SIDA Accounting Manual

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Ac c ount ing Manual

for Sida suppor t ed NGOsin Ind ia

Development Cooperat ion Sec t ion, Embassy of Sw eden

New Delh i

Sida


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Issued: May 1999

Issued: May 1999, Updated : Nov 2001

Reprint: Dec 1999; May 2001; Nov 2001


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FFoorreewwoorrdd

A leading principle in Sidas development cooperation work, be it bilateralcooperation or support to NGOs, is that the activities financed by Sida shall be

carried out efficiently and that the funds shall be administered in a secure manner.Sida has to ensure that this is being done.

In order to live up to this principle, the Development Cooperation Section, DCS,

of the Embassy of Sweden in New Delhi, decided in 1997 to carry out a financialreview of some selected NGO-partners. An important purpose of this review was

to develop an Accounting Manual to be used by all Sida supported NGOs.

This demanding task was given to the Chartered Accountants Sanjay Aditya &

Associates, which they have performed in a most conscientious and pedagogical

manner. All collaborating NGO-partners have met and discussed the contents ofthis manual in its draft form and have been able to influence the final product.

The Manual deals with basic aspects of accounting such as budgeting, internalcontrol, book-keeping and bank-transactions. It also gives clear directives as to

what Sidas requirements are in relation to these aspects.

Sida expects every NGO to follow and be guided by this Manual. If this is done

accurately, the financial and accounting systems of every NGO will be

strengthened, thereby promoting the financial planning and follow-up of the Sida

supported activities.

New Delhi, May 1999

Owe Andersson

Counsellor and Head

Development Cooperation SectionEmbassy of Sweden


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Accounting Manualffoorr SSiiddaa ssuuppppoorrtteedd NNGGOOss

1. Introduction.....................................................................................................1

a) Purpose of this manual ....................................................................................1

b) Scope ..............................................................................................................1

c) Authority.........................................................................................................1

(1) Essential Requirements............................................................................1

(2) Recommended Practices ..........................................................................1

(3) Compliance with Indian Law ...................................................................1

d) Modifications to this Manual ...........................................................................1

e) A word about style, colour and care.................................................................2

f) Terminology....................................................................................................2g) If you need any clarifications.......................................................................2

h) Acknowledgement...........................................................................................2

2. Budgeting........................................................................................................3

a) Budget Structure..............................................................................................3

b) How much.......................................................................................................4

(1) Increments...............................................................................................5

(2) Accountant ..............................................................................................5

(3) Audit fees ................................................................................................5

(4) Inflation...................................................................................................5

(5) Chief Functionary....................................................................................6

c) Break-up .........................................................................................................6

d) Variances ........................................................................................................6

3. Internal Control...............................................................................................7

a) Cash Box.........................................................................................................7

b) Responsibility Chart ........................................................................................8c) Advances.........................................................................................................9

(1) Opening Advance Accounts.....................................................................9

(2) Using rolling imprest .............................................................................10

d) Old Records ..................................................................................................11

4. Book-keeping................................................................................................13

a) Integrated Cash Book ....................................................................................13

b) Separate Ledger.............................................................................................14

c) Vouchers .......................................................................................................14


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d) Computerised Accounts.................................................................................16

e) Revenue Stamps............................................................................................16

f) Pencilled totals, alterations, blank lines..........................................................17

g) What about ledgers? ......................................................................................19

5. Other records.................................................................................................21

a) Integrated Salary Register..............................................................................21

(1) Plain register:.........................................................................................21

(2) Analytical Register: ...............................................................................21

b) Minutes Book................................................................................................22

(1) Disclosure of Interest.............................................................................23

(2) Associated Party ....................................................................................23

(3) Register and payments ...........................................................................23

c) Log Book ......................................................................................................23d) Fixed Assets Register ....................................................................................24

e) Stock Registers..............................................................................................26

f) Usage Registers .............................................................................................27

6. Bank Transactions .........................................................................................29

a) Signatories ....................................................................................................29

(1) Bank Resolution ....................................................................................30

(2) Amending bylaws ..................................................................................30

b) A/c Payee crossing ........................................................................................31

c) Cash withdrawals ..........................................................................................32

d) Cash payments ..............................................................................................32

(1) Expenses and assets ...............................................................................32

(2) Loans.....................................................................................................32

(3) Income Tax Implications .......................................................................33

e) Salary payments ............................................................................................34

f) Bank Reconciliation ......................................................................................34(1) What is a Bank Reconciliation? .............................................................34

(2) Why a difference?..................................................................................34

(3) Making a Bank Reconciliation...............................................................35

(4) Follow-up Steps.....................................................................................38

(5) How often..............................................................................................38

g) Field Bank Account.......................................................................................38

7. Income Tax ...................................................................................................39

a) Basic registration and exemption ...................................................................39


