SE-session 4: Legal aspects in NGO management

If you have even been reading this series of posts faithfully, I am sure this posts header would have turned you off. When I went for today's session, my objective was to keep myself awake till tea is served after about an hour of class and hope the tea will keep me awake till the break at the end of two hours. After that...well, no tea, and I would use my right to sleep! :)

But the instructor, Mr. M. Anant Kumar, a chartered accountant with over 30 years of experience made it reasonably interesting. The session was divided into two sessions

1. Three Categories of NGOs

2. Income Tax laws governing NGO sector

Both the section had so many fine details govern our responsibilities while forming, registering and maintaining the finances of NGOs that this session will not obviate the need of legal consulting when one starts an NGO. The first section does have a larger story, while income Tax laws section was just an accumulation of pieces of laws . So, I will focus on the first section and give a one-line treatment to the second section.

1. Three categories of NGOs.

• Trusts
• Societies or associations
• Section 25 companies

Trusts

Trusts are organizations run by "trustee(s)" entrusted using an "instrument of trust" (legal document which you never understand! :D) to use a property (money or kind) allocated by an "author of the trust" towards an "objective" designed for benefit of an identified "beneficiary" 

Author of the trust: One who allocates a portion of his property for an identified purpose.

Trustee: Person/people that the author entrusts the property and the responsibility to carry out the identfied purpose

Beneficiary: Well..beneficiary of the purpose. The author of the trust and/or his family can be the beneficiary, but then the trust will not be a private trust (not a public charitable trust, which is the focus of the session)

Trust property: The property the author of the trust allocates for the purpose.

Objective: The identified purpose of the trust (poverty alleviation, health, education etc)

While registering a trust, the above five aspects should be mandatorily identified with the registrar. The should be non-religious and should not be directed only to a particular class or group of people (with the exception of groups like women, tribal people, handicapped or the like).

Society

A society is an association of people who subscribe to a common objective/goal. From the legal stand point, the main difference between a trust and a society is that the former needs to show the "property" while registering. But the society can own property. (Example Amul is a society!)

A few other differences:

Trusts: 

• Always have a fixed number of trustees (though not necessarily the same people)
  
• Trustees can't be beneficiaries, but can draw salary for services rendered by applying specific skill set. For example, a trustee who is a CA can draw salary for taking care of the trusts finances.
  
• Only one governing body.

Society: 

• Members can be added
• Members can be beneficiaries (as in area welfare associations)
• There is a govrening body that governs the society, but doesn't take part in policy-making and a general body that makes policy and to which the rest of the members belong.

The society is governed by the central government's sovietyes registration Act, drawn in 1860 (and hasn't changed till date!) and the state laws that differ with each states. The societies are governed by the law of the state that is mentioned address of the society's premises. If EBAI has a center in Delhi and Hyderabad, and changes its headquarters from Delhi to Hyderabad, EBAI can't file a tax return in Delhi showing the premises address in Delhi.

Section-25 company:

From the legal stand point an organization registering as a section-25 company should 

1. have a social objective 
   
2. be run as a non-profit company (can earn profits but should be used in full towards the social objective)

Unlike the archaic laws governing the registration and running of trusts and societies, laws governing a section-25 companies are rigourously updated, implemented and enforced. For example proposed name of the company is rigourously scrutinized by the registrar's office to ensure that it doesn't identify with or similar to another registered company. Further, the name must also should be desirable and not misleading. For example, a section-25 company not endorsed by chennai municipality cannot have a name that contains words "Chennai municipal".

A section-25 company, since it goes through such a rigorous registration process and conforms to a stringent accounting standards, are guaranteed to have better credibility with the public than a society or a trust.

Interactive exercise on NGOs:

We performed an interactive exercise to rehearse scenarios in which an individual has to decide if  has to register his organization as a society, trust or a company

Scenario 1: A doctor couple coming back to India desires to use their properties to setup a charitable cardiac hospital.

In this scenario, the doctor couple are technically sound, but do need a management team to run the hospital, since they have the initial capital and need to rise more money, they can register their hospital as a charitable trust. However, considering the need for the hospital to be run even after their departure and the need to maintain high standards in quality of services, they should strive to eventually progress and register as a section-25 company.

Scenario-2:  Women's self help group to pool up some credit and jointly improve livelihood through small business

This is a loose association of people with a common objective of improving livelihood, with no property. Here the members are the beneficiaries and membership is variable. Society!

Scenario - 3: An individual identifies talented, but poor group of artisans proposes to start a fabric business to employ their skills, export finished materials to international market and profits with them thus providing more returns for their talant.

This organization has a double bottom-line of social benefit and making profit to be invested in social benefit. Since it caters to international market, it also has the obligation of show high standards of accountability and transparency. Section-25 company.

2. Income Tax laws governing NGOs.

Numerous legal aspects governing the income tax reponsibilities for NGOs were covered. In general, 15% of the NGO's funds is exempt from income tax. The rest 85% should be used towards the administrative and the purpose of social objective. The memorandum and bye-laws that NGOs provide while registering the organization, are very crucial since the IT department carefully scrutinizes the utilization of funds for the purposes that are strictly mentioned in the memorandum. Laws covering the taxation of foreign contribution were also discussed. (though much of this went right above my head)!

(Note about the instructor will be posted shortly!)