomeTax"http://www.irs.gov/charities/article/0id=96106,00.html

26

organisations involved in specified activities are provided tax relief. The government of the Philippines offers tax exemptions only those VOs involved in Charitable, scientific, athletic, cultural veterans rehabilitation, promotion of social welfare and non-profit education (Section 30 (e) (g) (h) Tax code). Even then the exemptions are only extended for income that comes by way of grants or contributions, irrespective of whether the source is foreign or domestic. There is no relief for income generated from for profit activities, like investments or bake sale, irrespective of how the proceeds are spent (Section 30 Tax code)31. In this regard the Philippines while not explicitly prohibiting for profit activities by volunteer organisations limits their reach by redirecting funds to the government coffers.
2.5 South Africa

In South Africa there are three legal forms under which associations of individuals seeking to be recognized as a VO qualifies, they are as a Voluntary Association, a Non-profit Trust and a Section 21 company Ltd. VOs however, will only secure tax exemptions if they qualify as a Public Benefit Organisations (PBO)32. To secure PBO status, an entity must apply to the taxexempt unit or the South African Revenue service (SARS). The SARS also maintains a supervisory role to ensure continued compliance by PBOs. In addition to qualifying as a PBO entity, the organisations founding document must indicate that three unrelated individuals hold fiduciary responsibility. Decision making power cant reside with a single individual (ITA 30(3)(b)(i)). Once PBO status is secured the VO qualifies for what may include exemptions from Capital gains and donation tax, in addition to Estate and transfer duty (Tax Exemption guide for PBOs in South Africa). It should be noted that South African laws limits the tax exemption surrounding for profit activities (ITA 10(1)(cN))33.
2.6 Japan

Japan has a very intricate scheme of taxation for its legal forms of VOs. In Japan there are five legal forms under which VOs are permitted to operate. They are Foundation & Associations, Associations & Foundations of Public Interest, Special Non Profit Corporations (SNCs), Organisations Established Under Special Laws Arising Under Civil Code Article 34 and Public Interest Legal Persons (PILPs). There is also a super VO status known as a Special Public Interest Promoting Corporation (SPIPCs). To qualify as a SPIPC, the aspiring entity must already be a Public Interest Association and Foundation; Private Schools and Social Welfare Corporations that already qualify as Organisations Authorized by Special laws Arising under Civil Code Article 34, are also eligible for SPIPC status.

31

A complication arises with regard to non-stock, nonprofit educational institutions. Under the Constitution, all revenues and assets of such entities used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties (Philippine Constitution 1987, Article XIV, Section 4). Privately owned educational institutions are allotted similar exemptions, though limited by restrictions on dividends and reinvestment. Notwithstanding the constitutional provision, however, Section 30(f) of the Tax Reform Act of 1997 imposes tax on the income of non-stock educational institutions derived from any of their properties (real or personal) or their economic activities. The constitutional dilemma created by this provision has yet to be resolved, and the provision in the tax code is still enforced by the Bureau of Internal Revenue. 32 PBO is defined under ITA 30(1) and includes activities such as: Welfare and Humanitarian; Health care; Land & Housing; Education & Development; Religion, Beliefs or Philosophy; cultural; conservation, Environment & Animal Welfare; Research & Consumer rights; Sports; Providing of Funds, Assets or other Resources; General. The Ministry of Finance reserves power to add more activities as necessary. 33 The activity does not result in unfair competition to for profit entities. Or is of an occasional nature and performed by volunteers.

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In Japan Public interest Associations and Foundations and Associations and Foundations must pay corporate income tax on earnings from activities that are not of public interest. Annual income that is less that 8 million Yens is taxed at a rate of 22%, while annual income greater than 8million Yen is taxed at a rate of 30% (Articles 4-7 corporate tax law). SNCs and PILPs are both required to pay corporate income tax on income generated from 33 specified for profit activities. The tax rate on these activities stands at 22% for PILPs, while SNCs are subjected to a split rate of 22% for the first 8 million yens earned and 30% for income in excess of the 8 million Yens. VOs from both groupings are permitted to deduct 20% of their income from profit making activities if that income is used to further their primary public interest activity. Social Welfare corporations, Private School Corporations and relief and Rehabilitation Enterprises from the Organisations Authorized by Special Laws Arising Under Civil Code Article 34 grouping tend to be subject to the same tax regime as PILPs with some noteworthy exceptions. The former are permitted to deduct the greater of 50% or 2 million yens of income generated from for profit activities. Other entities within the grouping such as Medical Corporations are taxed at the full corporate rate, the exception being on money received as reimbursements from the social insurance system. Finally, there is a classification for Special Medical Corporation, recognized by the Ministry of Finance, which entitles qualified entities to a reduced tax rate of 22% on profits as well as other tax benefits.

3. Tax Incentives in India

The Income Tax Act, 1961 section 80G, sets forth the types of donations that are tax- deductible. The Act permits donors to deduct contributions to trusts, societies and section 25 companies. Many institutions listed under 80G are government-related; donors are entitled to a 100% deduction for donations to some of these government funds. Donors are generally entitled to a 50% deduction for donations to non- governmental charities. Total deductions taken may not exceed 10% of the donor's total gross income. As to those entities not specifically enumerated in section 80G, donors may deduct 50% of their contributions to such organisations, provided the following conditions are met:

The institution or fund was created for charitable purposes in India; The institution or fund is tax-exempt; The institution's governing documents do not permit the use of income or assets for any purpose other than a charitable purpose; The institution or fund is not expressed to be for the benefit of any particular religious community or caste; and The institution or fund maintains regular accounts of its receipts and expenditures.

It is important to note that donations to institutions or funds "for the benefit of any particular religious community or caste" are not tax-deductible. Donations to Scheduled castes, backward classes, Scheduled Tribes or women and children may qualify for deduction under section 80G, even though the organisation, as a whole, may be for the exclusive benefit of only a particular religious community or caste. The organisation must maintain a separate account of the money received and disbursed through such a fund. In-kind donations are not tax-deductible under Section 80G.

