Jumping on the Social Enterprise Bandwagon

Dr. Ruth A Shapiro is the Chief Executive and Founder of the Centre for Asian Philanthropy and Society (CAPS). CAPS is committed to increasing the quality and quantity of philanthropy and social investment in Asia. CAPS conducts policy and applied research. In collaboration with our research partners and local experts, CAPS has been conducting a landmark study to understand best practices specific to 30 excellent social delivery organizations (SDOs)—non-profits and social enterprises—across 11 Asian economies. 

Here's her article from our latest CAP news magazine. 

Ruth speaking at Centre for Advancement of Philanthropy's 30 year event

 

In January 2014, the Ministry of Finance announced the creation of the India Inclusive Innovation Fund “that will drive and catalyse the creation of an ecosystem of enterprise, entrepreneurship, and venture capital, targeted at innovative solutions for the bottom of the pyramid”. Some states have set up their funds which may include projects in the social investment area but primarily focus on information technology. As of now, the national fund is still designing the specifics regarding the who, why and how of the money in this fund is to be distributed.

Our research shows that India is not alone in creating such a fund.  In Asia, there is a great deal of excitement and buzz around social enterprises.  Hong Kong, Singapore, Thailand, South Korea, and Indonesia have created funds to support the creation of social enterprises.  The tricky part here is the definition of what is a social enterprise and the role the government can provide in supporting their creation and viability.  Here there is great variability across countries.

In the write up for the India Fund, the goal of supporting world class enterprises that focus on the problems of the poor is highlighted.  This is a broad definition.  South Korea uses the following definition, “a company which performs business activities while putting priority on the pursuit of social purposes”.   This definition stresses the primacy of the social bottom line.  A social enterprise must perform the delicate balancing act of meeting its financial obligations while staying true to its social imperatives.  As we know from the case of SKS Financial in Andhra Pradesh.  Unable to maintain the balance necessary SKS veered toward profit first, resulting in the state government closing it down after numerous suicides by overleveraged borrowers.  At the time of its IPO, Mohammed Yunus of Grameen Bank warned that by going public, there would be incredible market pressure to focus on financial returns.  He was right.  In order to create financial opportunity while protecting social mission, the Benefit Corporation or B Corp accreditation system was created. By becoming an accredited B Corporation, a company must maintain strict compliance with the profitability/purpose goals of the company.   The first Indian company to become a certified B Corporation is eKutir which listed in June of last year.  More are certainly on the way.

The most important component of government schemes is the availability of capital, especially in the start-up phase of the effort.  Again, there is great variability.  Singapore has put US$6 million into two funds – one grant and the other impact investment for social enterprises.  South Korea has put US$28.3 million in their social enterprise support fund and Thailand provides $1.2 million in financial resources to social enterprises.  For India, according to an article in the Business Standard at the time of the announcement, the fund has an initial corpus of Rs 500 crore, which it expects to expand to Rs 5,000 crore once launched.  

All of these funds also offer ancillary types of support ranging from help with networking, mentoring, incubation hubs and registration assistance.   The key question here is who is doing the mentoring?  Generally, government bureaucrats and officials do not necessary know what makes a business plan viable.  It is important that people with on-the-ground business experience are brought into the mix so that their experience can be brought to bear on the projects.  In Hong Kong, the Social Enterprise partnerships program serves as matchmaker between start-up social enterprises and private sector mentors who work with the teams as they develop their ideas and launch them as businesses.

As India is still working on the development of the details of this fund, we do not know what specific products and services will be provided.   We do know however that while government support is still forthcoming, there is ample private sector support in place.  The Ministry of Commerce  lists 209 funds offering financing to new business enterprises and while not all include social enterprises, many do.   The government’s fund will add to this support.

Looking across other countries in Asia however, shows that there is widespread enthusiasm and support for the creation and growth of social enterprises.  It is still early days and there is much experimentation and innovation taking place.  As more and more people try their hand in creating new social enterprises, we will learn a great deal and in the process bring about win-win solutions to a better world. 

To know more about our work visit the website. 

Finance Act 2017 - Implications for charitable organizations after amendments to Finance Bill 2017

Implications for charitable organizations after amendments to Finance Bill 2017

The Finance Bill 2017 has been approved after modifications by both Houses of Parliament and received the assent of the President of India on 31^st March 2017. 

We are highlighting what is now law, relevant to charitable organizations in India:

Section 56(2)(x) not to apply to trust created for the benefit of relatives

Earlier exemption from the new clause (x) in Sec. 56(2) was provided to specified trusts and institutions referred to in Section 10(23C) or trusts registered u/s 12AA. However, after amendment, exemption from this section is extended for any sum of money or any property received from an individual by a trust created or established solely for the benefit of relative of the individual. Further, it is also extended to a trust registered u/s 12A.

Reduction in limit of cash transactions

The Finance Bill had proposed a new Section 269ST to provide that no person shall receive a sum of Rs. 3 lacs or more, otherwise than by way of an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account: (a) in aggregate from a person in a day; (b) in respect of a single transaction; or (c) in respect of transactions relating to one event or occasion from a person. However, now after amendment, the limit of cash transaction has been reduced from Rs. 3 lacs to Rs. 2 lacs.

Restriction on inter-charity corpus donations

Under existing law, corpus donation by a charitable institution to another charitable organization out of its income is treated as direct utilization of funds (by the donor institution). At the same time, since corpus donation is not treated as income in the books of the recipient institution there is no compulsion for the recipient organization to utilize it. Ministry of Finance viewed this as ‘hoarding’ of funds among charitable organizations instead of applying the same for charitable objects. Finance Act 2017 has now plugged this alleged ‘loophole’.

The proviso inserted in section 10(23C) clarifies that any amount credited or paid out of income of an institution referred to in sub-clause (iv), (v), (vi) or (via), to any charitable trust or institution registered under section 12AA, being voluntary contribution with specific direction that they shall form part of the corpus of the institution, shall not be treated as application of income to its objects.

A corresponding change in section 11 has also been effected by insertion of Explanation 2 at the end of sub-section (1) which similarly provides that corpus donations through income referred to in clause (a) or (b) of sub-section (1) shall not be treated as application of income for charitable or religious purpose.

Additional conditions for applicability of Section 11 and 12

Registration under section 12AA is an essential condition for an organization to avail tax exemption on its income under sections 11 and 12. The Finance Act, 2017 has amended sections 12A and 12AA to impose following additional conditions on organizations registered under section 12AA :

• To make application to the Commissioner of Income Tax (CIT) within 30 days if there is any change in the objects clause which do not conform to the conditions of registration and have it registered.
• Mandatory filing of income tax returns within the time allowed under section 139(4A).

It is obvious that a change in the object of the trust or institution which does not conform to the original conditions of the registration would render the registration untenable.

The change with regard to mandatory filing of income tax return makes enjoyment of tax exemption under section 11 and 12 conditional on timely filing of return. It is a step towards increasing compliance under section 139(4A).

Restriction on cash donations

The Finance Act has amended sub-section (5D) of section 80G to mandate that in order to avail deduction under the section, donation for an amount larger than two thousand rupees be made in modes other than cash (i.e. only by cheque or electronic transfer). The amendment has further lowered the limit on cash donations under section 80G to two thousand rupees only. The move is in consonance with government’s overall efforts to push towards a cashless economy and increase transparency in the system.

Expansion of power of survey

Amendment of section 133A has now included the place of ‘activity for charitable purpose’ within the scope of Section 133A. This amendment expressly empowers the income tax authority to enter any places of activity of charitable purpose for inspecting books of accounts, verifying cash, stock or valuable articles or furnishing any relevant information.

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