Why charities need an overhaul

April 16, 2021 6:46 AM

Making non-profits a vibrant partner in India’s development

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By Mohitkumar Daga

The non-religious charities and non-profits sector in India is undergoing a vigorous evolution and a fundamental transformation. The new CSR rules effective April 1, 2021, amendments to Foreign Contribution Regulation Act (FCRA) and compliances introduced by the Finance Act last year advance transparency and accountability for this sector. However, a comprehensive dialogue regarding the sector’s role, its functioning and financing has been lacking. An aspect that remains under-discussed is the need for a robust regulatory framework to oversee this sector.

With rising incomes, new fundraising methods and the 2013 CSR mandate, funding for this sector has become a deluge. Entities registered with the I-T Department reported a 3.5 times increase in the amounts applied for charitable and religious purposes between 2013 and 2019. As per The India Philanthropy Report, private philanthropic giving in India for 2020 was nearly Rs 64,000 crore vis-à-vis Rs 12,000 crore in 2010. Among the benefactors are a substantial proportion of retail contributors with minimal means of verifying the application of their contributions. The non-profit sector is also playing a greater role in augmenting capacity for delivery of developmental programmes, as also in policymaking, monitoring and evaluation. Effective scrutiny of such entities is imperative in a democratic framework. Hence, substantive regulation of this sector is essential to ensure that professed objects are pursued, prudent practices are adopted, and public trust is maintained.

The sector operates in a regulatory disarray resulting from oversight dispersal, weak enforcement and convoluted legislations. There are at least three legal structures under which charities can operate in India (public trust, society, or non-profit company), each with separate oversight structures and compliances. Multiple state-level versions of laws regulating trusts and societies also exist. The I-T Department and the home ministry also exercise oversight as far as the I-T Act and FCRA, respectively, are concerned. Most oversight authorities in the current system lack the manpower and expertise to monitor and enforce compliances by non-profits within their fragmented jurisdictions. The fact that there is no consolidated statistic on the total number of charities/non-profits currently operating in India (let alone a list) is a stark reminder of dysfunction.

This has resulted in severe governance, transparency and accountability issues in charities. Instances of deviation from stated objectives, financial jugglery and mismanagement are not uncommon. On the other hand, charities find extant compliances onerous. This conundrum cannot be solved without an overhaul.

A regulatory revamp of the sector was considered in 2008 by the Second Administrative Reforms Commission. It recommended that a comprehensive model law be drafted for adoption by states to replace current laws governing trusts, societies and charitable entities, and to create a state-level Charities Commission. However, with charities operating and fundraising across state lines, a state-limited jurisdiction cannot provide adequate scrutiny. Harmonising standards and information exchange across states will be difficult with the lack of a big-picture view. A national regulator can overcome these issues effectively. Countries like the UK, Australia and Canada regulate charities at the national level.

In India, ‘charities’ is a Concurrent subject, making Parliament competent to establish a national regulator through legislation. Any such regulator must perform five key functions: define ‘charities’, recognise entities accordingly through a ‘National Register of Charities and Non-Profits’, enforce reporting and monitoring of their finances/operations, enable prudent governance practices among charities, and protect public interest. Under the new legislation, consolidation of various legal structures currently available for charities is preferable, but, alternatively, non-profit entities may continue to be established under the current laws as legal entities but must mandatorily register with the regulator for recognition as a charity. Recognition by the regulator should be mandatory for tax exemptions, FCRA transactions and government partnerships. A strong enforcement structure with powers to penalise non-compliance through fines, deregistration and blacklisting of key management personnel will be important to ensure success. The regulator can introduce a rating system for non-profits to help retail investors make informed contributions.

These reforms are foundational if the non-profit sector is to become a vibrant partner in India’s development. Prompt efforts in this direction will ensure both the accountability and focus which this sector needs.

The author is a public policy and political consultant. Views are personal

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