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In early-April 2020, when many of us were still trying to adapt to the precautions needed against COVID-19, figuring out stringency levels of lockdown of different color-coded zones of the country, and coming to terms with the new reality of living in a lockdown, one of the authors received a call from an old friend. The friend explained that the organisation she works for is arranging food in the different parts of Delhi for the poor who have lost their sources of daily earnings due to the lockdown and were dependent on the organisation she was working in for daily food. With some hesitancy, she mentioned that the organisation’s coffer is going to run dry in the coming week and asked if the author would want to donate to the organisation. This is, of course, one example of the many ways that different charitable organisations have had to organise funding to help those in need during the lockdown and beyond.

Although most of us are familiar with the work that charitable or non-governmental organisations (NGOs) do and many also appreciate their efforts to make the society a better place, it is surprising how little is known about the difficulties NGOs must deal with in their day-to-day functioning.

The problems faced by NGOs can take many forms, including compliance with the regulatory requirements, though, arguably, the biggest challenge, often, is raising resources. Charitable organisations, like any other organisations, need resources to function. In fact, the scale and quality of work that NGOs can do is directly dependent on the scale of resources they have.

Indeed, in recognition of the important roles played by charitable organisations in society, many governments across the world try to encourage donations to charities through different policies, most common of which is ‘tax incentives offered for donations by individuals and companies. Simply put, this means that when a taxpayer donates to a charitable organisation, he/she receives a tax concession.

Such tax incentives for donation exist in India too. However, there is an acute lack of public discussion on these policies. For instance, when the  Union Budget 2020-21 introduced an optional tax structure with lower rates but no incentives for donation, there was little discussion on how these policy changes will affect the charitable sector.

Findings of a new study on tax incentives for charitable donations

To assess how India’s tax incentives regime fares in comparison to select eleven countries, and how tax incentives influence donations to charitable organisations, a new study was commissioned by Centre for Social Impact and Philanthropy (CSIP), Ashoka University in a research partnership with Centre for Budget and Governance Accountability (CBGA).

The study notes that while donations are influenced by many factors, tax incentives, too, influence the level of donations. Tax incentives provide monetary benefits to the taxpaying donors, and this in turn is expected to increase donations either by influencing the existing donors to donate more, or by converting a non-donor into a donor. In fact, even if donors do not avail the incentive, the mere presence of such tax incentives have a signaling effect that the act of donation is endorsed and encouraged by the government. This signaling effect by itself can be quite influential in affecting the donors’ behavior.

The study finds that while India’s incentive structure compares favorably to countries such as Brazil, China, and Mexico, it is less generous compared to countries such as the USA, the UK, France, and Singapore.

A unique fact about India, is that it is the only country among these countries, where donations to government entities also attract tax incentives. More importantly, tax incentives offered for these entities are far more generous compared to the ones offered for donations to NGOs. While the entire amount donated to certain government entities can be claimed as deduction, only half the amount donated to NGOs can be claimed as deduction. Further, the maximum amount that can be claimed for tax saving is as high as 100% for some government funds, compared to a 10% when donating to NGOs.

This skewed tax incentive structure makes it far more appealing for a taxpayer to donate to government entities than to donate to NGOs, which incidentally are far more dependent on such donations.

What the Indian government can do for providing a more enabling atmosphere for NGOs

The socio-economic crises brought on by pandemic, has once again highlighted the important role that NGOs play in our society. Perhaps it is time that the government too steps up to ensure a more enabling environment for the sector.

One way is to provide increased incentives for donations to NGOs to bring it par with what is offered for many government entities and funds. The government could also consider introducing taxes on the wealthy and provide tax incentives on these for charitable donations. Existence of such taxes in countries like the USA and the UK is considered one of the factors behind higher level of donations.  This one measure alone can help in not just charitable organisations raise more resources by inducing more donations from the wealthy, but also help the government raise more revenue. It can also go a long way in reducing the grotesque extent of economic inequality that exists in India today, a cause that most NGOs fight for.

Authors work with Centre for Budget and Governance Accountability (CBGA), New Delhi. Views expressed are of the authors, and do not necessarily reflect the position of CBGA. You can reach them at malini@cbgaindia.org and suraj@cbgaindia.org.