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(1) Exemption under section 10...................................................................39

(2) Exemption under section 11...................................................................40

b) Permanent Account Number..........................................................................40

c) Special conditions .........................................................................................40

(1) Large loans or expenses in cash .............................................................41

(2) Investments and bank accounts ..............................................................42

(3) Separate account books for Income Generation......................................42

(4) Transactions with key persons ...............................................................43

d) Filing of Income Tax Return..........................................................................44

(1) Last date and audit .................................................................................45

e) TDS...............................................................................................................45

(1) TDS Registration ...................................................................................46

(2) Deducting Tax at source ........................................................................46(3) Depositing the TDS ...............................................................................46

(4) Issuing TDS certificates.........................................................................46

(5) Filing TDS returns .................................................................................47

f) Approval for donations..................................................................................47

(1) 50% under section 80G..........................................................................48

(2) 100% under section 35AC .....................................................................48

8. FCRA Compliance ........................................................................................49

a) Overview of FCRA .......................................................................................49

b) Registration or Prior Permission ....................................................................50

c) Scholarship....................................................................................................50

d) Separate Bank Account .................................................................................50

e) Separate Books of Account............................................................................51

f) Maintaining FC-6 ..........................................................................................51

g) Filing FC-3....................................................................................................51

h) Transfers to non-FC organisations .................................................................52i) Bank Interest .................................................................................................52

9. Reporting to Sida...........................................................................................53

a) Budget & Balance Report..............................................................................53

(1) Format...................................................................................................53

(2) How to prepare......................................................................................57

(3) Variances...............................................................................................57

(4) How often..............................................................................................57

(5) Due dates...............................................................................................57


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(6) Delays ...................................................................................................58

b) Consolidated Accounts..................................................................................58

c) Copy of FC-3 ................................................................................................58

d) Audit Certificate............................................................................................59

e) Change of Auditors .......................................................................................59

10. Special Issues ............................................................................................61

a) Revolving Funds ...........................................................................................61

(1) Accounting and Control.........................................................................61

(2) FCRA requirements...............................................................................63

(3) Sida requirements: .................................................................................64

b) Transfers to General Fund .............................................................................64

c) Reimbursement of expenses ..........................................................................64

d) Multi-purpose workers ..................................................................................65e) Salary payments ............................................................................................65

f) Local Contribution ........................................................................................65

g) Sale of Fixed Assets ......................................................................................65

11. Accessories................................................................................................67

a) Forms ............................................................................................................67

(1) Budget & Balance Report ......................................................................67

(2) Audit Certificate ....................................................................................70

(3) Income Tax form 10A............................................................................73

(4) Income Tax form 10G............................................................................74

(5) Income Tax form 16 ..............................................................................77

(6) Income Tax form 16A............................................................................79

(7) Income Tax: Application under 35AC....................................................80

(8) Income Tax form 58A............................................................................83

(9) Income Tax form 60 ..............................................................................84

(10) FCRA form FC-1A............................................................................85(11) FCRA form FC-3...............................................................................90

(12) FCRA form FC-5.............................................................................104

(13) FCRA form FC-6.............................................................................106

(14) FCRA form FC-8.............................................................................107

b) Samples....................................................................................................... 112

(1) Program Budget...................................................................................112

(2) Accounting Budget ..............................................................................114


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Color Key Essential Sida Requirement Recommended Practice Legal Compliance Page 1 of 114

11.. IInnttrroodduuccttiioonn

aa)) PPuurrppoossee oofftthhiiss mmaannuuaall

This manual has been designed to help Sida1 Partners in India streamline or improve

their accounting systems and meet Sidas accounting and reporting requirements.

bb)) SSccooppee

The manual focuses primarily on financial and accounting aspects of Sida grants. Some

of these aspects are connected to other issues, such as FCRA or Income Tax. Therefore, a

limited discussion of these matters is also given.

cc)) AAuutthhoorriittyy

This is a composite manual to help strengthen accounting systems of our partners in

general. The contents of this manual may have varying degrees of authority. This is

explained below.

(1) Essential Requirements

These are practices, which Sida considers as a must for all projects supported by it. If

these are not followed, it may affect continuation of a funding relationship[SA1]. If a

requirement is found to be difficult to implement, you must immediately bring it to

Sidas notice in writing. Sida will then attempt to resolve the matter. Essential

requirements are highlighted in blue colour.

(2) Recommended Practices

Following these would help you simplify and strengthen your accounting systems. Our

monitoring teams may also encourage you to adapt these practices. However, it is up toyour judgement whether or not to follow these. These are coloured green.

(3) Compliance with Indian Law

These are requirements prescribed by Indian laws as interpreted by the designers of this

manual. The manual is designed so that there is no conflict with the legal requirements.