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To be valid, receipts issued to donors by not-for-profit organisations must bear the number and date of the 80G certificate and indicate the period for which the certificate is valid. Previously, as per section 80G(5)(vi), approval under section 80G had effect for such assessment year or years, not exceeding five assessment years, as may be specified in the approval. However, the Finance (No.2) Act, 2009 omitted clause (vi) of section 80G (5), effective September 1st 2009, thereby eliminating the need for organisations to become frequently recertified. As a result of the amendment: 1. Approvals, once granted, shall be valid indefinitely. Therefore, all the approvals granted after January 10, 2009 shall be valid indefinitely, unless specifically withdrawn. 2. Existing approvals expiring after January 10, 2009 need not be renewed and shall then be deemed valid indefinitely, unless specifically withdrawn. 3. Approvals expiring before January 10, 2009 will have to be renewed once, but after such shall be valid indefinitely, unless specifically withdrawn. The Income Tax Act, 1961 contains a number of other provisions permitting donors to deduct contributions. Under section 35AC34 of the Act, donors may deduct 100% of contributions to various projects, including: 1. Construction and maintenance of drinking water projects in rural areas and in urban slums; 2. Construction of dwelling units for the economically disadvantaged; and 3. Construction of school buildings, primarily for economically disadvantaged children. Furthermore, under section 35CCA of the Act, donors may deduct 100% of their contributions to associations and institutions carrying out rural development programs and, under Section 35CCB of the Act, 100% of their donations to associations and institutions carrying out programs of conservation of natural resources. A weighted deduction of 175% is also allowed for contributions to organisations approved under section 35(1) (ii) (i.e., a research association or a university, college or other institution) specifically for "research," and for contributions made under section 35(1) (iii) specifically for "research in social science or statistical research." The Finance Act, 2008 introduced a weighted deduction of 125% for contributions for scientific research, made to a company registered in India, whose main objective is scientific research and development, when those contributions are approved by the prescribed authority and fulfill specified conditions. Previously, such a deduction was available only for payments made to scientific research associations or to universities, colleges, or other institutions. However, under Finance Act, 2008, the weighted deduction of 150% available under section 35(2AB) to qualifying companies and manufacturers for expenditures incurred on scientific research or in-house research and development, would not be available to a company approved under section 35(l)(ija).
34

Section 35AC will be deleted if the DTC is passed and receives assent in its current iteration

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4. Tax Incentives Elsewhere

It is being recognized that individuals will be more generous to their favourite cause if there are benefits to be had35, a number of organisations have seized on this and have created incentive programs. Gifts that vary in value are offered at various increments to inspire generous giving. In a number of countries the governments have recognised this and are offering their own incentives for giving in the form tax deductions and/or tax credits to individuals and corporations that make donations.
4.1 United Kingdom

The UK government has the Gift Aid Scheme36. Further, donors that are in a high tax bracket are permitted to claim relief against their contributions. The process is user driven; as a result the claimant must file a Gift Aid Certificate with the Inland Revenue. That filing is necessary for the charity to be able to claim its benefit under the Gift Aid Scheme. Also, a donor who is a higher-rate taxpayer may claim back higher- rate relief from the Inland Revenue, reducing the net cost of making the gift. Corporations can get in on the benefits if their donations are considered an allowable expense. In that case they are permitted to advance a claim against the contribution. Donation of land, buildings and stocks etc. are also exempted from taxes.
4.2 United States and Canada

In the USA and Canada, the incentives for philanthropy allows for the distinction between regular VOs and charities. The laws permit only charities and other qualified donees to receive a donation for which the donor might claim a tax benefit. Other VOs are not granted this privilege. In the event of a tragedy such as the recent Haitian earthquake, American and Canadian governments have been known to add incentive establishes specific exemptions to encourage additional giving. Both countries also permit a five-year window for carry over of claims that may exceed the maximum in the year of the donation37. An individual in the US can claim a deduction depending on the nature of the donation, cash contributions are claimed in full up to 50% of adjusted gross income; property contributions can be deducted in full up to 30% of adjusted gross income; and one can deduct contributions of appreciated capital gains assets in full up to 20% of adjusted gross income. Corporations are limited to a deduction of 10% of gross income. The rules vary for other businesses depending on whether it is a sole proprietorship or a partnership. Also, USA charitable giving receives a boost as an alternative the inheritance tax. In Canada an individual or corporation can claim a deduction up to 75% of their net income against a contribution to a charity. There is an exception for the year the individual dies. In that year and the year prior; the estate is permitted to claim 100% of net income donated as a deduction.
4.3 Philippines

In the Philippines, contributions to an Accredited Non-stock Non profit Corporation by a corporate entity will attract a tax deduction of up to 5% of its taxable income. Individuals may
35 36

Testing for Altruism and Social Pressure in Charitable Giving (2009 DellaVigna et al) Under this scheme, charities can reclaim the basic tax rate paid by the donor on the income from which the donation was made. 37 If an individual has given more than he or she can claim against in a given year; that individual can add the excess to claims for subsequent years for up to five years after date of gifting.

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claim a deduction of up to 10% of their annual income (section 3(a), Revenue Regulations No. 1398)38. Cash donated to an accredited NGO can be deducted in full (Section 30(b) Revenue Regulation No. 13-98). The Benefit is also extended to the VOs receiving the donations. The exemption from the donors tax is secured when entities are able to affirm that no more that 30% of donations and gifts within a single tax year is used for the administrative expenses of the organisation.
4.4 South Africa

In South Africa, giving is supported only when donations are made to specific entities. Donations to Public Benefit Organisations engaged in a specified slate of activities39 are the only entities permitted to issue a receipt that can then be used by the donor to secure a tax deduction. Claims must be accompanied by a receipt, and are limited to 10% of donors taxable income. Both individuals and companies clam at the same rate.
4.5 Japan

In Japan selected organisations are permitted to grant receipts entitling donors to a tax deduction. The difference in the Japanese instant is that it is not exclusive to a category. Japanese specialists have argued that there are no clear criteria for determining which entities are permitted to receive tax-deductible donations (APPC Conference, p. 161). Donations are deductible if they are made to SPIPCs, Organisations eligible for Designated Contributions and SNCs, all require the approval of the National Tax Administration. Donations to the SPIPC and the SNCs from individuals can be deducted at a rate up to 25% of income above 5 000 yen. Corporations are permitted to claim up to 1.25% of income plus and additional 0.125% of paid-in capital40. Individual donations to the Organisations eligible for Designated Contributions are also deductible up to 25% of the individuals income above 5 000 yen. Corporate contributions to these organisations have no limits on deductions.

5. Value Added and Other Tax in India

The value added tax is in and of itself not a regulatory tool, it is included here because it is one of a series of tax benefits that voluntary organisation in some countries. India subjects certain sales of goods and services to VAT, with a fairly broad range of exempt activities. The rates range from 1 percent to 12.5 percent, with most goods and services taxed at 12.5 percent. An entity (including a public charitable trust) is liable under the VAT Act if its sales/purchase turnover in the previous year exceeded Rs.500, 000. The threshold is lower, Rs.100, 000, for importers. Several other tax laws have now merged into VAT, including the Sales Tax Act, Motor Spirit Taxation Act, Purchase Tax on Sugarcane Act, and the Transfer of Right to Use Act. [3]

38 39

Income is defined as, donors income from a trade, business or profession as computed without the benefit of this deduction. The slate of activities are: Welfare and Humanitarian; Health Care; Education and Development; Conservation, Environment and Animal Welfare; Land and Housing (ITA Schedule Nine 2 (1-5)). 40 Paid-in Capital refers to a situation where a corporation is a primary sponsor of a charity and makes donations in excess of its standard commitments to the entity.

