When powerful companies break the rules, the typical reaction in India is not to identify the problem and punish the culprit, but introduce mindless restrictions with punitive consequences for the entire sector. This only adds hurdles to doing business, creates stress, increases costs and generates a sense of disillusionment, instead of the ‘animal spirits’ that the government wants to unleash.
Sledgehammer regulations never work. If they did, trillions of rupees would not have been looted from public sector banks. But they certainly cut off access to many deserving genuine enterprises. Such arduous regulation is now being applied to not-for-profit organisations as well.
Over the past few years, all non-governmental organisations (NGOs) have been systematically demonised with allegations about misuse of funds, violation of rules and hidden agendas. Indeed, some poorly funded NGOs focused on work that benefits society may be a little tardy about the increasingly onerous web of regulatory compliances. But, how is it fair for the government to create new rules for all, just because the most privileged Indian charities that enjoyed unparalleled exemptions and poor regulatory oversight are accused of violating the law?
On 6th January, Business Standard(BS) reported that the forthcoming Budget could have a new provision to the Income-tax (I-T) Act enabling tax authorities “to seize trustees’ personal assets if there’s a breach of objectives governing registered charitable trusts.” The article quotes an anonymous source to say, “Public trusts have become the easiest route to launder money due to lack of governance and proper monitoring. The operation of trusts is mostly opaque and there’s no system to track them.” The source also says, “Since these trusts also receive funds from genuine people, the managers of these trusts should be questioned and held liable for not fulfilling the objectives.”
This sweeping indictment of all NGOs is patently false, grossly exaggerated and smacks of a biased mindset. Over the past five years, non-profits and NGOs have been subject to multiple registrations with various ministries and face stringent clearances and tough new rules to regulate every aspect of their functioning. Hundreds of NGOs have had their permission to obtain foreign donations (under the Foreign Contributions Regulation Act –FCRA) cancelled; some have shut shop and others are struggling with coercive action by banks, including freezing of legitimate donations received when their FCRA permission was valid. Tough rules and steep fines are prescribed even for inadvertent mistakes in the use of these funds. As always, grievance redress in India is abysmal and the hardship suffered by them is crippling.
As opposed to this, the BS source appears to catalogue allegations primarily against six powerful and extremely wealthy Tata Trusts which enjoyed unique privileges and exemptions for decades.
Correcting legal anomalies that gave a special status to the Tata Trusts by introducing a sunset clause is a necessary action. Punishing them for lapses, pointed out by the Comptroller and Auditor General (CAG) is also fair, if they are proven. But why bring draconian new rules that will hurt smaller NGOs that have no clout, access or money like the Tata Trusts?
India already has no tradition of volunteering time or donating money to social causes (as opposed to religious issues). Threatening to ‘seize the assets’ of trustees will force eminent and qualified persons to step away from NGOs. Trustees of most NGOs today, except the really large philanthropies set up by our IT czars or industrialists, offer their time and goodwill as a service to society. Why should the government create a disincentive to any formal association with social causes? The question is not about compliance, but misuse of punitive powers by the State and its enforcement agencies.
Noshir H Dadrawala, chief executive of the Centre for Advancement of Philanthropy (CAP), points out that this “may have immense and far reaching consequences” for several foundations; only limited liability companies registered under Section 8 (earlier Section26) of the Companies Act may be unaffected. Let us understand how this situation has come about.
The Tatas are India’s most respected corporate house and have better business practices, ethics and governance standards than most others. This has allowed the group to get away with some egregious lapses in good governance and decency. The unceremonious sacking of former chairman Cyrus Mistry, its political deals through corporate hustler Niira Radia, and Ratan Tata’s strange dalliance with the notorious S Sivasankaran are a few examples.
But it has always been able to ride out these disgraceful events with nary a dent to its pristine image. This time, however, two important issues under litigation could have serious implications for the group. First, the alleged misuse of tax exemptions and the historical exemption enjoyed by the six powerful trusts to hold shares and, thereby, control the Tata group.