However, please note that it is your responsibility to follow the law and you must obtain

independent expert legal advice wherever required. Legal compliance issues are markedwith yellow.

dd)) MMooddiiffiiccaattiioonnss ttoo tthhiiss MMaannuuaall

No manual can ever survive the test of time. We expect this one to

evolve over a period of time. Your inputs in this process will be

welcome. Modifications will be formally notified to all existing Sidapartners along with replacement sheets and instructions.

1Refers to Development Cooperation Section (DCS) of the Embassy of Sweden


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ee)) AA wwoorrdd aabboouutt ssttyyllee,, ccoolloouurraanndd ccaarree

We feel that reading an accounting manual from cover to cover needs a lot grit, courage

and determination. To ease your journey, we have added graphics and tried to use a light,

conversational style of writing.

This manual has not been printed on offset presses, as we needed

very few copies. The colours were added to help readability but arewashable. Only the black ink is permanent. So please be careful about

spilling tea or coffee on the manual!

Still accidents do happen. If your manual is spoilt by chance, please

write for another copy to Sida at New Delhi.

ff)) TTeerrmmiinnoollooggyy

Today, there are no terms or words which can meet everyones approval. We have triedto use words which are common. In this context, NGO means Sida partners or

organisations which mainly implement programs directly. Often we have used the word

you when addressing the NGO. Organisations which mainly raise or provide funds forsuch programs have been termed as Agency. Accountant means the person who looks

after your accounts. Throughout this manual, Sida refers to Development Cooperation

Section (DCS) of Embassy of Sweden.

We have also tried to keep this manual free from gender-bias. At some places, this means

difficult grammar. At other places, where using appropriate terms would debilitate the

monitoring process, we have retained gender-bias.

gg)) IIffyyoouu nneeeedd aannyy ccllaarriiffiiccaattiioonnss

! You can discuss the matter with your auditors / advisers; or

! You can speak to the concerned Sida program person; or

! You can contact Sida office at New Delhi; or

! You can write to Sanjay Aditya & Associates1, with a copy to Sida at Delhi.

hh)) AAcckknnoowwlleeddggeemmeenntt

We would like to acknowledge the support and inputs provided by our partners during

development stages of this manual. Part of the material used in the manual has been

adapted from AccountAid India circulars, with their consent. Other material has been

developed by Sanjay Aditya & Associates, in consultation with Sida.

1Sanjay Aditya & Associates, Chartered Accountants, 55-B, Pocket C, Sidharth Extension, New Delhi 110014; Ph:

6346253, 6347253, Fax: 6343852; e-mail: [email protected]


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22.. BBuuddggeettiinngg

Budget is a very important component of the project document. If it is prepared

carefully, it can be integrated with the action plan. A clear budget will also help your

accountants book expenditure under proper heads. This will allow you to monitor

variances effectively.

This can be done only if expenses are booked under proper heads. Sometimes,

expenditure is debited to account-heads depending on amount of margin left under the

budget head. The nature of the expense is ignored. This results in distortion of theaccounting reports.

If the partner proposes a reasonable budget, chances are that Sida will not make any cuts

while approving the budget. This means that partners can start with realistic budget

estimates. There is no need for anticipatory padding.

Unspent balances, within reason, can be carried forward and used in the next year. Sida

hopes that by following this policy, partners will be able to time and implement activitiesaccording to ground realities. There will not be a need to use up all the unspent funds

before the end of the grant year.

Sida does not have a standard form for preparing budgets. However, we can offer a fewsuggestions on a useful budget structure.

aa)) BBuuddggeett SSttrruuccttuurree

There is a view that program persons and accountants have different expectations from a

budget document. Program people hope that the budget will tell them how much is

budgeted for a particular activity. Accountants want to know where an expense should be

booked. Often such information is not clear from the normal budgets.A possible way to solve this problem could be like this. First prepare a budget based on

the program. This budget could be structured on a simplified logical framework. This

budget could be useful in the following ways:

! It can help you visualise the planned activities;

! It can help you plan the resources needed for each activity and its components;

! It will help Sida understand your program and your requirement for funds;

! It can help your implementing team understand the work-plan and link it up with

funds available.

A Program Budget would have the following headings you can add or modify columnper your needs and the size of paper used!


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Sl Name of

Program

Specific

Objectives of

this program

Logic / reasoning

for each activity /

item

Number of

direct

beneficiaries

Village / location

where the

activity will occur

Duration

of activity

Budget

Line Item

Narration

Budget Line

Item

Calculation

Amount

(Rs.)

A sample Program Budget is given on page 112.

After you have finalised this budget, prepare another summary budget. This will help

your accountants book expenses under normal accounting heads. The AccountingBudget is simply a reclassified Program Budget. Columns for the Accounting Budget

could be as given below:

Ref. Account Head Program Duration Calculation Amount (Rs.)

