Dear Friends,
Would like to understand the Legal/Statutory basis of a donor NGO, insisting from the Donee NGO
1) Registration under 12 A to receive the Grant
2) Expecting an Auditor Certified Utilisation Certificate for financial closure of the Support.
Would the donor agency actually face problems and legal issues or this is just a control mechanism to avoid a situation of vicarious liability. Grants would be provided/received as advances and in instalments.
regards,
R K Devar
Dear Mr. Devar,
It is mainly from the internal control perspective wherein donor wants to make sure that the fund given are truly for “not for profit” purpose. As regard UC being certified by an Auditor gives some sort of satisfaction that the funds given to grantee are spent as per grant agreement. However donor has the right to do financial review/audit even after receiving the certified UC.
Regards,
Jiwan
On the issue that why UC is insisted upon, when audited financial statements are available. I think both the issues have been well covered, I will only like to supplement that in India audits are considered to provide accountability assurance (one may debate this, but this is the fact as on date). However credibility of the audits entirely depends on the independence of the auditor. Most audit firms who are appointed by the NGOs are in reality more of finance advisors to the NGOs who help them in legal compliance. (This aspect has been well considered under the new Companies Act and appointment of auditors has been made far more strict compared to past, particularly in case of listed companies.) Several donors recognising this fact appoint their own auditors with direct reporting, thus ensuring independence of the auditors.
In case a donor insists on a Utilisation Certificate from the auditor of the NGO, it is basically to help the donor to provide a direct documentation for the exact expenditure incurred by the NGO. Overall financial statements may not necessarily reflect the exact utilisation amount thus facilitating donor to account for utilisation so certifed as expenditure in its books.
Mr Devar has raised an important debate role of legal compliance vis-a-vis donor support.
The argument forwarded by Mr Devar that 12A registration is the need of the NGO and any risk of taxation of income is of the NGO alone, why the donor should be concerned seems valid on the face of it. However 12A is the official recognition of the non-profit nature of a non-profit entity. Even an NGO could for example be undertaking ‘For Profit’ activties. Income Tax officials examine the charitable nature of the objects of an NGO and based on that issue 12A certifcate. Even subsequently, Income Tax officer, if s/he considers that the NGO is not undertaking charitable activities can revoke 12A registration. Thus 12A registration is an important document signifying that the NGO is involved in charitable activities.
A donor by insisting on 12 A registration is only ensuring that the donor support is being given to a charitable entity only.
As Soma has stated in his response, it is the 12A registration, which gives the sanctity to an organisation to receive grants tax free. Therefore, a donor agency would want to make sure that the their grantees have 12A registration, in the absence of which, their income will be subjected to taxes, thus the grants given cannot be applied fully for the purposes for which it was given.
In fact, depending on the quantum of the grant, different donor agencies subject their prospective grantees to a “pre-award audit”. Such audit, inter alia, covers various issues of statutory compliance (PF, IT, FCRA, Societies Act, etc.), issues of Governance, issues book keeping, financial management, internal control, etc. It is a pre-requisite to receiving a grant from any donor of repute (such as an INGO).
As regards to your query on Audited UC, the statutory audit report of an organisation would cover all funding received. But, for a donor, they would need an audited UC, which is specifically for their funding. Even the reporting period could be different from donor to donor, depending on the reporting calendar that is used by their parent organisation. This will be part of any Grant Agreement, which will define the periodicity and even the format in which the reporting is to be done. Apart from audited UCs, now-a-days, the INGOs also expect reporting electronically, in their prescribed templates, which facilitates faster scrutiny and accounting at the donor’s end.
Dear Devar,
If the donee had to pay taxes on the funds, it may end up using the money of the donor if there is no other source. Secondly, TDS is Tax Deducted at Source and so the donor will have to dedcut the same and give funds to the donee. Why will the donor use the funds meant for charitable purpose for paying taxes to the government.
So far as the audit is conerned, every organization does an annual audit which is for the FY i.e. April to March. The project period of the donor may not necessarily coincide with the FY. Also the organizational audit may not give a clear picture of the project unless a project wise audit reports are prepared.
At the end of the day, the “Doctrine of Cyprus” will previal which essentiallly means donors wish will previal as long as it is within the law of the land.
Thanks and regards,
B V Soma Sastry
Dear Mr. Devar,
The legal basis would be Indian Contract Act under which two parties to a contract can set up mutually any terms & conditions, unless anything contained is not untenable in court of law. However, there is no statutory requirement on the part of Donor to set conditions mentioned by you. They may do away with these.
However, the two conditions mentioned by is driven by practical considerations. In case 12A exemption is not there, recipient may end up paying Income Tax. In that case, the fund would suffer from double-taxation as whoever has provided money to Donor has already paid Income Tax earlier. Anyway, it is natural that Donor should expect maximum utilisation of fund for the cause it is being given for, rather than it getting used to pay tax.
Auditor certified UC is stipulated in order to make sure that fund given for a particular project was spent as per stipulated budget. General audit by CA limits itself to just checking if accounting is being properly done by the organisation, rather than checking item-wise utilisations against approved budgets of different projects supported by different donors. Anyway, money is fungible and an NGO may always show proper budget-wise utilisations under two projects while actually spending more in one and less in another. CA would not be bothered with this in his routine audit. However, it is true that system of UC is not much of a check, as these are generally produced without much ground-work by CAs. A better method could be to directly hire a professional consultant to do program and finance review (better to do a mid-review as well as end-review).
However, a donor is free to do away with either of these clauses.
Regards
Neeraj
Sir
Again it depends on the grants given by the donor and for what purpose. If you are accepting the same, he has very right to check up how his funds have been used. He can also get an internal audit of the funds utilised , and even assess the benefit to the persons out of his geant.
All depends on the quantum of the grant and his satisfaction.Once you have accepted the conditions of the grant, you cannot crib that he is checking accounts
regards
srinivasn
Sastry guru,
Thanks for clarifying but the questions linger on.
So if the donor is insisting on the Donee to have a 12 A registration, it is only to protect themselves from a Vicarious Liability? How would it affect the Donor directly?
Also, as a matter of Statutory Compliance the funds of the Donee are always audited by a Statutory Auditor at the end of the FY, and if there is a problem with the funds use, it would appear in the Statutory Audit. Would there be a significant difference, especially where even the Audited UC is by the same auditor.
Therefore the doubt.
regards,
rkdevar
Dear Devar,
The insistence of registration under section 12a of the IT Act is something that applies to both the parties as it indirectly affects the donor. For the recipient organization, this certificate is a document that provides exemption from tax on all the incomes. We may well argue that grant is not pure income but a restricted fund. This is a separate debate as there are case laws in Indian Courts that support both views. In absence of 12a, the recipient organization may well end up paying taxes on the income.
Audited utilization is both a control mechanism on how the funds have been used which is certified by an independent third party i.e. auditor. This is needed for the donor as well to authenticate the utilization of funds.
In case of advance, the recipient may well have to submit the copies of the bills to the donor as this would amount to the expenditure being spent by the donor. In case of grant, the recipient will provide a audited UC to confirm the utilization. In case of FC funds, the case will be totally different as FC cannot cannot be even advanced to non FC organizations.
Thanks and regards,
B V Soma Sastry