How are charitable donations treated under the law in India?

By Bambi Bhalla

Introduction:

Voluntary contributions or donations are often received by non-profit organizations for carrying out charitable work. Donations may be received domestically or from foreign sources. A person who wishes to receive foreign donations is required to obtain permission or register under the Foreign Contribution Regulation Act, 2010 (“FCRA”). In this post, we will briefly discuss the FCRA route and the laws applicable to domestic donations vis-à-vis to the entities in India receiving such donations. ?

Foreign contributions:

In India, non-profit organizations such as trusts and societies with a charitable or religious cause are permitted to receive donations. With respect to foreign contributions, the FCRA states that any person[1] having a definite cultural, economic, educational, religious or social programme may receive foreign contributions with FCRA registration / permission. The term ‘foreign contribution’ [2] has been defined as any donation, delivery or transfer made by any foreign source of article, security or currency (Indian or foreign). Therefore, all possible modes of giving of donations or grants have been covered under the definition of foreign contribution made by a foreign source. It is also clear from the definition that, as long as any donation is made by a ‘foreign source’, the type of currency will not affect the applicability of the FCRA. The provisions of the FCRA would apply, regardless of the fact that the donation was made in Indian or foreign currency. The term ‘foreign source’ has been given an inclusive definition consisting of the following sources:

(i) the Government of any foreign country or territory and any agency of such Government;

(ii) any international agency, not being the United Nations or any of its specialized agencies, the World Bank, International Monetary Fund or such other agency as the Central Government may, by notification, specify in this behalf;

(iii) a foreign company;

(iv) a corporation, not being a foreign company, incorporated in a foreign country or territory;

(v) a multi-national corporation[3];

(vi) a company within the meaning of the Companies Act, 1956 (1 of 1956), and more than one-half of the nominal value of its share capital is held, either singly or in the aggregate, by one or more of the following, namely:

(A) the Government of a foreign country or territory;

(B) the citizens of a foreign country or territory;

(C) corporations incorporated in a foreign country or territory;

(D) trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory;

(E) foreign company;

Provided that where the nominal value of share capital is within the limits specified for foreign investment under the Foreign Exchange Management Act, 1999 (42 of 1999), or the rules or regulations made thereunder, then, notwithstanding the nominal value of share capital of a company being more than one-half of such value at the time of making the contribution, such company shall not be a foreign source;

(vii) a trade union in any foreign country or territory, whether or not registered in such foreign country or territory;

(viii) a foreign trust or a foreign foundation, by whatever name called, or such trustor foundation mainly financed by a foreign country or territory;

(ix) a society, club or other association of individuals formed or registered outside India;

(x) a citizen of a foreign country.?

It is important to note here that an exception has been provided under Section 2(j)(vi) of the FCRA to any Indian company in which foreign shareholding exceeds 50% and where the Indian company is compliant with the sectoral caps prescribed under the Foreign Exchange Management Act, 1999 (“FEMA”). Such companies will not be considered as a foreign source under the FCRA. Therefore, for all practical purposes, Indian companies with 50% or more foreign shareholding which meet the permitted sectoral caps under FEMA will not fall under the scope of the FCRA and entities can proceed to receive donations from such companies without any permission or registration.

Further, the FCRA explicitly prohibits any person registered under the FCRA and receiving foreign contributions from transferring such contributions to any other person in India[4]. Thus, any person in India is prohibited from receiving any foreign contributions as a secondary recipient and may only directly receive contributions from foreign sources under the FCRA.

In view of the above, an entity in India may only receive foreign contributions directly from the foreign source under FCRA registration / permission or may receive funds from Indian companies with foreign investment in compliance with FEMA, without requiring FCRA registration/approval. However, any foreign contributions received by such entity under FCRA cannot be further transferred to any other entity in India. Further, entities may receive domestic donations without any restrictions under any law for the time being.

Domestic contributions

In India, there is no specific regulation governing charitable donations and one can freely make such donations. Moreover, the Companies Act, 2013 (“Companies Act”) states that the board of directors of a company may contribute to bona fide charitable and other funds[5]. Further, the Companies Act has made it mandatory for companies having a net worth of Rs. 500 crore or more, or turnover of Rs. 1000 crore or more, or net profit of Rs. 500 crore or more in the preceding financial year to formulate a Corporate Social Responsibility (“CSR”) policy and spend on social upliftment activities. The companies are required to formulate a policy which indicates the activities to be undertaken by the company and the amount of expenditure to be made towards these activities. The board of directors of such a company are required to ensure that at least 2% of the average net profits of the company made during the three (3) immediately preceding financial years is spent in accordance with the CSR policy[6].

In view of the above, companies in India are permitted to make donations towards charitable funds and in some cases CSR is mandatory. Further, as per the Income Tax Act, 1960 (“Income Tax Act”) and rules made thereunder the term ‘voluntary contributions’ includes all donations made including both domestic and foreign contributions and are treated as income received by a non-profit entity under the Income Tax Act. Thus, in the case of charitable trusts or institutions created for charitable or religious purposes, donations received which are “voluntary contributions”, which otherwise do not possess the character of “income”, are also to be included in income. All these amounts will, in the first instance, be included in the income of the charitable trust or institution, and, thereafter, exemptions can be claimed subject to fulfilment of the conditions prescribed under the Income Tax Act. In order for the entity and donors to claim deductions under the Income Tax Act, it is mandatory for the entity to be registered under the Income Tax Act and possess the necessary exemption certificates.

Therefore, to briefly summarize, entities in India may only directly receive contributions from a foreign source under the FCRA with FCRA registration/permission or may receive domestic donations from entities in India, not backed by foreign funds and claim exemptions under the Income Tax Act for which they may be eligible.

Disclaimer:?The information contained in this site is provided for informational purposes only and should?not?be construed as?legal advice?on any subject matter.?Further, the information produced in this article is published by and reflects the author’s personal views, in their individual capacity. For any related query or assistance, reach out to us at?[email protected].

[1] Section 2(1)(m) of the FCRA defines “person” as:

(i) an individual;

(ii) a Hindu undivided family;

(iii) an association;

(iv) a company registered under section ?of the Companies Act, 2013;

[2] Section 2(h) of the FCRA.

[3] Section 2(1)(g) of the FCRA defines “multinational corporation” as:

A corporation incorporated in a foreign country or territory if such corporation:

(a) has a subsidiary or a branch or a place of business in two or more countries or territories; or

(b) carries on business, or otherwise operates, in two or more countries or territories.

[4] Section 7 of the FCRA.

[5] Section 181 of the Companies Act.

[6] Section 135 of the Companies Act.