16TH January 2017

Financial Compliances for NGOs

Presented by: Sunil Goel & Associates, Cas for The Atma Network

Over

31,00,000*Number of NGOs in India as per CBI Report 2015The CBI records filed in the Supreme Court in January 2017 show that only 2,90,787 NGOs file annual financial statements out of a total of 29,99,623 registered ones under the Societies Registration Act.

January 2017

•In depth Analysis of 12AA/80G(Basics, Caution Areas, Key Points)

•Capacity Building of NGOs(Internal Control, Fund Raising, Budgeting)

•Year End Compliances( Companies Act, Income Tax Act, MPT Act and

FCRA)•FAQs

Agenda for Webinar

Financial Compliances for NGOs in India

INTRODUCTION

Non-government organizations are increasingly bridging the gap between expectations from the government authorities and the actual implementation which can be seen in various areas of our lives. But, to be more effective, NGOs must have a vision, a working plan and a reliable system to implement the plan.Accountability calls for a simplified structure that avoids duplication and achieves greater impact; empowered and responsible staff managers; a leaner and more efficient non-governmental organization (NGO) that fosters management excellence and is accountable for achieving results. resources.

In depth analysis of Sec 12AA/80GThe caution areas and the check points

1

Meaning of ‘Charitable Purpose’ – Income Tax

As per S. 2(15) of the Income Tax Act, 1961, unless the context otherwise requires, the term “charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility;

Basics

▪ Application for registration under Section 12A (Form 10A) and approval under Section 80G (Form 10G) can be applied immediately after registration of the NGO, they are normally applied for together.

▪ If some organization is willing to apply both applications separately, then application for registration u/s 12A will be applied first. Getting 12A registration is a must for applying application for registration u/s 80G of Income Tax Act.

Basics (Contd..)

▪ Application for registration is required to be submitted electronically & thereafter in hard-copy to the Director of Income Tax (Exemption) in case of Metro Cities & to Commissioner of Income Tax in other cases.

▪ The Trust/MOA Document must contain the following clauses:-- Dissolution Clause to provide that in event of

dissolution of the Organisation, funds/assets will be transferred to an

oranisation with similar objective. - Use of Funds only for Objects of the Trust- Use of Funds within India only.

Caution Areas

▪ The NGO should normally visibly depict that activities have actually commenced since incorporation.

▪ If the NGO has business income then it should maintain separate books of accounts and should not divert donations received for the purpose of such business.

▪ The bylaws or objectives of the NGOs should not normally contain any provision for spending the income or assets of NGO for the purpose other than charitable in nature and outside India.

Registration

▪ The DIT (Exemptions)/Commissioner on receipt of application shall call for such documents or information as he deems fit and accordingly shall pass an order in writing for granting or refusing to permit registration of the trust.

▪ The order shall be passed only after giving reasonable opportunity of being heard to the assesse.

▪ The order shall be passed within 6 months from the end of month in which the application for registration is received.

VOLUNTARY CONTRIBUTION Vs. CONTRIBUTIONS WITH SPECIFIC DIRECTION/ CORPUS GRANTS

S. No.

Particulars Voluntary Contribution with a specific direction

Voluntary Contributions

1. Direction To constitute corpus donation, there should be direction from the donor to the donee.

There is no direction from the donor to the donee.

2. Specific Purpose

There is a direction. The direction may be for specific purpose or towards corpus.

There are no specific purposes as such and funds can be used for ANY charitable or religious purposes.

3. Receipt It has a character of capital receipt.

It has a character of revenue receipt.

4. Exemption The entire income is exempt under section 11(1)(d) of the Income Tax Act, 1961.

Exemption is subject to application of income.

5. Accumulation Provision

Accumulation provision will not apply to corpus donation.

If the application is less than the 85%, then, option is there to accumulate the income.

Investment of Surplus Income

The organization must apply 85 %of the income derived from property held under trust including the amount received as voluntary contributions in the previous year.

Explanation 2 to Section 11(1), provides that the income will be deemed to have been spent in the previous year.