A sample Accounting Budget is given on page 114.

At first glance, this appears to be additional work. However, single budgets in vogue

these days try to be both the program budget and the accounting budget. These end up

being neither. Program persons are not able to get enough information from these to help

plan expenditure. Accountants also find it frustrating opening accounting heads, whichlook like program activities and are different for each Agency.

Secondly, if you use a spreadsheet program like Lotus 1-2-3, Excel or Quattro Pro, you

could set up cross-references between the two budgets. Then if you make changes in the

program budget, the accounting budget will get updated automatically.

bb)) HHooww mmuucchh

Budget figures must be based on ground realities. When budgeting salary for a Sida

supported project, you may wish to see what are the general salary levels in the region.

Also the salary amounts budgeted should not be so high or so low that these would cause

conflicts within the organisation.

Budgets for materials should be based on how much is likely to be used. Prices used in

calculations must be realistic.

Name of theprogram or

programcomponent

You may have manyitems or activities

under each program.Give the logic or

necessity orrationale for each

separately.

How manypersons /

householdswill benefit

directly. Be asspecific as

possible. This

will help youcheck your

calculations.

Give namesof villages. Ifa school will

run in thecommunitycentre, say

so.

Give thenumber of

days /

months(under thisbudget)

Describe

the Lineitem.

Show how

the amountwas

calculated.

Show theamount for

each lineitem here.

Item numberof the mainbudget. Will

help inreferring back

For theaccountantsinformation

Will help theAccountant in

checkingamounts booked

in accounts.

Combine these two columns to openledger accounts. For example:

AIDS Salary to Outreach WorkersOr

Training Material for Camp


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You also need to provide for the following:

(1) Increments

People grow over time in terms of skills and experience. An annual increment is a

normal expectation. If your organisation provides annual increments, you should

increase the salary budget each year accordingly.

(2) Accountant

Good accountants are difficult to find. It is even more difficult to retain them. One factor

sometimes, is the lack of a salary budget for an accountant. Sida requires that its partners

will find, employ and retain good, full time accountants. Such persons should haveadequate training in accounts, and preferably a commerce degree. They should also have

sufficient experience.

For this purpose, reasonable amount of salary should be budgeted. For budgeting thesalary, you may want to look at what good accountants are paid by local businesses.

Where the salary can be shared with other agencies, a proportionate amount should bebudgeted in Sida proposal.

(3) Audit fees

Independent audit of your Society or Trust is an essential

requirement for public accountability. Sida requires that its

partners will retain a good firm of Chartered Accountants for this

purpose. If such a firm is available in a nearby place, its services

will be more useful.

In order to do a proper audit, adequate professional remunerationis essential in most cases. Unfortunately, an audit fees component is often not included in

the budget. It is suggested that where audit fees can be shared with other Agencies, aproportionate amount should be provided.

You should also provide an additional amount in the Budget for Sida audit certificate.

Consult your auditors as to the amount of fees they would expect for the Sida Audit

Certificate. Auditors should carefully consider their professional responsibilities and thescope of work involved in the Certificate before indicating their fees.

(4) Inflation

When proposing a budget for the first time, remember that it may take some time beforethe proposal is approved. In the meanwhile prices will continue to rise. Keep this in mind

when estimating budget amounts.

If the proposed budget is for more than one year, provide for inflation in the second and

subsequent year also.


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(5) Chief Functionary

If you have a full-time Chief Functionary1, you may need to pay a salary to the person.

There is no bar in the Income Tax Act on paying reasonable salary to an office bearer.

Under the Societies Act, it is expected that an office bearer such as a Secretary orTreasurer will not be paid for duties of a Secretary or Treasurer. Your auditors can

explain the intricacies of this law to you.

Sida suggests that reasonable and proportionate amount of remuneration for a full-time

Chief Functionary should be budgeted, where required.

cc)) BBrreeaakk--uupp

If you want to make a good budget, it is important to provide break-up of figures that are

included. For example, salaries should be broken down by person (with role), rate per

month, number of months. Amount for an exposure tour must be broken down into fare,

food, lodging, incidental expenses how you arrived at these items should be indicated

for example, food for 20 persons @ Rs.75 per day x 4 days. This exercise may appear

to be time-consuming at first but will help avoid under-budgeting or over-budgeting.Finally if an item can not be broken down at all, say lump-sum.

Sida requires that all budget items will be broken down to the extent practical. Budgeted

costs should correspond as closely to the activities as feasible.

dd)) VVaarriiaanncceess

If you make a budget, variances will follow naturally. These variances should not be

suppressed. An attempt should be made to book all relevant expenses under proper

account heads. Sometimes, expenses are booked under a different head just because the

budget under the proper head has been used up.

