The Impact of Budget 2011 on the Voluntary Sector

The Financial Management Service Foundation (FMSF) is a development resource organisation that deals in financial management, legal issues and governance of development organisations in South Asia. In its analysis of the Indian Union Budget 2011 that was presented on 28 February 2011, it has studied those changes that affect  the voluntary sector. Below are some excerpts of the analysis:

Business Activity Limit Increased to 25 Lakhs

The Finance Bill 2011 has amended the proviso to section 2(15) to increase the limit of incidental business activity to Rs 25 lakh, up from the current limit of Rs 10 lakh, as follows:

“In section 2 of the Income-tax Act, in clause (15), in the second proviso, for the words “ten lakh rupees”, the words “twenty-five lakh rupees” shall be substituted with effect from the 1st day of April, 2012.”

Going back a few years, we can see how significant this amendment is for smaller NGOs. In 2008, amendments to the definition of 'charitable purpose' under section 2(15), had far- reaching implications on the business income of charitable organisations. The definition of 'charitable purpose' had been divided into six categories:

(i)            relief of poor

(ii)          education

(iii)         medical relief

(iv)         preservation of environment

(v)          preservation of monuments or places or objects of artistic or historic interest

(vi)         advancement of any other object of general public utility.

The Finance Act, 2008 had, with effect from 1 April 2009, excluded any trade, commerce or business related activity by any trust or NGO engaged in the sixth category, i.e., advancement of any other object of general public utility, from the scope of 'charitable purpose'.

In other words, while NGOs engaged in the fields of education, medical relief, relief of poor, and preservation of environment and/or monuments could have incidental business activity without any monetary ceiling, the income from trade, commerce or business of NGOs who came under the sixth category of ‘charitable purpose’ was not to be treated as charitable activity.

As a result, such organisations were not eligible for any exemption under section 11 or other provisions which provide exemptions towards charitable purpose. The issue of whether the business activity was incidental or not, was of no consequence, as this sixth category of NGOs would lose their charitable status.

Two years later, the Finance Act 2010 retrospectively provided relief to small NGOs by providing a limit of Rs. 10 lakh. Now, with the newest increase of this limit up to Rs.25 lakh, the Finance Bill 2011 has provided greater respite to the sixth category of NGOs. However, this enhancement shall be prospective in nature and will be applicable only from the assessment year 2012-13.

What this means is that NGOs having business activities to the extent of rupees 25 lakh (receipt) will not be affected. Other NGOs (not coming under the sixth category) can have business related activity beyond Rs. 25 lakh, as permitted under section 11(4A), and other provisions pertaining to business activities shall be applied without any changes.

Earlier on, the law was very liberal to all NGO business activities. Even their income from unrelated businesses (for example, publishing newspapers) was eligible for exemption if the entire income was used for charitable purposes. The law will continue to remain liberal for the first five categories of NGOs.

To sum up, the proposed amendment will be immensely helpful to smaller charitable organisations who have incidental business activities, e.g., NGOs trading goods produced by their beneficiaries, sale of khadi, handicrafts etc.

Special Exemption for Government Bodies Engaged in Charitable Activity

The Finance Bill, 2011 has inserted a new clause (47) to section 10 of the Income Tax Act, by which the income of various bodies set up by the government for charitable purposes shall be exempted:

“It is proposed to insert a new clause in section 10 of the Income-tax Act to provide exemption from income tax to any specified income of a body, authority, board, trust or commission which is set up or constituted by a Central, State or Provincial Act or constituted by the Central Government or a State Government with the object of regulating or administering an activity for the benefit of the general public, provided --

(i) It is not engaged in any commercial activity, and

(ii) Is notified by the Central Government in this behalf.

The nature and extent of Income to be exempted will also be specified by the Central Government while notifying such entity.

A consequential amendment is proposed in section 139 of the Act to provide for filing of the return of income by such notified entity. These amendments are proposed to take effect from 1st June 2011.”