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6. Value Added and other Taxes Elsewhere

6.1 United Kingdom

In the UK Charities and other VOs alike are subjected to the Value Added Tax (VAT) currently applied at 17.5%. A new law, in place since January 1st 2010 allows charities that deliver goods and services in excess of 67 000 each year to pay at a reduced rate of 5% on some supplies employed within that year. The VAT, which is not normally applied to grants, might be applied in the event that the grant is conditioned on benefits to donor or a third party. The VAT may also be applied if the grant is employed as a subsidy for trading activities of the VO. When it comes to other taxes Charities are eligible for an 80% reduction of its local property taxes, local authorities have the authority to grant an additional 20% reduction effectively eliminating property taxes for charities. The local authorities have discretion to grant a partial or total property tax exemption to other VOs. The benefits to charities continue in that they are also not required to pay ad valorem Stamp Duty on transfer of assets including shares; inheritance Tax on legacies and bequests and Capital Gains Tax (ICNL country Profile 2010).
6.2 Canada

In Canada, the VAT is called the Goods and Services Tax (GST). Generally speaking, there are no exemptions from the GST for charities and VOs alike with a notable exception. Charities and VOs that receive 40% or more of its income from government at any level, is entitled to a rebate of net tax paid. This condition will remain unaffected by the new HST41 that was implemented in a few provinces on July 1st 2010. Canada does not have in place a gift tax or death tax. Both charities and VOs are exempted from property tax.
6.3 United States of America

The United States does not presently have a VAT. As stated earlier the US does have an inheritance tax. However that is argued to be an incentive for charitable giving42. Individuals, it is noted might rather their money go to their favourite charity than to the federal government. In the area of other taxes, charities are generally not subjected to property tax though this is the domain of the State and municipal government bodies. Usually entities have to apply to the governing body for the necessary exemption, State government for sales tax exemption and municipal government for property tax exemption
6.4 Philippines

In the Philippines, VOs engaged in commercial activities with gross sales in excess of PHP1 500 000 within a year, are required to register as a VAT taxpayer (Sec. 4. 109-1 revenue Regulation 16-2005, VAT- Exempt Transaction). Otherwise, Non-stock, non-profit organisations and association, with revenue from commercial activity less than PHP1 500 000 are required to register as Non-VAT entities. There is a fee required for this registration (Sec.9. 236-2 (3) and (4) of Revenue Regulation 16-2005). Given the VAT rate of 12%, Non-VAT registered VOs are subjected to a tax rate of 3% of the monthly sales receipts (Sec. 7 of RA 9337 (which amends

41 42

HST is the harmonized tax it merges the provincial sales tax in Ontario and British Columbia with the federal GST. Washington Post, Editorial, June 6, 2006

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section 109 (z) of the Tax Code) and Sec. 4.116-1 of Rev. Regulation 16-2005). The Philippines also grants VAT exemptions on goods used for education, medical and cultural activities.
6.5 South Africa

In South Africa the VAT sits at 14%. South Africa is one of a few countries that grant specific VAT exemptions, they are granted to entities that qualify as Associations not for Gain and Welfare Organisations (VAT A 1). These entities are permitted to claim for VAT paid on acquisitions. They must however collect and transfer VAT on the goods and services that they provide.
6.6 Japan

Japan has the lowest VAT of all the countries in this proposal. There are no exemptions as an organisation from the 5% VAT in Japan. There are however, product specific exemptions for goods namely books and equipment for use by disabled individuals.

7. The Direct Taxes Code Bill, 2010

There is a proposal that is due to come through the Indian parliament that proposes reforms to the tax code, there are many provisions that will directly affect VOs in India. In this section we review these proposals. Within the Direct tax code, the changes of the greatest concerns to voluntary organisations are: a. The elimination of the provision that permitted an annual growth in the corpus of 15% of the annual income for the VO. The new rule requires 100% application of income with any unused amounts being subject to 30% tax. Where as before VOs were allowed to grow their Corpus through adding maximum of 15% of annual earnings, they are now required to spend it all. In addition, only 15% can be carried over and must be utilized within 3 years. This virtual spend out clause undermines the ability of VOs to plan for the future. There is a more pressing problem regarding organizing funding around a multi-year project. The provision reverses a 2005 Supreme Court ruling, where the justices deemed it reasonable that necessary a VO can allow its corpus to grow. It is difficult to determine what is driving this legislation. There are a number of laws in place that already addresses misuse of donated funds. For example, if a charity goes out of business the money transfers to another charity. Inurnment is strictly prohibited. There are significant laws prohibiting members from benefiting, beyond receiving a salary for services rendered. If we believe that VOs are best at understanding the needs of the communities they serve. Then we need to trust them to administer the funds in a timely and appropriate manner. Spend out legislation will not lead to greater productivity. On the contrary, it may result in misguided wasteful spending in an attempt to avoid penalties. Looking at the legislation from another angle reveals that the new legislation is not only an indictment against voluntary organizations but also against the bodies that police them. While it is beneficial to replace bad laws with good laws, adding good laws to good laws is not a solution, if the problem is poor enforcement. We posit that resources might be better utilized improving policing of current laws. If there is a mistrust of the regulatory regime the answer is not new legislation.

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Finally taxation as a remedy, guarantees that the some portion of the funds will not go to the cause for which it is intended. This reflects poorly on the government. How can a viable remedy to suspected misuse of funds be repurposing of said funds. Surely, there is a way to ensure that funds go to intended purpose instead of to the tax coffers. There are no clear benefits in this clause, and it places an unnecessary restriction on legitimate charities. The one true looser under this proposed remedy is the beneficiary, that is twice victimised It is important to note that none of the countries in this have similar spend out clauses in place. b. the new law limits the ability of VOs to claim depreciation on assets and corpus funds. This revokes the ability for VOs to claim erosion of on the capital assets. c. a prohibition of business activities except where that business is a component of the charitable exercise. This replaces the incidental business activities that were permitted under the FCRA 1976. It has the support of leaders within the sector, because is unambiguous. However in an environment where foreign funds is in retreat, organisations may have to engage more fund raising ventures, these measures would under this new rule be subjected to tax. d. the exemption of Sixth Schedule income for persons. Since registered VOs by virtue of being registered have acquired a legal personality then them sixth schedule exemptions should be extended to them. It should be noted though that it is unlikely that a VO engaged in sixth schedule activities will likely have hose activities already exempt as business conducted as a part of the charitable exercise. if upon dissolution an VO fails to transfer its assets to another VO, a levy of taxes on assets at a rate of 30%. This provision is decried by the review as grossly unfair because the tax is applied to the entire corpus. The author cites that money in the corpus might have already been subjected to taxes or had otherwise met with other government stipulations. While its commendable that the government hopes to discourage spurious organizations, the remedy amounts to little more than trading one illegitimate use of charitable funds for another. Paying a fine and keeping the funds is absolutely the wrong way to go. A more appropriate remedy would have the government body manage the transfer (ensuring that eliminating the possibility for failure) as is done in other jurisdictions. In the event that a VO miss appropriates funds then the government prosecutes to the full extent of the law. That I propose, may be a stronger deterrent than a tax penalty. It is worth restating, TAX PENALTIES ultimately hurt those most in need. f. that the new Act makes mandatory the requirement that VOs engage in charitable activities each year, if not then the VO is treated as a for profit entity for that year. Further if an VO fails to perform in two of any four ears then the government levies a 30% tax on the entire net worth of the organisation. This clause treats VOs as suspect, absents of cartable activity, as a reason to dissolve or impose a tax seems like a cash grab on the part of the government. Laws governing the sector dissolution are sufficient to protect the public interests. Beyond that, we must exercise faith in the virtue of the VOs. Enforcement of laws on the books is always preferable to enacting new laws that may fall victim to poor the same poor enforcement that predicated the enactment of new laws. 34 e.