Variances would be calculated and reported, as discussed in the section on Reporting toSida (page 57). Past variances should also be used to revise budget amounts wherever

required.

1

May be an office bearer


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Situation Cash

handled by

Suggestions

Accountant

but no

cashier

Accountant,

Chief

functionary

or another

senior

person

1. Keep cash separately in locked drawer or almirah in the office.

2. Maintain diary or note book for entering all receipts and

payments immediately.

3. If person handling cash takes advance, enter this amount also

immediately in the note book. Such advance should be takenwith consent of Chief functionary or another senior person.

4. Periodically tally the cash balance as per note book with cash

in drawer or safe.

5. Chief functionary can participate in cash tally once in a while

(at least 10-12 times a year) and initial the note book.

Both Full

time

accountant

and a

cashier

Cashier;

Sometimes

extra1

cash

kept with

Chief

Functionaryor senior

person

1. Person keeping extra cash should sign a voucher for receiving

the cash.

2. Keep normal2

cash separately in locked drawer or almirah in

the office.

3. Maintain diary or note book for entering all receipts andpayments immediately.

4. If cashier takes advance, he/she should enter this amount also

immediately in the note book. Such advance should be taken

with consent of Chief functionary or another senior person.

5. Cashier should periodically tally the cash balance as per note

book with cash in drawer or safe.

6. Chief functionary can participate in cash tally once in a while

(at least 10-12 times a year) and initial the note book.

The above chart shows three different situations. However, a system where cash and

account books are handled by two different persons is usually desirable. It is thereforestrongly recommended that where feasible, such an allocation of duties should be made.

bb)) RReessppoonnssiibbiilliittyy CChhaarrtt

Where an organisation is small, things are easily controlled without any delegation. But

as it grows, it becomes necessary to let different people handle things. In such a

situation, people should also know what their responsibilities are. This will help them in

their work.

To improve clarity on this, many NGOs prepare a simple chart showing who is expectedto handle what functions. For example, the responsibilities of the cashier, accountant etc.

are clearly specified. The chart also shows who have the authority to approveexpenditure. Similarly in a decentralised organisation, the chart would also show who

has signing authority for donor agreements, for operating bank accounts etc.

While most of the time these responsibilities are known to the people within the

organisation, auditors and reviewers sometimes expect to see a written note on this. You

may also wish to paste this chart in the accounts office for easy reference. The chart

should be updated regularly so that it remains a live document.

1In case of large withdrawal, extra cash may not be kept with cashier.

2

Cash handled by cashier normally


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Sida requires that such a chart would be prepared and easily available for reference.

cc)) AAddvvaanncceess

Office advances are different from personal advances1. Here we have discussed office

advances only.

Office advances cover money given to a worker as advance for office expenses. SomeNGOs record these transactions in the accounts most do not.

The NGOs who do not record advance transactions, may be using IOUs2 or may

maintain advance registers. This practice is improper. All cash transactions are meant to

be recorded in the cash book.

Using IOUs is risky. Maintaining separate advance registers actually increases the work.

It is also not a reliable method. As an alternative, you can open advance accounts or use

a system of rolling imprest.

(1) Opening Advance Accounts

It would be simpler if you opened separate advance accounts for the staff in your main

ledgers3. If a person handles both FCRA projects as also general projects, then you can

open two advance accounts, one in each ledger.

When you maintain advance accounts, you would debit the persons account whenever

money is given to them. Later when they submit vouchers, the amount would be creditedto their account.

If you dont use a journal, entries in the cash book would look like below:

Receipts Payments

Date Particulars Amount Date Particulars Amount

4.4.98 Ms. Ramawati

Advance: (FCRA -

main)

Cash given for Balpur

mela

5,000

10.4.98 Ms. Ramawati

Advance: (FCRA -

main)Expenses on Balpur

mela

4,360 10.4.98 Balpur Mela (SIDA)

Expenses incurred by

Ms. Ramawati onBalpur mela

4,360

In this system, you dont have to settle the advance account after each transaction. It

could be settled once a month or once each quarter. The balance due or recoverable

would be paid or recovered in cash.

1For example, advance against salary or a personal loan

2I owe you; the amount given as advance is written on a slip or a voucher. This is later destroyed when the advance is

settled.3

See chart on page 13.


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If you use a journal also, then the second entry can be made through the journal. Using a

journal is better than using the cash book for such entries:

Date Particular Debit Credit

10.4.98 Dr. Balpur Mela Exp. (SIDA) 4,360

Cr. Ms. Ramawati Advance (FCRA-main) 4,360

Expenses incurred at Balpur Mela by Ms. Ramawati

(2) Using rolling imprest

Rolling imprest helps reduce accounting work. Under this system, a person is given a

permanent advance. When they incur expenses, they are reimbursed whatever is spent.The original imprest gets replenished.

