Non-profit entities and foreign donations
Many non-profit organisations are registered entities and contributions by US residents can be claimed as a deduction.
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Perez Chandra, a philanthropist, decided to dedicate the rest of his life to helping the slum-dwelling children and educating them. He decided to set up a charitable trust with his contributions, as well as donations from friends and well-wishers. The trust not only started receiving money from different donors but also received the attention of non-residents, who wanted to donate money. We now look at the compliance aspects of running a non-profit organisation.
REGISTRATION
A non-profit organisation can be registered in India as a Society, a Trust or a Section 25 company in India, following registration with the Income Tax department.
While setting up the non-profit as a society or trust is a procedural activity, the subsequent permissions requires the discretion of the officials. The first such is Sec 12A registration with the Income Tax department, which entitles the trust to treat its income as tax-exempt. Previously, the I-T Department's commissioner would sanction this registration as soon as all documentary formalities were complete. However, the current procedure requires the trust to do certain initial activities to convince the Commissioner of Income Tax that the purpose is a charitable one, as per the Income Tax guidelines.
The 80G registration comes next and this entitles donors to the trust to claim a tax exemption for the amount donated to the said trust. Again, practically, getting this permission takes a few months after the 12A registration is granted, though the Income Tax Act doesn't prevent granting of 12A and 80G together. It would save substantial time for the tax officials, as well as for the trust, if the 80G could be considered as a corollary of the 12A registration. The premises on this are that once the Commissioner grants permission to the trust to exempt its income from tax, it goes without saying that the Income Tax department is convinced as to the goals and activities of the said trust.
The next permission required in this list is to receive donations from foreigners / non-residents. This is governed by a separate Act viz. the Foreign Contribution (Regulation) Act 1976 (aka FCRA). Under this Act, the trust must register with the Central Government, and designate the bank branches through which such foreign donations would be received. The act has a two-fold goal — one to prevent the use of such money for acts of terrorism or any other act which isn't in national interest, and two, to prevent / control religious conversion issues.
FOREIGN DONATIONS
Registration is granted only to those units which have a proven record of functioning in the chosen field of work during the previous three years. After registration, such an organisation is free to receive foreign contribution from any foreign source for their activities. However, newly-established organisations may also receive foreign contribution for specific activities, for a specific purpose, and from a specific source after seeking project-based prior permission from the Ministry of Home Affairs.
In the case of foreign contributions, a way out of these procedural requirements would be to register the trust with a Foreign NGO or Non-Profit organisation and receive money through them. The donor would make a contribution to the foreign NGO / NPO and they would route the money to the specific project of the trust in India. This approach has a double advantage — it saves time and procedural delays for the trust on one hand and on the other, it enables the foreign donor to claim a tax exemption in his country for the contribution made.
The latter, of course, is based on the assumption that the foreign country allows a tax exemption for contributions. This is true of the US (a major contributory — more than Rs 1500 crore per annum) where many NGOs and Non-Profits are registered entities with the IRS (Internal Revenue Service), and any contribution made to them by US residents can be claimed by the taxpayer as a deduction on the return.
However, if the taxpayer were to make a direct contribution to the Indian trust, it isn't always possible to claim a deduction on the US return, as this trust wouldn't be a recognised entity as far as the IRS is concerned. Perez's goal in setting up a trust for the education and health needs of the slum-dwelling children is indeed praise-worthy. All the paper work and documentation required at the initial stages are an attempt to provide the necessary collaterals to all authorities concerned, that the trust being set up will work for stated goals.
Registering the trust with a foreign non-profit organisation and receiving money through it saves time and enables the foreign donor to claim tax exemption.
(This article was published in the Business Line print edition dated December 19, 2011)
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