That being said, it is not unreasonable to expect that organizations established to provide some public benefit should engage and provide said benefit. Removing in active organizations from the public domain is an admirable goal, but it should be exercised with care to ensure that only inactive orgs get caught in the net. A single year or inactivity should trigger a review at which records are examined and an argument presented to explain the inactivity. The reviewing body should have at least fifty percent representation from the sector. It can be a rotating body with rotating membership. The body will be responsible to make a determination on whether a probationary period should be extended or the assets of the org should be transferred. g. that the new legislation does not encourage local contributions, it proposes a reduction in tax incentives for individuals from 100% to 50%. While tax incentives have shown to have a huge impact on charitable giving. India has a claim to a culture of giving that speaks to a greater deduction. While the government should do all that it can to promote giving. The sector needs to look at other factors that may be having an impact on local giving. The reduction from 100% - 50% is regressive when compared to incentives elsewhere. This new incentive package takes Indias incentive already lower than the donor nations in the study even lower. This sends mixed messages at a time that India sees itself and transitioning from a donee state to a donor state. To be a truly credible donor nation, India needs to promote local giving, allowing it to grow to levels that will support engagement at home and overseas. As a package of laws, the proposed changes to the DTC represents a sincere albeit misguided effort to address the issue of fraudulent volunteer organisations. The effort is misguided because it fails to properly identify the problem facing the sector. The remedy being proposed assumes that the laws in place are inadequate. We contend that it is not the laws that are inadequate but the administration and monitoring of the laws. Likewise the new laws are good laws but the penalties for violation are shortsighted, in that they fail to take into account that whether 30% of money intended for some public benefit cause goes to the government or some unscrupulous individual, the cause the intended recipient suffers. The new laws preventing the growth of corpus shows a major mistrust of organisations. If laws on inurnment, administrative expenses and the requirement that VOs engage in charitable acts, among others are adequately administered; there is no need to fear growth in corpus funds. Any growth of funds in that regard will just better enable organisations to perform the activities as necessary. We must have faith that VOs are in the business to provide for the constituents. There is no denying that there are institutions that are charities in name only. The current laws, if properly administered are sufficient to identity and these institutions. Once they are identified, the government or governing bodies should move swiftly to apply the legal remedies in place. Volunteer Organisations are equally responsible to ensure that they comply with the measures. They should recognize that the laws function to protect the public and build confidence in the sector.

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8. Observations
The management of the voluntary sector through taxation policy is very popular. The democratic principles that permit freedom of association dictated that citizens are free to associate. The governments recognizing this right, then uses taxes as a carrot to get organisations to leave the shadows. As we saw however, the approaches are varied. When we look across system we find that there are some strong similarities as well as some sharp differences. The countries are all supportive of their charities and public benefit organisations. There are generous exemptions on direct income that allow the funds to go where the need exist. USA and Canada are the most progressive in this area; both provide income tax exemption for all VOs whether or not they are registered. VOs in all the other regions examined, must not only register to be eligible for an income tax exemption but must also be engage in public benefit activities. Here India is in the main stream, encouraging registration and providing benefits for organizations engaged in public benefit type activities. There is less consistency when we consider income generated through for profit activities. The USA and Canada again run together in their approach. The neighbours allow an exemption for profit activities if the proceeds go to further the stated objectives of the organisation. The UK and Japan provide some exemptions with a ceiling above which income generated from for profit activity is taxed. In South Africa and the Philippines income generated from for profit activity is not exempted. As indicated, there is potential for a change in this area. The proposed DTC is looking to tax income generated from for profit activity except where that activity is component of the charitable exercise. The current model placed restrictions on certain organizations while permitting others incidental encounters with for profit activities. The tax incentive is lauded as a significant instrument for encouraging philanthropy. All of the countries in this study provide some form of tax incentives aimed at attracting donations. Presently, India offers 100% deductions on donations up to 10% of ones income, when the donation s made to a government fund and specified entitles listed in 80G of the tax code. Otherwise donations attract 50% deduction when contributions go to other Indian charities. Under the 35 there was even greater incentives, in many instances, well in excess of 100%. Here to the proposed DTC chances will have an impact. The new code removes as it proposes to remove section 35AC. However, many generous albeit narrowly defined incentives remain. The incentive in the UK is in the form of a gift aid as opposed to an income tax deduction or credit. Under this scheme a donor will have their donations grow between giving and receipt by the charity. There is also an added incentive to those in the higher income brackets in the form of a deduction. The American and Canadian donors are provided a tax receipt for donations to charities. These receipts are then used to offset their tax liability. In the US the rate for the claim varies among three values 20%, 30% and 50% of their gross income, conditioned on the nature of the donation. Canadians get to claim at 75% of net income. Both are 100% of donation up to the respective percent of income. In the Philippines, donors can claim deductions of 5% (corporate) and10% (individual) of their income against charitable donations. . In addition, cash donation can be claimed in full. Donations in South Africa can be claimed if they are made to a public benefit organisation. Here too the maximum is 10% of income. Japan also follows suit but is more generous. Claimants are

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permitted a deduction for up to 25% of their income above 5000 yen. Corporations can claim at 1.25% with an additional 0.125% aid in capital. There is also a very generous limitless claim allowance to corporations for certain donations. In South Africa, as else where deductions can only be claimed against contributions to public benefit organisations engaged in specific activities. Then claimants are permitted to reclaim donations up to 10% of gross income. The incentives are very consistent. Countries only permit tax claims against contributions to Charities, some countries like Japan and South Africa had stricter rules allowing claims only for donations to charities engaged in specific activities. Where the differences were pronounced was in the income levels tied to the claims. The USA had a scale tied to gross income, specific to the source of the contribution. Canada used net income and offered a generous 75% claim maximum. Only Japan with individual claim levels of 25% gross came close. In the rest of the countries including India, individual levels were at 10% with corporate levels matching or lower. The third distinction was in the percentage of the donation that can be claimed. In the USA and Canada a donor can claim 100% of their contributions up to the levels of income referenced, additionally in a year of heavy giving where they exceed the respective percentage of the gross or net income, the donor can apply the remainder against future tax liabilities for up to five years after the donation. If Indias new Direct Tax Code (DTC) is implemented in its current form it will represent a blow to the voluntary sector. As discussed the proposed legislation seeks to punish violators with tax penalties; these penalties ultimately hurt the very people the government is trying to protect. While we do not underestimate the importance of ridding the sector of fraudulent organisations. Levies and taxes is not the most efficient way to achieve the objective. The fact that it also repurposes funds intended for public benefit use is egregious. We argue here that the real problem facing the Indian government is not one of too few or even ineffective laws. The problem facing the government is one of adequate monitoring. As we noted this is not solved by enacting new laws, but by better administering the laws in place and where necessary enacting and properly administering additional laws.