Alternatively, the assessee can also accumulate the income for 5 years.

Investment of Surplus Income [Sec 11(5)]

INVESTMENT OF SURPLUS INCOME

Government Saving

Certificates

Deposit in PO, Saving Bank

A/c’s

Investment in UTI

Investment in Debentures

Investment in Bonds

Investment in immovable

property

Deposit with IDBI

If an organization has obtained certification under section 80-G of Income Tax Act then donors of that NGO can claim exemption from Income Tax.

Check points

Stamped Receipt to be issued to Donor The receipt should comprise of Name, Address and PAN of the organisation. The name of the donor must be mentioned Registration number u/s 80G must be mentioned Amount should be mentioned in numeric as well as words The Receipt should be serially numbered.

For Deduction u/s 80G, donations > Rs. 10,000 should not be in cash.

If organizations have business income, donations received should not be used for business purposes.

Mode of payments eligible for deduction

Donations made as gifts/in kind do no qualify for tax deduction

Cheque/Draft are the ideal mode of receiving donation. Limited cash donations are also allowed

Donation can be deducted from salary with donaton receipt in the name of the employer.

Remedy for Rejection

On refusal to grant registration/ approval by Commissioner/DIT (Exemptions) remedy available is appeal to the ITAT.

Place your screenshot here

Online Details

Organisations and Donors can see the tax exemption details online on

http://www.incometaxindia.gov.in/Pages/utilities/exempted-institutions.aspx

As per section 10(23C), the income of certain funds, Universities, educational institutions, hospitals etc are not includible in the total income. Section 10(23C) does not prescribe any stipulation which makes registration u/s12AA a mandatory condition.

Types of Educational Institutions eligible for exemption u/s 10(23C)(vi)

Any income of educational institution existing solely for educational purposes and not for profit provided is substantially financed by the Government.

Any university or other educational institution existing solely for educational purposes and not for purposes of profit and which is not financed wholly or substantially by the Government and the aggregate annual receipt of such institution exceeds Rs. 1 Crore, then the income will be exempt from tax, subject to approval by the prescribed authority.

[S. 10(23C) (vi)]

Where the aggregate annual receipt does not exceed Rs. 1 crore, then any income is also exempt, subject to the condition that it exists solely for educational purposes

Capacity Building of NGOsHow to grow effectively and efficiently

2

Improving financial documents control the operating processes and procedures applicable to an NGO. It also incorporates the internal controls that are intended to improve the effectiveness and efficiency of an NGO’s operational activities

Why do donors or NGOs need to put internal controls in place?

OPERATIONAL — effective and efficient use of

resources

FINANCIAL REPORTING —

reasonable assurance on reliability of

financial reporting

COMPLIANCE — compliance

with applicable laws and

regulations

Structures and levels of controls

There is an inverse correlation between the quality of internal controls and the amount of risk an organization faces.

The better the quality of internal controls, the greater chance an organization has to minimize the risks it faces.

Source: EY Publication

Framework

Receipt — establishing agreements between donor(s) and the NGO

Expenditure — procuring, delivering, disbursing, accounting and reporting of aid delivery

Requisition — telling the donors what and how much is needed, as well as acknowledging receipt of aid given

Checkpoints

Control Environment Policy Type Key aspects to be included

Financial

Financial reporting policy

Dates for financial year, accounting method and relevant compliance requirements

Budget process Timing and approval process of budgets.

Financial review and analysis

Detail who is responsible for financial review and analysis, frequency of review, key areas to be reviewed.

Checkpoints

Control Environment Policy Type Key aspects to be included

FinancialAudit

Policy on frequency of audit, appointment of auditors, personnel responsible for providing auditors with necessary information.

Reporting

Compliance reporting policy

Identify stakeholders, frequency, content and preparation responsibility of compliance reporting.

General reporting policy I

Identify stakeholders, frequency, content and preparation responsibility of general reporting..