For example, a person is given Rs.1,000 as a rolling imprest. This is debited to his

imprest account. Now he incurs expenses of Rs.780. He is paid the full amount of

Rs.780. Now he can again spend upto Rs.1,000. Entries for this are shown below:

Receipts Payments


4.4.98 Sri Venkat Imprest:

(FCRA - main)

Cash given as rolling

imprest

1,000

10.4.98 Sapling purchase

(SIDA)

Mango saplings

purchased by Sri

Venkat from rolling

imprest

780

The rolling imprest of Rs.1,000 will be recovered only when the person leaves theorganisation or does not need the imprest any more.

Rolling imprest is given only to those people who often incur many small expenses for

the office. No time limit is normally kept for settling the imprest but if you wish, you

could clear the imprest once annually for better discipline.


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dd)) OOlldd RReeccoorrddss

No time limit is given under FCRA for keeping old records. But under the Income Taxlaw, you have to keep old accounting records for at least ten years1. For practical

purposes also, a period of ten years is sufficient.

What do you need to keep? Cash books, ledgers, asset and stock registers, cash log (or

rough cash book), vouchers, vehicle log books etc. all form part of accounting record andshould be kept. In case your accounts are computerised, you need to keep printed copies

of these. Keeping computer files on a floppy or hard-disk is not sufficient.

The registers and cash book etc. can simply be labelled and stored. But how would you

keep old vouchers etc. for ten years?

After the audit is over (or even before that), you can have the vouchers stitched. Simple

book-binding (using cardboard and thread) is sufficient. The binder would charge you

about Rs.15-20 per file. The voucher files are then labelled and kept in tin boxes. You

should keep the boxes safely, in a dry place. Keep some moth-balls in the trunks and air

them at least once a year.

1The actual requirement is for keeping the records for eight years from the end of the assessment year. For financial

year 88-89 (1.4.88-31.3.89), the assessment year will end on 31.3.90. You have to keep the records till 31.3.98. This

effectively translates to 10 years (April 88 till March 98).


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44.. BBooookk--kkeeeeppiinngg

aa)) IInntteeggrraatteedd CCaasshh BBooookk

NGOs receiving FCRA funds are required to keep a separate cash book for FC funds.

But should they keep separate cash books for each funding agency / project as well?Many NGOs maintain separate cash books, sometimes as many as fifty each year!

This practice apparently started with a misinterpretation. Most agency agreements say

that separate accounts will be kept for the funds given by them. This actually means that

the NGO should keep separate ledger accounts for their expense heads. This does not

mean that they should keep a separate set of account books. At some point of time, the

meaning was twisted and separate cash books emerged.

This practice increases work-load of Accounts Department. It also weakens cash control.

It is because of this that many NGOs keep a separate rough cash book for controlling

cash.

Is there a simpler alternative? People have experimented with columnar cash books. One

column is kept for each agency on the receipts side and another on the payments side.

This is feasible only if you are working with 3-4 agencies. Further, you need to get such

cash books printed specially.

Another alternative (recommended) is to use the standard cash book. Each entry is

marked suitably with the name of the agency. This is then posted to the relevant ledger1.

The overall accounting system may look as below:

1Separate ledgers are kept for each agency / project. This is explained under the heading Separate ledgers.

General

Cash

Book

FCRA

Cash

Book

General

Ledger

Sida

Ledger

CAPART

Ledger

CRY

Ledger

OxfamLedger

SidaReports

CAPARTReports

CRYReports

Societys

Balance

Sheet etc.

FCRA

Ledger

OxfamReports

FC-3 and

FCRA

Balance

Sheet etc.

Rough

Cash Log

IGP

Cash

Book Fisheries

Ledger

Fishery Profit& Loss A/c


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The next question that arises is how do you make entries (which will be posted to severalledgers) in one cash book. For this, each entry should be marked with the ledger where it

would be posted. An example is given below:

Receipts Payments


4.4.98 Salaries (Diakonia)

Salary to teachers for

March 98

8,600

4.4.98 Salaries (Sida)

Salary to Sida project

staff per details

14,200

6.4.98 Travel (Oxfam)

Visit to Ahmedabad

by Sri Venkat for

meeting

1,230

10.4.98 Sapling purchase(SIDA)

Mango saplings

purchased by Sri

Venkat from rolling

imprest

780

Over a period of time, we expect that people will gradually switch back to integratedcash books. In the short run, some of the agencies you work with may continue to insist

on a separate cash book.

However, a separate cash book should not be kept for Sida funds. These should be

reflected in the main FCRA cash book itself.

bb)) SSeeppaarraattee LLeeddggeerr

While you can keep a common cash book as discussed above, a separate ledger would be

needed for each agency (shown in blue colour on the chart). Each ledger will be labelled

with the Agency / project name. You can post entries into these ledgers directly from the

General Cash Book or the FCRA cash book. There is no need to post these into a ControlAccount.