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SECTION 3 FOREIGN FUNDING AND GIVING

The advocacy work done by voluntary organisations has been called "Non-Party Political" work, because it involves organising people around issues and demanding change. That is very often the work that forms the basis for the emergence of some political party. Labour parties, the green parties are a couple of examples of political parties that started out as mobilization around an issue. To this end government concerns around political activity on the part of VOs receiving foreign funds is a legitimate concern. VO work that questions the status quo may provide some cause for concern to politicians especially where that action can be seen to be inspired by foreign agencies. In the developing world, foreign sources of support has long been the lifeblood of development sector. Today even in the midst of a slow recovery from a global depression, foreign funding remains a very important source of development dollars and resources for much of the developing world. An examination of foreign funding within the comparative context presents an interesting challenge. Within the study we have donor countries (Canada, Japan, UK & USA); a single Donee country, in the traditional sense (Philippines); both India and South Africa are simultaneously donor and Donee countries. Also important to note is that India is the only one of the countries in the study that has a somewhat actively hostile neighbour prompting an almost permanent state of high alert. Finally, violent, militant subversive activity in most pronounced in India the Philippines and the UK, is an emerging problem in the USA. As usual we will start with a summary of the situation In India. in the past the volume of foreign money flowing into India has been so great that it has inspired a piece of legislation called the Foreign Contribution Regulation Act (FCRA). It is argued that the Act, passed in 1976, was conceived as an instrument by which the Home Ministry would control the Voluntary sector. So serious were the concerns about the potential of unregulated foreign funds that the government devised a means through which they would be able to identify with relative ease the destination of every foreign dollar coming into India. Let us start by looking at the two pieces of FCRA legislation.

1. The Foreign Contribution (Regulation) Act, 1976 (FCRA)

All not-for-profit organisations in India (e.g., public charitable trusts, societies and section 25 companies) wishing to accept foreign contributions must: a) register with the Central Government; b) agree to accept contributions through designated banks; and c) maintain separate books of accounts with regard to all receipts and disbursements of funds. Furthermore, not-for- profit entities must report to the Central Government all foreign contributions received within 30 days of the receipt of the contribution, and must file annual reports with the Home Ministry. The entity must report the amount of the foreign contribution, its source, the manner in which it was received, the purpose for which it was intended, and the manner in which it was used. Foreign contributions include currency, securities, and articles, except personal gifts under Rs.1, 38

000. Funds collected by an Indian citizen in a foreign country on behalf of a not-for-profit entity registered in India are considered foreign contributions. Moreover, funds received in India, in Indian currency, if from a foreign source, are considered foreign contributions. FCRA guidelines require that an organisation allowed to receive funds from a foreign source may provide funds from its FCRA account to another organisation, only if the other organisation also has clearance from the Home Ministry to receive funds from a foreign source. If the foreign donor agency specifies in writing that the whole or part of the grant may be directed to the recipient organisation's capital fund or endowment, the organisation may do so. Such an endowment or capital fund may be invested in an approved security. The interest or dividend generated should be accounted for as an amount received by way of interest on a deposit drawn out of funds received from a foreign source. In other words, even the interest/dividend received in India in Indian rupees must be disclosed in the Return Form FC-3. Contributions from expatriate Indians are not considered "foreign contributions" if an individual has become a citizen of a foreign country.

2. Foreign Contribution Regulation Act, 2010

The parliament passed and the government is in the final stages of implementation of a new FCRA, 2010, replacing the FCRA 1976. The FCRA 2010, already the law of the land should go into force in 2011. Some of the key changes include: i. a redefined of a foreign source to include an Indian company where 50%+ of the equity has come to be held by foreigners. ii. an VOs can claim consultancy fees for work with an international entity as local income. This comes with a warning from Manoj Fogla that there is a conflict with the Income tax Act, which limits such receipts to Rs. 10 lakhs. iii. provisions for expanding the list of people or organisations prohibited from receiving foreign funds. iv. There are limits on the use of funds, yet undefined speculative business. It places limits on administrative expenses of 50% of foreign funds. There is a consideration for administrative expenses in excess of 50% with prior approval. v. easies restrictions, a key security condition prohibiting the transfer of foreign funds, once received to an entity that itself is not approved to receive foreign funds. The new law allows with prior permission, Community based Organisations to be funded. vi. a requirement that FCRA registration renewed every five years. vii. a perceived positive; the new legislation is the entrenched turn-a-round time for a decision on an application. The new outer limit is set at 90 days. A problem immediately emerges, as the law does not provide a curse of action if that deadline is not met. The Authors request that after 90 days status is deemed permitted or that there be a clear course for redress. viii. The new legislation grants sweeping powers for addressing registration and requests for prior permission. ix. a provision that allows the government to completely block donations from subversive donors. x. codification of the governments right to cancel a certificate of registration for various reasons, like inactivity, providing false information, and other violations of the Act. Most

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xi. xii.

xiii. xiv.

concerning is the stipulation of cancellation for no reasonable activity, troubling because yet has yet to be defined. the power of the government to suspend the certificate of an VO. Under special permission the entity may still be permitted to receive foreign funds. the governments right to take charge of the assets of a cancelled or suspended organisation for the duration of the suspension. If the organisation is going out of business then the assets should be transferred to a similar organisation. Failure to do this will also lead to the government taking over. a restored power, VOs can again have multiple accounts for the disbursement of resources. the fact that the government reserves the power to determine the process of disposal of FC assets.

The new portions of the FCRA are not bad laws. On the contrary they reflect an attempt by the government of India to address legitimate concerns. There are also a number of concessions for the sector. The government has acknowledged earlier difficulties and has addressed them. The easing of the restrictions on the use of multiple accounts for disbursement is addressed. This was a problem where no branches of the approved FCRA bank easily accessible to VOs. The specified 90 days window for a response to an application is an attempt to provide some predictability and accountability. The repeal of the prohibition on flow of FCRA funds to non-FCRA approved entities is probably the most welcome change. Even with the requirement for prior approval, the fact that Community based organisations will have a legitimate avenue foreign funds is a definite plus. Some of the legislation, however, appears to be duplicative and raise the issue of administrative capacity addressed in the previous section. The FCRA rule that government will have the power to dispose of a voluntary organizations assets at dissolution is already written into the tax regulations of VO. Entities must transfer assets to a similar organisation if it goes insolvent. The request for re-registration every five years is designed to force VOs to resubmit their documents that they can be evaluated for inconsistencies and breaches. However, the tax laws in place already require, with penalties for failure to comply, that VOs submit audited accounts statements to the government at regular intervals. As we saw with the proposed DTC the new legislation is an addition to similar pieces of legislation which if enforced would produce the same outcomes. In this environment where administration of current laws prove burdensome for share volume of work or capacity of staff then adding new laws will only exacerbate the situation. In 1974 Kochanek argued that Indian bureaucracy overwhelmed by the volume of work with which they are confronted on a daily basis.
The upper echelons of the bureaucracy are so overwhelmed with paper and files handled in such an archaic manner that anyone who has any business to conduct with the government must have someone who can expedite the process of pushing paper through the various level of bureaucracy. The alternative is interminable delay and inaction. Even the state governments in India have found it necessary to establish Delhi offices for this purpose (Kochanek 1974, p290).