Fraud and Internal controls

▪ Separation of duties – no one person should be responsible for a complete transaction from start to finish

▪ Access controls – physical controls, such as locks and passwords for valuable assets, including information and business systems.

▪ Authorization controls – policies that clearly articulate who is authorized to conduct business on behalf of the organization and who is responsible for each step of a transaction, building in the separation of duties requirement.

Check List for Effective Internal Control

Funding for activities of NGOs can be a challenge - the shortcomings of the NGOs can be compounded by restrictions placed by donors, that further complicate the matter. Challenges for NGOs include, for example, managerial skills needed to access and utilize funds for projects, or undertaking sustained activities on the long term.

Types of fund raising

National(PAN Card/80G)

International(FCRA Prior Permission/

Registration)Fund Raising

Check points for NGOs

01

Donation from NRIs is not FC

02

Foreigners donating while in India are a foreign source

03

Foreign Contribution can be in INR too

04

Donation from Indian Companies is not a foreign source

Funding Mix

Donor Funding (External)Short Term

Investments(Internal)Long Term

Income Generating Activities

Fundraising

The Reality The Strategy

Easier to get money for one event than for a sustained long-term programme.

Develop a comprehensive long-term programme, but break it into smaller chunk sized bits to seek funding for each part, from the same or sometimes different source

There are many conditions and terms imposed on funds provided by most donors that may restrict its use

Understand the need for these conditions/terms by looking at it from the donors' perspective; ensure that you have communicated your needs very clearly - the who, how, why and when; try to find a middle ground in negotiating with the donor - satisfy their needs without sacrificing your own.

Fund raising activities need skills and knowledge to be effective and successful - which most NGOs do not have

Creating NGO Networks, NGO service centers, information kiosks etc. help in pooling and developing the knowledge and skills needed for this purpose.

Government Initiative: NGO DARPAN

▪ Get details of existing VOs / NGOs across India

▪ Get details of the schemes of the participating Ministries/Departments/Government Bodies

▪ Apply on -line for NGO grants and Track status of your applications for grants

Budgeting

Through these reports decision making for future business planning and getting information on how your funds have been utilized can be done easily with the ability to see variance in the budgets based on user specified time periods.

Types of Budgeting

Traditional(Incremental effects to last year’s budget)

Zero Based(Current

resources should be

allocated to sanctioned activities)

Budgeting

Steps involved through Zero Base Budgeting

01

Identification of decision units

02

Analysis of each decision unit through development of decision packages

03

Evaluation and ranking of decision packages to develop the budget.

04

Preparing the budget including those decision packages which have been approved.

Types of Budgets

Income and Expenditure

BudgetCash Flow ForecastCapital Budget

Tips for Cash Flow

▪ Cash flow forecasts are not simply the budget broken down into 12 equal installments

▪ Expenses must be entered on the cash flow forecast when the cash is expected to leave the bank.

▪ For unpredictable expenses – e.g. equipment repairs – it is best to put a monthly or quarterly sum.

▪  Obvious but easily forgotten: you exclude non-cash transactions from the cash flow forecast (e.g. donations in kind or depreciation) so if these are on the budget, they have to be left off the cash flow

Variance analysis is a critical part of any budget. However, the analysis must always consider the unit on the basis it is being prepared. The Budgeted figures should be adjusted in accordance with any change in the units. For example: If Rs 20,000 were allocated for 2 farmers, actually incurred expenses were Rs 17,000 towards one farmer. Then the variance should be calculated between Rs 17,000 and Rs 10,000 (that is 20,000 /2) instead of comparing Rs 20,000 with Rs 17,000.

Check Points for Variance Analysis

Year End CompliancesYour to do list for the coming months

3

Year-End Compliances

▪ The Voluntary Organisations take various forms such as that of a Trust or a Society or a Company. There are number of aspects in each form like the formation, management, functioning etc. To cover each aspect there are laws which require mandatory compliance.