In the past there were many court cases pertaining to 12AA registration of such government-promoted bodies. The Income Tax department had rejected applications of such bodies as marketing committees, producer’s societies, etc. The charitable status of such government-promoted bodies was a matter of judicial debate. Various High Courts held that even government constituted bodies were eligible for registration under Section 12AA as charitable organisations.

The new amendments highlighted above effectively resolve the existing controversy regarding government-promoted charitable organisations. The amendment will be retrospective by one year, and is applicable for the assessment year 2011-12.

Reporting Requirement for Liaison Offices

One very significant amendment laid out in the Finance Bill 2011 is that all liaison offices of foreign NGOs working in India will now have to report to the Assessing Officer within 60 days from the end of the financial year. Currently, these liaison offices have not been required to file any return/document, unless they have income in India. The proposed Section 285 is as under:

“Every person being a non-resident having a liaison office in India set up in accordance with the guidelines issued by the Reserve Bank of India under the Foreign Exchange Management Act, 1999, shall in respect of its activities in a financial year, prepare and deliver or cause to be delivered to the Assessing Officer having jurisdiction, within sixty days from the end of such financial year, a statement in such form and containing such particulars as may be prescribed.”

The rules and forms in this regard will be notified later.

Other Highlights of the Budget Affecting the Social Sector

The proposed allocation to social sector for year 2011‐12 is Rs 1,60,887 crore. This is a 17% increase over last year, and amounts to 36.4% of total plan allocation.

RURAL INFRASTRUCTURE:

Bharat Nirman (which includes Pradhan Mantri Gram Sadak Yojna (PMGSY), Accelerated Irrigation Benefit Programme, Rajiv Gandhi Grameen Vidyutikaran Yojna, Indira Awas Yojna, National Rural Drinking Water Programme and Rural Telephony) has been allocated Rs 58,000 crore. This is higher by Rs 10,000 crore over last year’s allocation.

The Government has decided to index the wage rate notified under MGNREGA to the consumer price index for Agricultural Labour.

Remuneration of Anganwadi Workers and Anganwadi Helpers has been increased from Rs.750 and Rs.1500 to Rs.1500 and Rs.3000 respectively.

Specific allocations have been provided in budget 2011‐12 towards Scheduled Caste sub‐plan and Tribe sub‐plan. An increase in the budget allocation for primitive tribal groups from Rs 185 crore in 2010‐11 to Rs 244 crore in 2011‐12 has been proposed.

EDUCATION:

Total allocation for 2011‐12 is Rs 52,057 crore which is an increase of 24% over last year’s allocation. Allocation towards Sarva Shiksha Abhiyan (elementary education) for 2011‐12 is Rs 21,000 crore, which is a 40% increase over last year’s allocation of Rs 15,000 crore.

HEALTH:

Total allocation for year 2011‐12 is Rs 26,760 crore, a 20% increase over the last year’s allocation. The Rastriya Swastya Bima Yojna (health insurance) has been further extended to  beneficiaries of MGNREGA (unskilled manual rural employment), beedi workers and others.

ENVIRONMENT AND CLIMATE CHANGE

The National Clean Energy Fund has been allocated Rs 200 crore for a ten‐year Green India Mission. Implementation will begin in 2011‐12. A further allocation of Rs 200 crore goes towards the launching of environmental remediation programmes. Another Rs  200 crore has also been allocated for the cleanup and restoration of several grossly polluted strategic lakes and rivers around the country.

MICRO FINANCE INSTITUTIONS:

It has been proposed to create “India Microfinance Equity Fund” of Rs 100 crore with Small Industries Development Bank of India (SIDBI). Another fund called “Women’s SHG’s Development Fund” for the promotion of Self Help Goups, has been proposed with a corpus of Rs.500 Crore.

Following the submission of a report by an RBI committee to look into the issues related to the micro finance sector in India, the Government is looking into setting up an appropriate framework that will protect the interests of small borrowers.

For more information please visit www.fmsfindia.org.in