While Kochanek, is speaking to a specific point in time, I posit that not much has changed, except 40

that the volume of work has increased several folds. The establishing of new laws in this instant only add to the tremendous burden of government workers that are already struggling with the volume of submissions the already receive. A very real likelihood is that the new legislation will increase corruption and the perception of corruption. Going back to Kochaneks statement anyone who has any business to conduct with the government must have someone who can expedite the process of pushing paper through the various level of bureaucracy. Kochanek is describing an environment of rent seeking. People or organisations needing to have their affairs handled in a timely manner wiling to pay extra for the privilege. Where laws are lacking or are inadequate new ones should be enacted. Likewise there are entities that fail to submit returns, and otherwise comply with the regulations. These organisations should be held to account. It might be better addressed by increasing resources to administer the laws already on the books. The new laws, while purging the system at the moment of implementation, does nothing to prevent the recurring clog that will undoubtedly follow. The short-term, fraudulent and/or so-called suitcase organisations will not necessarily be impacted by the five-year registration requirement. In fact the new rule might have the reverse effect. It is likely that the new five-year period provides safe window where there might be less incentive to administer the annual audits. Government offices comfortable with the idea that re-registration is a catch all will be less vigilant in between registration periods, allowing spurious organizations free reign free reign to act in a manner incongruous to the ideals of the sector.

3. VO Activities Overseas

In India, the Government does not only exercise controls over the inflow of foreign money, the tax code has two provisions addressing VOs engaging in activities overseas, section 11 and section 10(23C)(vi). Under section 11(1)(c) of Income Tax Act, any income applied to activities outside India is not eligible for tax exemptions. Further, Section 11 expressly prohibits VOs engaging in activities outside of India. All charitable organisation except a trust created before 01-04-1952 or those engaged in promotion of international welfare in which India is interested are prohibited from engaging in activity outside India43. Other VOs must receive special permission from the Central Board of Direct Tax (CBDT) prior to engagement. A voluntary organisation registered after 01.04.1952 are not allowed to have any international activity unless such activity is specifically exempted or other wise approved by CBDT. Section 10(23C)(vi) does not explicitly prohibit activities overseas. The provision has been interpreted by the Supreme Court of India, not just an absence of objections but, indeed as a permit to act overseas. There is however a caveat, the ruling noted this can occur as long as local activities are the primary objective of the VO44. In other words at this stage an Indian NGO can not make the provision of foreign aid its primary goal. This will be problematic as India rounds the corner as a donor nation. A scan of the Donor nations within the study reveal that all promote an environment where VOs with the sole purpose of providing aid overseas thrive and are able to raise local and spend globally.

43 44

Standard & Norms (Legal series) vol 1 issue 2 American Hotel & Lodging Association Educational Institute vs. CBDT (2006) 206 CTR (Del) 601 : (2007) 289 ITR 46 (Del

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4. Foreign Funding Elsewhere

Foreign funding has been the lifeblood for VOs in the developing world. It has been the force behind many of the projects and initiatives that have been launched over the years. Most countries have in place laws, with notable exceptions, permitting unfettered flow of foreign funds into their country. It is a common practice to prevent the direct influencing the politics of a nation through foreign financing Political activities. All countries prohibit foreign funding to political parties, candidates and VOs with a mandate to secure the election of one group or another. Beyond that, we find that Canada and the USA have no direct taxation on foreign grants. In fact, the only requirement (informal) imposed on foreign funding is a desire for disclosure of the source. Japan and the UK are similar in that there is no legislation addressing funding sources to their respective local charities. In the Philippines, a country with some very similar internal security concerns to that of India, the Government has adopted a very open and liberal policy on the issue of foreign funds coming into the country. The government reversed central bank restrictions on foreign funding. According to the Asian Development Bank (ADB) the prevailing view is that all forms of foreign assistance constitutes additional resources much needed by the Philippine economy, whether such funds are channeled through government or through the NGOs45. The government of the Philippines has three formulas by which foreign funds can be transferred to a VO. The first model is in place for a VO receiving funding from a foreign government. This process, according to the ADB, does not require the approval of the National Economic Development Authority (NEDA). However it is common practice for NEDA to give a one time no objection response to the full program and amount46. In the second model, funds from external funding agencies are transmitted through the government of the Philippines to be made accessible to the VO. Under this model the government reviews and prioritizes funding proposals. only proposals of accredited NGOs are generally considered for possible external funding47. In the third model foreign NGOs directly support the efforts of local NGOs. There is no requirement of government approval. All three formulas appear to be in place to facilitate the different desires of donors as opposed to being means through the government monitors the money coming in. The second model, especially might appear to be a process of gate-keeping by the government. A closer reading reveals, that the government is there because some organizations and more often other governments would rather deal with governments. The government is then responsible to ensure that the resources are placed where they are most needed and can have the greatest impact. In South Africa, the government has in place a welcoming policy toward foreign funding. The South African government recognized that voluntary organisations have a crucial role to play and attempt to ensure that voluntary organisations are provided with the necessary resources. Foreign

45 46

A Study of NGOs Philippines, 1999. Ibid 47 Ibid

42

donors are unrestricted, free to fund organisations and projects of their choice48. Donors can identify a need transfer the resources directly to an organization working in that area.

5. The Overseas Activities of Voluntary Organisations

There is a long tradition of overseas activities by NGOs in Canada, Japan, the USA and the UK. For many in these countries providing aid assistance is responsibility. The laws in these countries have traditionally been very supportive of this reality. One significant requirement is that the recipient foreign funds be eligible for tax exemption their own country in order to receive taxexempt funds from VOs in donor nation. Even South Africa, a nation not seen as a large-scale donor nation has similar policy in place: Providing funds to foreign not for profit entities that are exempt in countries of origin constitute a public benefit activity49. This means in effect that a voluntary organisation in South Africa can raise funds in South Africa for relief efforts exclusively outside the country. With that India is the only donor nation within the study that prohibits or severely restricts the foreign activity involving private locally raised funds. The world trade centre bombing in 2001 is considered a watershed moment in the regulating the transfer of VO funds. Since 911 there has been a plethora legislative measures passed around the world intent on combating terrorist financing. For example in 2007 the UK, following the lead of the USA, passed new anti-terrorism law that requires NGOs, charitable trusts and foundations to know the backgrounds of their trustees and volunteers50. In addition, due in part to the tightening in the global economy and in the interest of openness and accountability there has been increased selfpolicing within the donor community to ensure that donated funds go for the purposes intended. The impact of terrorism legislation on the aid organisations is an emerging area of study. This reports recommends further reading in this area.