Such ledgers are called sub-ledgers. These help you keep separate accounts for each

agency without loss of control over cash. In the sub-ledgers you can open ledger

accounts according to the budget heads of the relevant agency. This will help youprepare financial reports for the agency.

Ledger Accounts which are not related to any specific agency are kept in the General

Ledger or the FCRA ledger.

For Sida expenses and assets, a separate sub-ledger should be maintained.

cc)) VVoouucchheerrss

Some NGOs do not use vouchers whenever a cash memo is available. However, this is

not satisfactory. A covering voucher should be used for each entry, including those for

which a cash memo is available.

This will be posted toSida ledger

This will be posted toOxfam ledger


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A covering voucher carries useful information such as why an expense was made, who

made the payment and the account-head to which it should be debited. The voucher is

also used as an authorisation for the expense.

There are many different types of vouchers in use by NGOs. Generally, you can find

receipt vouchers, cash vouchers, payment vouchers and journal vouchers. This of course

means that you have to print and keep separate stocks of each type.

A simpler alternative is to print a voucher that can take care of all these transactions.Such a design is suggested below:

Whatever the design you use, try to ensure the following while printing the voucher:

! There should be enough space on the left-hand side for punching and filing. Leaveadequate margins around the other sides to allow for curling and tearing during

storage.

! You should use a standard size, keeping in mind the paper sizes available. Odd-sized

vouchers result in wastage of paper and are difficult to file.

! Use a paper that will not tear easily and will last for ten years. Flimsy paper (lessthan 70 gsm1) is not suitable.

1Grams per square meter: standard measurement system for paper weight

Lok J agran Manch, Machhera, A.P. Voucher No .

Date

Budget / Account Head Project / Agency Amount (Rs.)

Dr.

Dr.

Dr.

TotalCr.

Cr.

Description Total

Total Rupees (in words)

Amount paid (in words) Rs.

Accountant Project Incharge Treasurer/ Secretary Receiver

Revenue

stamp

> 500

Use this rubber stampto mark Sida vouchers

and supports.


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members. Later when funds become available, these are repaid. How should these loans

be transacted1?

Properly speaking, all loans (whether large or small) should be taken by crossed account

payee cheques. Only exception would be where a clear cut emergency has occurred. In

such cases, the nature of the emergency should be noted on the voucher. For all loans

taken, a receipt should be issued. The receipt should give the name and address of theperson who has given the loan. Under no circumstances, an anonymous loan should be

accepted.

All loans2

must be repaid by crossed account payee cheques. If a loan is repaid in cash,

there should be a very good reason for it, which should be recorded on the voucher.

When the loan is repaid, the receiver3 should acknowledge the repayment by signing on

the voucher. The name of the receiver should be given on the voucher.

Sida requires that the above procedure would be followed whenever a loan is taken orrepaid for Sida fund transactions.

Sometimes a loan may be taken from General Fund4 for Sida expenses. This means the

loan would be paid from General Fund into Sida funds. This is an internal loan and may

be a simple cash loan or a bank payment.

A related loan from another person may appear as a receipt into General Fund. This loan

would be called an external loan. Sida therefore requires that the above procedure would

be followed for the external loan as well.

(3) Income Tax Implications

Under Income Tax Act

5

, loans above Rs.20,000 have to be taken or repaid by crossedaccount payee cheque or draft. What does the limit of Rs.20,000 mean? Obviously, any

loan bigger than Rs.20,000 is covered. But the ban also applies when the amount due to

one person adds up to more than Rs.20,000.

This is explained more clearly in the section on Income Tax (Large loans or expenses in

cash on page 41)

Under the Income Tax Act, you should also not make any payment (for expenses or

assets6) above Rs.20,000 in cash7. If you do, then 20% of the amount will be added back

to your income. There are some exceptions to this8. These include payments to farmers

for farm products and to cottage industries. If you make a payment to a person who livesin a place without a bank, then you can make it in cash.

1Income Tax implications of cash loans discussed under the heading Large Loans or Expenses in Cash in the section

on Income Tax2

Including an emergency loan which may have been taken in cash3

The person who gave the loan in the first place4

There may be adverse FCRA implications.5

Section 269SS6

Remember that NGOs get 100% deduction for assets.7

Section 40A(3)8

Rule 6DD


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Also the bank credits interest to your account twice a year. You have to pass entries in

your books for these transactions.

Sometime the bank makes totalling errors. Also someone may alter a cheque and draw a

large sum of money from your account.

When a difference appears between your ledger balance and the pass book, you have to

prepare a Bank Reconciliation to understand the reasons.

