The Government’s demonetization of Rs500 and Rs1000 and impact on the social sector

The digital revolution in the social sector has arrived. The Prime Minster Modi’s ban of Rs 500 and Rs 1000 notes last week in the country’s biggest crackdown on black money and corruption marks a pivotal point for the digital economy, for CSR and for the nonprofit sector. Experts predicted in 2015 that 20% of all giving in India will occur online within two years and 50% within 10 years, according to a Charities Aid Foundation India survey. The move of demonetization has just drastically accelerated that. India’s social sector is being fired head first into the digital age and it’s going to change life as we know it for NGOs and CSR.


Impact on CSR funding


The demonetization is going to adversely affect NGOs. How? Cash-strapped donors mean individual giving, which is primarily offline, will decrease considerably. In turn, this means that reliance on CSR funding will increase for most NGOs, with total CSR spend by corporates already exceeding Rs 5,000 crores.


Large businesses, who exceed certain thresholds of revenue, net worth, or net profits are mandated to spend 2% of their net profit on CSR every year. The demonetization move by the government has impacted certain sectors adversely such as jewelry, luxury products, and real estate. With the expected fall in the profits of companies in such sectors, CSR funding is expected to decline in the short-term. However, NGOs needn’t panic just yet as CSR funding is based on an average of past three years’ annual net profit, so any potential decline may be offset by growth in other sectors in the Indian economy.


NGOs must accelerate online giving transition


According to the Charities Aid Foundation India report, 80% of Indian NGOs indicate that they raise the majority of their funding offline. In fact, online donations currently represent less than 10% of total revenues. This is a big transition challenge in the face of demonetization move. Indian consumers will naturally gravitate towards digital payments as they struggle with the deficit of high denomination notes in circulation. This shift will not be temporary as consumers are forced to use digital payments for convenience and consequently become more comfortable with the safety of the online payment processes. This comfort will also transcend to online giving as the donation process used by leading nonprofits and crowdfunding marketplaces are similar to the checkout process on an e-commerce website.


It’s absolutely critical at this point that nonprofits invest significantly in digital channels to be ready for this shift towards online giving. NGOs with or without an existing online presence should immediately look towards setting up mobile friendly websites, online payment gateways to accept online donations, and a social media presence. Thankfully, nonprofits who don’t have such expertise or want to turbo charge their online giving transition can rely on crowdfunding platforms like Impact Guru to create mobile friendly fundraising campaigns or microsites at a very low cost.Crowdfunding platforms can not only help raise funds by driving a lot of online traffic to nonprofits’ pages but also help grow the digital brand of a non-profit using sophisticated marketing methods.


Largely, though, this online transition will be a long term positive for the NGO sector in India as it will reduce reliance on expensive and ineffective offline methods such as door to door fundraising, call center operations, and event-based fundraising.


Religious institutions to see a temporary boost


Specific segments within the social sector rely heavily on cash donations, such as religious institutions. In fact, the Charities Aid Foundation India Report showed findings that a total of 84% of Indians donated money to an individual or an organization in 2015, and out of that those 84%, over 70% donated solely or partly for religious reasons. As current income tax regulations allow religious institutions to accept anonymous donations,we should expect to see a temporary surge in donations as some people may donate part of their black money to religious institutions.


Increase in anonymous donations for non-religious charitable institutions


Section 115BBC of Income Tax Act introduced by Finance Act 2006 stipulated that income tax is waived for nonprofits on anonymous donation only if they aggregate up to 5% of the total income of an organization or a sum of Rs1,00,000, whichever is higher.


This was further amended by Finance (2) Act 2014 according to which:

“The income-tax payable shall be the aggregate of the amount of income-tax calculated at the rate of 30% on the aggregate of anonymous donations received in excess of the higher of the following, namely:

(A) five per cent of the total donations received by the assessee; or

(B) one lakh rupees, and

(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of anonymous donations received in excess of the amount referred to in sub-clause (A) or sub-clause (B)


As a consequence, we can also expect non-religious NGOs to see a surge in anonymous donations but they will likely be within the specified thresholds of the Income Tax regulations.


Misuse of non-profit as a vehicle for corruption to decrease


The crackdown on black money will curtail the misuse of nonprofits as vehicles for money laundering, improving the credibility of the industry as a whole. Illegal and fraudulent practices such as accepting donations by check, withdrawing 80-90% of the amount in cash and returning it back to the donors will come to a halt. Hopefully, this will not just be a short-term change but a permanent one with increased monitoring of liquidity and funds flow.

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