6. Promoting Local Giving

Foreign funding is a huge source of income for VOs the world over. It is however a fact that in many countries the largest source of funding is local philanthropy, coming from the men women and corporations within the state. Local giving is heavily influenced by two major factors, a culture of giving and incentives that encourage giving. We are fortunate today that the levels of philanthropy among developed countries and emerging economies. There are all kind of measures employed to show what countries are the big givers. The Americans top the table giving at a rate in excess of 2.2% of GDP. Among the countries in our sample, the people of England & Wales (UK) and Canada give at roughly half the rates of Americans at 1.3% and 1.2% of GDP respectively. The rate of giving in India is often referred to as paltry at 0.6% of GDP. That giving rate however, places India ahead, of China 0.1 of GDP and Brazil 0.3% of GDP, its two main rival emerging markets51. South Africans are very big givers. In comparison of giving as a function of national wealth levels, South Africa was the only country gave above their national wealth levels. When compared to the USA UK and Canada, a Charities Aid Foundation (CAF) study found that on average South Africans gave well above their income level. In the 2006 study, CAF found that Americans had an
48 49 50

CMI Policy Brief Development Aid to South Africa 2003 http://www.usig.org/countryinfo/southafrica.asp Home Office. Possible Measures for Inclusion in a Future Counter Terrorism Bill. July 25, 2007. Available at http://security.homeoffice.gov.uk/news-publications/publication-search/counter-terrorism-bill-2007/ct-bill-consultation.pdf 51 Yuen, Dien S. State of Indian Philanthropy 2010

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average income of 40K per year and gave at a level expected for an average income level of roughly 34k per year. Canadians and the UK ran tightly together with average income levels of 32k and 33ks respectively with corresponding levels of giving projected for a society with average income level of roughly 14.5k and 15ks respectively. The numbers for South Africa were staggering. At an average income level of just under 10k annually, South Africans manage to give at an average income level of 14k (see fig 1). It is widely accepted that giving is encouraged by progressive tax policies that provide decent incentives. Equally true is that the wealthiest 10% of the population account for anywhere from 2550% of charitable contributions, depending on region. There is a strong belief among the wealthy that more favourable tax policies will provide a greater incentive to give52. The tax incentives for giving in our subject countries were discussed earlier. Other studies have indicated that giving is not a function of wealth but instead of happiness. CAF 2010 world giving index found that per capita giving was highest, not for the wealthiest countries but among happiest countries. This radical departure from the conventional wisdom begs the question. How might this influence our concept of charitable giving and how this new understanding will influence our efforts to promote giving in Indias local communities? For our purposes, we will go behind the findings of the CAF 2010 giving index for the countries in our sample. If we accept the conclusion that the wealth of a country is secondary to the happiness of a country when determining giving levels, we naturally conclude that India is not a happy country. Table five shows all the countries in the study ranked ahead of India on the giving index.

7. Observations

Indias FCRA is unique instrument; the regulations it prescribes have gone further than any of the nations in the study. In most instances it is not that the rules are different than those that exist in other regions. The Western Democracies and Japan all allow money to flow into the county with the major restriction being that that money cant fund, or otherwise seek to influence political activity. Likewise South Africa and the Philippines openly welcome foreign sources of funds. The position in these regions appears to be that the laws in the criminal code that prohibit money laundering, funding a terrorist group or other criminal activity apply to the voluntary organisations as well as the rest of the society. This it would appear negates the need for laws specific to the sector or indeed new laws regulating the sector at this time. Clearly on the rise as a world power, the Indian government recently lauded the fact that they were huge donors of charitable aid to Africa. That being said, the policies regarding VO activity overseas, as dictated by the DTC is very different that those that exist among other donor nations. Presently, money collected in India for public benefit activity overseas is taxed at the highest rate in the nation. The Philippines does not speak to the matter of overseas activity, this may be because at this stage of its development it is largely a recipient of aid. On the other hand, South Africa also recipient, classified as a mid-level nation, permits overseas activities on the part of its local VOs, the caveat being the same as western countries. Recipient organisations must be tax exempt in home country and funds must be used for public benefit activities. The international activities of VOs took a hit at the dawn of the 21st century. The 2001 terrorist attack on the USA ushered in
52

Ledbury Research, Traditional values drive charitable giving but barriers to giving persist, according to new report from Barclays Wealth 2010

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some significant changes in the way that VOs funding projects or organisations overseas behaved. Even where countries like the USA, UK etc seek to protect their citizens with the terrorism legislation; the legislation also seeks not to restrict the flow of funds to legitimate needs. Despite what many see as restrictive legislation, passed on the heels of the September 11th attacks in the USA, the donor countries in this study all have significantly more permissive regulations than India, regarding overseas activity of local VOs. In the post 9-11 world, western governments have acted in concert to limit funding to terrorist organisation. Recognizing that some entities could pose as VOs and receive funds legitimately, laws have been passed making it illegal to materially support a terrorist organisation. International donors are responsible to know where the money goes. In addition, donors are required to be familiar with the donee institutions. Violations of these conditions have criminal penalties associated and serve as real deterrents. Here we see laws that are applicable to the nation on a whole are applied to the sector, negating the need for separate legislation. This brings us back to one very important question and probably the most egregious failure on the part of the regulatory mechanism in India. An examination of the DTC the FCRA and the Criminal code reveal several duplications and overlap of responsibility. This duplication, when considered in light of the amount of corruption at the different levels of Indian society, can be perceived as an enabler to rent seeking by overwhelmed, under trained government employees. We often look at the government employee as an entrepreneurial rent seeker. However this may be systematically trusted upon him or her. In a situation where there are more demands than can be met by the staff at a government office. The seekers of the service try to expedite the service providing an incentive. The employee accepts the incentive and expedites those requests. Soon it becomes the normal way of doing business. Critics of the FCRA 2010 argue: the addition of more regulation, where old regulations were not being administered properly, will only expand the environment for rent seeking. This is the situation that Kochanek spoke to in the 1970s. It is selfperpetuating cycle.