It is now public knowledge that the Tata Trusts operate like a business conglomerate and are privy to all corporate decisions of Tata group companies. Its former managing trustee, R Venkatramanan, a confidante of Ratan Tata, also enjoyed enormous power, pay and perks, on par with CEOs (chief executive officers) of top corporate houses. This has also turned contentious. He has joined the Reliance group after several controversies about his role.
It is CAG that first highlighted many irregularities in the functioning of the Tata Trusts in 2013 and, again, in 2019. The issues have also noted by Parliament’s Public Accounts Committee (PAC) in its 104th report in 2018. Far from political vendetta, much of this reflects how the government and its agencies are reluctant to apply the rulebook to the Tatas.
But the matter is now in court, thanks to the bruising war with Cyrus Mistry who was sacked on 24 October 2016 as group chairman by the Tata Trusts led by Ratan Tata. In December, Mr Mistry won a sweeping order in his favour before the National Company Law Appellate Tribunal (NCLAT) and the matter is now in the Supreme Court.
CAG Reports: In 2013, CAG reported that Jamshetji Tata Trust and Navajbai Ratan Tata Trust were given irregular tax exemptions by the tax department, the ‘tax effect’ of which was a sizeable Rs1,066.95 crore. The exemptions to the Dorabjee Tata Trust had implications of Rs30.34 crore, it said. There are two of the six large charitable trusts of the group.
The government only permits charitable trusts to invest their money in bank deposits. The six Tata Trusts, however, enjoy a legacy exception to this rule, going back to June 1973, which continues to this day.
They are now accused of misusing this exemption to buy and hold shares even after the cut-off date. In fact, the Trusts control the group through their 66% stake in Tata Sons, the group holding company. It is alleged that the Trusts were donated valuable Tata Consultancy Services in 1999-2000 which were sold and converted to preference shares in 2008. Here is what the 2019 CAG report has to say, unfortunately without naming them:
Tax Exemption: In 2019, CAG expanded on its findings and discovered some that several trusts, including the Tata Trusts, were violating tax exemption rules under Section 12AA. This should have led to a cancellation of their tax exemption. But the I-T department has been inexplicably lenient, as is clear from the CAG 2019 findings given below.
In 2015, when things began to heat up, the Tata Trusts claimed they had voluntarily surrendered the tax registration. The I-T department, however, says that there is no provision for ‘surrender’ of a registration and cancelled the registration of six Tata Trusts— Jamsetji Tata Trust, RD Tata Trust, Tata Education Trust, Tata Social Welfare Trust, Sarvajanik Seva Trust and Navajbai Ratan Tata Trust -- in October 2019. They have challenged this decision before the I-T appellate tribunal.
The CAG report of 2019 clearly shows that the tax department was rather benevolent to the Tata Trusts and seems to have acted only after the CAG’s 2019 report. Is specifically refers to shares held after 1 June 1973 which is the exemption date. Here is what it says:
Foreign Donations: Another sticky issue for the Tata Trusts is the huge foreign donation made to Harvard and Cornell Universities. The law permits such donations by charitable trusts only if it promotes ‘international welfare in which India is interested’.
CAG 2019 notes that a trust established in 2008 donated Rs430 crore to two foreign universities, Rs232 crore of endowment fund and Rs197 crore for financing a campus building. This was done between 2009 and 2015. Interestingly, the CBDT (central board of direct taxes) had first objected to this donation but then reversed its order permitting a retrospective exemption for the donation of $100 million.
CAG termed the reversal ‘erroneous’ and ‘irregular’, quantified the tax impact at Rs135 crore and called for a review of all such tax concessions.
There are other issues as well, including the controversially high salary paid to the former managing trustee of the Tata Trusts. But, so long as new regulations and law are aimed at curbing misuse and ensuring a level playing field, it is a good thing. On the other hand, introducing sweeping new rules, based on specific violations by a privileged few, will bludgeon smaller NGOs doing serious work among the neediest sections of society.