COMPANY/ TRUST/

SOCIETY LAWS

OTHER

LAWS

LABOR

LAWS

FEMA/ FCRA LAWS

TAX LAWS

Income Tax Act, 1961

▪ Every charitable organisation is required to file a return of income in the prescribed Form ITR 7 every year on or before the due date if the total income exceeds the maximum amount, which is not chargeable to income tax.

▪ The audit report in Form No.10B duly signed and verified and setting forth such particulars as may be prescribed, is to be submitted along with the return of income for the relevant assessment year besides Form No. 10 (if required)

Date: 30th September 2017

Companies Act, 2013

Year End: AOC -4 and MGT -7

First Board Meeting: MBP-1

and DIR-8

Compliances for Section 8 Companies

Date: 29th November 2017

MPT Act, 1950(Filing of Budget)

▪ To be filed at least one month before the commencement of each accounting year

▪ Applicable for trusts having annual income exceeding Rs. 10,000 (Rs. 5,000 for public religious trusts)

▪ To be filed in Schedule VII-A

Date: 28th February 2017

MPT Act, 1950(Finalisation of Accounts)

▪ Balance Sheet to be prepared in format as per Sch. VIII, while Income & Exp A/c as per Sch. IX, Lastly, Income liable to contribution – Sch. IX-C

▪ To be done within 6 months from 31st March every year or such other date as may be fixed by Charity Comm.

▪ Contents of Audit Report as per Rule 19 ▪ Trusts having annual income of Rs. 15,000 or less is

exempt from audit

Date: 30th September 2017

FC(R)A, 2010

Quarterly disclosures

within 15 days after the last

day of Quarter

Annual Report through FC-4 needs to be

submitted by 31st December,

2017

Foreign Contribution

Regulation Act, 2010

Date: 15th January 2017 15th April 2017 31st December 2017

FAQsYour Questions , Answered !!

4

Who are Public Servants? Which NGOs are covered under the ambit of Lokpal and Lokayuktas Act, 2013?▪ If the foreign contribution received by an organization

exceeds Rs Ten Lakhs in a year then all the directors, managers, secretaries, other important officers during the said period, irrespective of the fact whether they are or are not still a part of the said organization, shall have to disclose their personal assets and liabilities under Lokpal and Lokayuktas Act, 2013.

What is the current status of Lokpal?

▪ A recent Office Memorandum dated 1st December 2016 states that there is no requirement of filing the Declaration relating to Assets and Liabilities by the Public Servants as of now.

Previous memorandum dated 29th July, 2016 had postponed the last date for furnishing of declaration/information/annual return relating to assets and liabilities to 31st December 2016. However, a recent memorandum (attached) clarifies that the government is in the process of finalizing a fresh set of rules, and Public Servants shall have to file accordingly thereafter.

What are the eligibility criteria for grant of registration under FCRA?

For grant of registration under FCRA, 2010, the association should:

(i) Be registered under the Societies Registration Act, 1860 or the Indian Trusts Act, 1882 or section 8 of the Companies Act, 2013 etc;

(ii) Normally be in existence for at least three years and has undertaken reasonable activity in its chosen field for the benefit of the society for which the foreign contribution is proposed to be utilised. For this purpose, the association should have spent at least Rs.10,00,000/- over the last three years on its activities, excluding administrative expenditure.

Can foreign contribution be received in and utilised from multiple Bank Accounts? ▪ No fund other than foreign contribution can be deposited in

the exclusive single FC account of a Bank, as mentioned in the order for registration or prior permission granted by MHA, to be separately maintained by the associations.

▪ However, one or more accounts in one or more banks may be opened for utilising the foreign contribution after it has been received provided that no funds other than that foreign contribution shall be received or deposited in such account or accounts

Credits

SPECIAL THANKS TO ALL THE PEOPLE AT THE ATMA NETWORK

WHO ARE ENABLING THE NGO SECTOR IN INDIA

Any questions?You can find us @

suhel.goel@sunilgoel.com; info@sunilgoel.com

Or you can Call Us New Delhi: +91 11 41663000Mumbai: +91 22 66953000Noida: +91 120 4033000

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