Gautam Shah, chartered accountant and expert working with charitable institutions, asks non-government organisations to be scrupulous about the rules, if they want to avoid harassment at the hands of the authorities

Click here for more pictures of the workshop

Civil society organisations have come to play an increasingly important role in our lives. While the government struggles to implement laws and schemes, non-government organisations (NGOs) have, in many cases, effectively filled in the gaps. From reviving neighbourhoods to educating slum children, providing relief during calamities or even taking care of stray dogs, they are visibly active in several areas. This increasing responsibility is putting pressure on the management of their activities. Unfortunately, there have been allegations of poor management against quite a few of these organisations.

The zeal for charity is not enough. Institutions should be equally diligent with their financial accounts and they must comply with the laws if they are to be more effective and inspire trust in the public. This was the advice of Gautam Shah, managing partner of Gautam Shah & Associates, Chartered Accountants, to NGO workers at a workshop hosted by Moneylife Foundation on Saturday, 18 December 2010.

"We feel very good when we donate something for a noble cause, but is it enough," Mr Shah asked the participants attending the programme. "We have to see that the money is utilised properly, and to ensure that the support continues even when the donor is no more. Moreover, not some family member, but the public at large should be the beneficiary. That defines the purpose of a charitable institution. And for a good NGO to continue you have to stick to every norm, notify the authorities of every single development and most importantly, maintain detailed verifiable financial records. "

At the outset, Mr Shah described the process of setting up a charitable institution. While elaborating the mechanism for formation and registration, he explained why a Section 25 company was an ideal format over a charitable trust and society. He said, "People think that setting up an NGO is an easy thing. It is not. Several clauses are to be included in the constitution and many documents and certificates are required. If these are not in place at the registration, the institution will be unable to make any amendments in the future and could face many problems."

He gave an example of a charitable trust which had two persons as trustees. It did not mention what was to happen if one of the two quit or died. As a result, the trust suffered much difficulty. Many institutions face similar difficulties because of a lack of technical knowledge.

NGOs should not only get registered under Section 12(a) and get an 80G certificate, but they should also know how to channelise funds properly. NGOs, who accept contributions from abroad, should source the money from an NRE account (non-resident external) and get registered under the Foreign Contribution Regulation Act 1976 (FCRA). "Just think", said Mr Shah, "if the Tirupati temple does not have an FCRA registration, it cannot do anything with the huge amount of donations it gets from NRIs and foreigners. Then, the only other way is to convert this money to 'white money', which is definitely not preferable."

Also, it is very important to have proper accounting in a fixed format. Mr Shah recommended that accounting should be intensive and done by professionals. He said that it is a must to have at least four meetings annually, as well as maintain a minute book recording the proceedings, to present to the supervisors.

Mr Shah warned that the proposed Direct Tax Code (DTC) "is going to be very bad for NGOs". Earlier, NGOs could accumulate 15% of their funds for some future big project, for five years. But that feature is to be changed considerably under the DTC. The new rule will only allow for 15% of surplus or 10% of gross earnings (whichever is greater) to be accumulated for five years. Also, exemptions will be more basic in nature, like that of individual tax exemptions.

While sticking to the rules is good in itself, it also helps to avoid many legal hassles and interferences from the authorities. In Maharashtra, NGOs are set up under the Bombay Public Trust Act, 1950, and are under the scrutiny of the charity commissioner. "The charity commissioner is the Supreme Court," Mr Shah said. He mentioned the elaborate red-tape process and an astonishing amount of paperwork that an NGO has to undertake before, during and after the registration. Every financial and administrative detail is to be notified, otherwise, the NGO could be threatened with de-registration and may even be closed down.

Mr Shah gave the example of an exclusive high-end association which had to undergo a lot of trouble because it had not notified the charity commissioner of some changes.  To their horror, they were told that they had conducted "illegal activities" for a decade, and their work was suspended. They were unable to get relief even after many phone calls to higher-ups. After meek submission and several apologies (and some payments), the association was allowed to operate again.

Mr Shah described how some of these officials abused their position for personal gain. The law, while making many procedures mandatory towards ensuring accountability, is giving NGOs nightmares. "We do good for society, and then we are harassed. The process should be such that the authorities should be accountable and NGOs should be allowed to function freely," Mr Shah said.

Mr Shah had some specific advice: "Do not start an NGO in Maharashtra. Get it done somewhere else. That way, even if your operations and property are in Maharashtra, the charity commissioner cannot interfere with the operations." This brought up the question on the ideal place to start an NGO. "New Delhi," Mr Shah answered promptly. "In union territories, central laws are applicable, which are more simplified and the process is hassle-free. Delhi, being the capital, will provide the best infrastructure and ensure better access to resources."

Questions from NGO representatives attending the workshop ranged from tax exemptions to legal issues and validation certificates. Mr Shah answered most of the questions and promised to answer more on email.

For Mr Shah, social duty comes before private gain. He holds a PhD in business finance for which he submitted a thesis on "Management of Charitable Institutions-a Financial Perspective". His association utilises 80% of the funds to help NGOs with their finances. "For me, charity is not a hobby. I am where I am because of somebody's contribution. And so, I think it is very important to help other people."

The turning point for him came many years ago, when he decided to sponsor the education of his maid's daughter. He decided to establish his association about a decade back, when a school with more than 600 students approached him for help with their accounts. The charity commissioner had threatened to close it down because the accounts showed discrepancies. Mr Shah helped the institution out, and decided to start an association which would help charitable institutions with financial management and legal advice.

This workshop was second such programme for NGOs held by Moneylife Foundation. The first was held in July.Click here for details and registration.