A new report examines the law on civil society in India

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Over the last few years, a perception has developed in India that scrutiny of the civil society by authorities has increased.

This perception is scaffolded by data of rise in invocation of laws such as the Foreign Contribution (Regulation) Act, 2010, the Prevention of Money Laundering Act, 2002 and pressure from the Enforcement Directorate and Central Bureau of Investigation. The perception is also fuelled by an increase in the number of licence cancellations among non-profit organisations (NPOs) in India.

In 2016, the home ministry cancelled the licences of around 20,000 NPOs, out of a total of 33,000, for violating the provisions of the FCRA.

In March 2016, the Ministry of Home Affairs, which regulates the NPOs registered under the FCRA, cancelled the registration of Greenpeace India, an international environmental organisation that aims to hold government and corporations accountable.

The decision was allegedly taken by the regulatory authorities due to the allegations that the organisation was "prejudicially affecting the public interest and domestic interest of the State".

In 2020, the ED froze the account of Amnesty International, an NPO that campaigns for human rights, for allegedly receiving foreign funds through illegal means.

Following the freezing of its account, the organisation stopped its work in India.

In 2021, the FCRA licence of Oxfam, an organisation that works to support child education, empower women and fight against injustice in India was invalidated by the ministry.

Reportedly, the home ministry has cancelled the licences of over 6,600 non-profit organisations in the past five years.

In March this year, the FCRA licence of Legal Initiative for Forest and Environment, founded by lawyer Ritwick Dutta, was cancelled.

A probe by the CBI was also directed against Dutta on the allegation that the initiative was involved in "criticising government policy and agitating farmers against industrialist and industrial policy of the government".

Whether these allegations and the perception of increased scrutiny are true or not requires a separate investigation. It is, however, true, that the law on civil society organisations and NPOs in India is generally not well understood.

This is prejudicial to the organisations themselves as they navigate complex legal minefields as well as for the general public concerned about the health of the republic. 

Report on the legal framework of civil society

The new report by Noshir Dadrawala of the Centre for Advancement of Philanthropy aims to cement this knowledge gap.

The report, titled Analysis of the current legal framework for civil society in India, is the second iteration of their 2019 report analysing the legal status of civil society and NPOs in India.

The report provides an in-depth analysis of the legal aspects of forming an NPO in India. 

Civil society 

The report provides a helpful working definition of civil society as being "a sum of individuals, groups or organisations that work on behalf of a variety of interests and initiate various activities and interests in society in support of those interests".

The report details that civil society or non-governmental organisations perform three functions, namely— filling gaps in the government's welfare systems, conducting research-based advocacy and working on a rights-based approach.

"Voluntary groups work for marginalised communities in providing access to basic services, and their modus operandi is primarily to educate and empower the community about their entitlements and review government plans and policy for their efficacy," the report explains.

Referring to civil society as the "social basis of democracy", the report highlights several roles of civil society, including of a watchdog in holding public institutions accountable; an advocate in raising awareness of societal issues; and delivering welfare services to meet societal needs such as education, health, food and security.

The report lists several types of NPOs such as trust, society, a Section 8 company (governed by The Companies Act, 2013), informal organisations, for-profit social enterprises, microfinance organisations and Revive Alliance (an initiative by funders, companies and social organisations that provide capital to informal workers and entrepreneurs).

The legal framework

The analysis explains that while registration of an NPO is voluntary, the registration is mandatory for any such organisation receiving grants from a foundation, government or company based in India or abroad.

To qualify for tax exemptions and deductions, Section 2(15) of the Income Tax (IT) Act, 1961 states that an NPO must fall within the definition of "charitable purpose", which includes relief of the poor; education and yoga; medical relief; preservation of the environment; preservation of places with artistic or historic interest; and the advancement of any other object of general public utility.

In order to enjoy tax benefits, an NPO must register with the income tax department under Section 12AB of the IT Act to obtain income tax exemption and under Section 80G of the Act for organisation donors to receive tax deductions.

The report says that the Ministry of Home Affairs regulates NPOs that receive foreign funding. NPOs that receive funding from any "foreign source" have to apply to the home ministry under the FCRA.

In the case of foreign NPOs seeking to establish a branch in India, they are required to apply to the Reserve Bank of India (RBI) under the provisions of the Foreign Exchange Management Act, 1999.

Following the amendment to RBI's notification of March 31, 2016, as amended in August 2018, such foreign NPOs whose activities are covered under the FCRA are required to register under Act.

The registration of an NPO registered under the FCRA can be revoked if it accepts foreign contribution that is likely to prejudicially affect the sovereignty and integrity of India; the security, strategic, scientific or economic interest of the State; the public interest; freedom or fairness of election; friendly relation with any foreign State; and harmony between communities.

Amendments to the FCRA

The report states that the amendments to the Finance Act (aimed at giving effect to the financial proposals of the Union government pertaining), namely– amendments of 2008, 2010, 2011 and 2015— have limited the scope of economic activity carried out by an NPO without losing its 'tax-exempt status'.

In view of new compliance requirements by way of amendments to the FCRA as well as official circulars and Orders, the analysis claims that the Union government exercises 'control' rather than merely 'regulating' NPOs.

The report notes that according to the amendment introduced by the Union government to the FCRA Act and its Rules in November 2020, all foreign contributions are mandated to be received in a designated FCRA bank account with the State Bank of India in New Delhi.

It is also stated by the report that the amendment introduced a complete prohibition on sub-granting FCRA funds, affecting the grassroots NPOs that relied on larger NPOs to fund them from foreign sources.

According to the report, only around 20,000 organisations are presently eligible to receive foreign funds under the FCRA.

The report points out that as per the Ministry of Home Affairs, compared to India's Foreign Direct Investment (₹6,95,000 crore), a small amount of foreign income was directed towards not-for-profit organisations (₹22,085 crore) in 2021–22.

It is stated by the report that the allegations that foreign funding of organisations is a potential "threat to national interest" or it "affects prejudicially the sovereignty and integrity of India" disproportionately target NPOs.

Additionally, the report notes that following the amendment in the Foreign Contribution Rules in 2020,  registration of an NPO can be rejected on the ground that it is engaged in active politics and party politics.

Further, the report also notes the dichotomy between the state and Union laws, particularly in the context of investment of funds by organisations in mutual funds.

While under the Income Tax Act, 1961, the organisations are allowed to invest funds in any mutual fund, however, under the Maharashtra Public Trusts Act, 1950, NPOs are allowed to invest funds only in debt-based mutual funds.

The Ministry of Home Affairs prohibits NPOs registered under FCRA from investing funds in any mutual fund.

Recommendations of the report

On the basis of its analysis and discussions, the report presents certain recommendations and suggestions.

Among the recommendations, the report suggests not introducing additional laws or compliance requirements for NPOs. It says that the Union government can exercise its powers to investigate NPOs through the Comptroller Auditor General and CBI.

The report recommends that the home ministry constitute an appellate body to address FCRA-related grievances.

According to the report, the government needs to develop the perception that NPOs contribute to nation-building in order to enable them to seek parity with the corporate sector.

In conclusion, the report highlights that civil society, which is based on core values of trust, service and collective good, plays a powerful role in constituting solutions to societal challenges.

The report draws attention to the urgent need for the Union government and the civil society to work together to "build institutional relationships based on mutual trust and shared vision".

It is a must read for anyone interested in knowing the developing jurisprudence on civil society in India.

Read the full report here.