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CONCLUSION
Looking at India in isolation with the levels of corruption as a backdrop tempts even the most astute observer to label the system of regulations in place as corrupt. However, when compared to what exist elsewhere, we see that India does not fair badly. The body of the legislations, passed and pending, are by and large similar to that that which have been passed in other countries. However, the differences, where they do exist, signal a significant departure from the industry norms, as reflected in the study. There are systemic factors that contribute to the registration differences among states within the study. As discussed, federalism accounts for the differences in registration for orgs of a similar form within a state. Federalism it is argued is the most ideal for large and diverse nation states, both conditions met amply by India. We saw that other federalist states countries had in place similar mechanisms with largely similar decries being uttered. The complaints regarding differences in requirements from state to state or province to province as the case might be, is a feature of federalism, which mandates spheres of influence for the constitutionally recognized, governing units. Other components of the registration process were very consistent across nations. Where there were different names, descriptions and labels, a peeling of layers revealed - whether they were called public benefit organisations or charities - institutions established for the benefit of the society at large were treated in a very similar manner. Trust, as they were often called, or charitable donors were treated differently from charitable doers, societies CBOs etc. Tax exemptions, where they varied in the amount, were consistently awarded to these public benefit organisations. In the area of self-regulation, Indias most noteworthy organization Credibility Alliance has laid the groundwork. However, with self-certification no sanctions and only an aspirational Beneficiary Accountability, the effectiveness is questionable at best. Comparatively, India falls at the bottom of the group examined. India and South Africa are the only countries not to have sanctions in place. In the countries with multiple options, the Philippines and the USA, there are institutions that do not have sanctions. This emerging regulatory mechanism, presents a real opportunity for India to steal the momentum from the government. To achieve this, there needs to be a more concerted commitment to the three major areas of enforcement, sanctions and beneficiary accountability. Where as the registration and monitoring processes and the self-regulation initiatives have been quite consistent. Financial regulations have some significant and telling differences. The key area of differences between India and the rest were in the manner that these nations dealt with the flow of money into or out of the respective sovereignty. India through the instrument FCRA applied significant restriction on the inflow of foreign funds. Tax regulations all but prohibited outflow of money raised in India. Other countries, even those western nations with perceived less need for inflow of aid dollars, have very permissive policies regarding the inflow of foreign funds. The example of the so-called 9/11 Mosque as discussed is one instant where inflowing money came under significant scrutiny. We saw however that while questions were raised, the law permitted and protected the right of an

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NGO where no laws have been violated to raise and spend money within the stated objectives of an organisation. Of the countries in the study India was the only one with the registration requirements, and a separately administered set of regulations governing the inflow of foreign money. The FCRA represents a radical measure in itself. It could be argued that the existence of the law I necessary to Indias political realities given naxalite activities within and an enduring hostile border with Pakistan. While not the same, countries have used regular laws to address terrorist activity and the potential that charitable organizations may knowingly or unknowingly transfer funds to anarchist organisations. Equally, the tax tools limiting the out flow of Indian funds to charitable endeavours outside, is unique to India. If a similar set of legislation had been in place in western donor countries, aid and development around the world might have been very different in scope and reach. While governments are still very large donors of aid, private NGO overseas spending is a major development tool. It is the permissive laws around the out flow of aid dollars that has allowed the significant development and relief that has occurred throughout the world. Here the government of India is sending a mixed message. On the one hand the government hopes to promote the image of India as arriving as an industrial power player; simultaneously, there is in place a xenophobic tax policy that prevents a more complete manifestation of India as a donor nation. In countries where the need is great what we see is that there are no policies expressly prohibiting the raising and pending of funds for public benefit schemes. The size and scope of the needs (market force) is usually a determining factor limiting fundraising for these purposes. However, in the event of a crisis, where Indians what to help they are prohibited in effect by an artificial hand that prevents the market force from working In the case of the FCRA and the new DTC, we see India looking to legislate its way out of problems, perceived or real. This approach is not new; in fact it is very common. The real problem with the laws is not even the fact that they are duplicative. There are many duplicates or overlapping laws out there. The real problem here is that where enforcement and administration of laws are found wanting, adding new laws does not provide relief. Instead, it exacerbates the situation. In an environment were laws are numerous and overlapping we find that bureaucrats are unaware what laws apply in what circumstances. When combined with a high demand for the service the environment is rip for rent seeking behaviour. What is being described is a problem with capacity that results n corruption. India could be argued to have issues with capacity. There is a significant shortfall in Indias ability to administer the laws that are in place. While this study did not adequately undertake this issue in the depth necessary to speak to what is wrong and how it might be adequately addressed, there is little doubt that there is a problem. We need only look at the significant overlap or duplication of laws to understand that there is a capacity problem. It is the position of this work that issues of rent seeking might also be traced to the poor capacity of the government to adequately address the need for maintenance within the sector. The main recommendation coming from this study is that the issue of government capacity to adequately administer the sector be placed under a microscope.

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The differences in security needs for India and the similarities among regulatory environments do not by themselves justify the apparent over legislation of Indias voluntary sector. The issue of capacity is a recurring question that must be addressed.

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Tables

Table 1 Flow of Foreign Funds for Charities/ Public Benefit Organisations .

Restrictions Money (In) Restrictions Money (Out) From To Tax To From Tax Canada none None no Charity none no India A/R A/R no* restricted restricted yes Japan none none no charity none no Philippines none none no ------n/a South Africa none none no charity none no UK none none no charity none no USA none none no charity none no A reference to none acknowledges that criminal code prohibiting money laundering and terrorism etc are in effect. (a/r = approval required) * money experience shrinkage due to banking fees associated with FCRA restrictions. Countries

Table 2 Value added Tax and For profit Activity

Countries Value added tax rate % exemption Canada 12-15 No India 1-12.5 LoL Japan 5 some Philippines 3,12 LoL South Africa 14 yes UK 17.5 UpL USA N/A --/--* before and after DTC 2011 LoL lower limit UpL upper limit type d d d Tax incentives % limit 50 100 100 100 100 10% 25% 10% 10% 50-75 For profit activity allowed taxed Yes No Yes/no* No/yes* Yes yes yes yes yes limits Yes No yes No Prosperity tax Some exemptions Exempt

80% + 20% exempt

Table 3 Self-regulatory initiatives in our seven countries

Self regulatory imitative Code of ethics of Canadian Council for International cooperation Credibility Alliance Minimum and Desired Caucus of development NGO Network Code of Conduct. (CODE NGO) Philippines Council for NGO Certification South African NGO Coalition Code of Ethics Child sponsorship accreditation project Independent Sector Statement of Values and Code of Ethics for Non Profit Org Maryland Council of Non-Profit Org Standard of Excellence: Ethics and Accountability Code for N-P Sector Interaction's Private Voluntary Organization (PVO) Standards Data from One World Trust 2011 Country Canada India Philippines Philippines South Africa USA USA USA USA Enforcement Self-certification Self-certification with desk review None Third Party Certification None 3rd party certification None 3rd Party Certification Complaints investigated Self certification Sanction Y N N Y N Y N Y Y Beneficiary Accountability Aspirational Aspirational Aspirational Aspirational Some standards provided Some standards provided No mention Some Standards provided Some Standards provided

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Table 4 Monitoring
Countries # Canada India Japan Philippines South Africa UK USA Registered # per Capita #-A 500-600 Audits Random/tar both Sus Sanctioned fin reg tax appeals Cou agen tot

targeted

Key Reg = deregistration Sus = Suspension fine= fines tax = loss of tax benefits Cou = Through the courts agen = agency # = number of organizations # per Cap = Number of Orgs relative to pop # -A = Number of Audits Random/Tar = Random or Targeted Audits

CAF 2006 Report on Giving

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Table 5 Giving Index 2010 CAF

Countries Canada India Japan Philippines South Africa UK USA World giving index 3 134 119 50 76 8 5 Giving money 64 14 17 45 15 73 60 Volunteering time 35 12 23 27 19 29 39 Helping a stranger 68 30 25 35 57 58 65

51