(3) Making a Bank Reconciliation

You need four things to prepare a bank reconciliation. (i) Your Pass Book; (ii) YourCash Book or Ledger containing the Bank Account; (iii) A colour pencil or pen; (iv)

Previous reconciliation, if there was difference in opening balance. After having armedyourselves with these, proceed as follows, with extreme caution:

(a) Ticking Off common items

! First decide the period for which you want to reconcile. Lets say you decided on1.4.98 to 31.7.98.

! Compare the opening balance (1.4.98) of the Pass book and the Ledger.

! If there is a difference in the opening balances, locate the previous reconciliation.Your auditors will probably have a copy.

! Now you have to start ticking off the common items in the pass book and the ledger.

! For this see the first entry in the ledger on debit side. Locate this entry in the pass

book also (in Deposits column).

! Compare both the entries are the amounts same? If there is a small difference, it

may be due to collection charges. Note the difference separately.

! Tick off both the entries if these match.

! In this manner, tick off all matching entries on debit side right upto 31.7.98.

! Now look at the Credit side of the ledger . Compare these entries with those in

Withdrawal column of pass book. Match cheque numbers also if possible.

! Tick off all common entries one by one.

(b) Correcting Our Ledger Balance

Now we can prepare the first part of the Reconciliation:

! Take a fresh sheet of paper and note down the closing balance as per ledger.

! From this deduct any bank charges (or collection charges) or cheques that may have

been dishonoured.


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! This will give you the corrected ledger balance .

(c) Reconciling the Pass Book balance

Finally we reconcile the Pass Book balance:

! Note down the balance as per pass book.

! To this balance add those cheques which have been depositedbut not yet cleared. You will find these as unticked items on

the Debit side of the ledger.

! Then deduct the cheques which you have issued but which

have not reached your bank. These will appear as unticked

items on the Credit side of the ledger.

! The resulting balance should be the same as the corrected

Ledger balance.

If a difference remains, scan the pass book and ledger for unticked items. Check the

totalling and the manner in which you have added or deducted items. If the differencestill remains, you will have to tick the items again. Use a different colour pen this time.

And be more careful!


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(4) Follow-up Steps

After reconciling the bank, you must look into the items that appear on the list. Pass

entries in the ledger for bank charges, interest etc. Pass entry for dishonoured cheque

also. Depending on reasons for dishonour, talk to the concerned party or your bank.

If the amount for any cheque which you issued is different from your records, approach

the bank immediately. Find out the reason for the difference. If there is a mistake at the

bank, have it corrected. If there is an unauthorised alteration, consult your auditors. They

will be able to guide you.

(5) How often

This depends on the way you use your bank account. If you have many bank transactions

(say more than 50 a month), then you should reconcile your accounts each month.

Otherwise, a quarterly bank reconciliation may be sufficient. At a minimum, you must

reconcile your bank account each year.

Sida suggests that you should reconcile your bank accounts periodically and passcorrection entries as necessary.

gg)) FFiieelldd BBaannkk AAccccoouunntt

Sida does not require or expect that its funds will be

deposited in a special or separate bank account. However,

Sida is classified as a foreign source under FCRA. Youneed to deposit and keep Sida funds in the designated1

FCRA bank account.

In some cases, NGOs open additional bank accounts in the

field because the main FCRA bank account is too far away.

Strictly speaking this is not allowed under the FCRA2 and it is possible that FCRA

authorities may object to this.

Sida suggests that you consult your legal advisers before taking such a step.

1See the section on FCRA

2

Section 6(1)(b), Rule 8(1)(b)


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77.. IInnccoommee TTaaxx11

Some people believe that NGOs are automatically exempt from income-tax. This is not

true. You need to apply for income tax exemption. After that you need to follow certain

conditions in order to remain exempt. Additionally, there are other requirements which

affect an NGOs working.

Broadly there are three types of registration. Basic registration means that the NGO will

not have to pay income tax2 on its surplus3. This is the most important registration and

every NGO should have it.

Next comes registration for TDS4. NGOs have to deduct income tax when they make

payments to some people. After deducting tax, this is deposited with the Government.

Third is the approval for donors. These approvals mean that your donors can will have to

pay less income whenever they donate money to you.

aa)) BBaassiicc rreeggiissttrraattiioonn aanndd eexxeemmppttiioonn

For NGOs involved in development5 work, basic income tax exemption can be of two

types. One is under section 10 and the other is under section 11.

(1) Exemption under section 10

Section 10 has many sub-sections. Each sub-section has several clauses. For NGOs, the

relevant clause is 10(23C)(v)6. This exemption is not available very easily. You need to

apply to the Director General of Income Tax (Exemptions) at Calcutta through your local

Income Tax Commissioner. The application is made in form 56.

After an inquiry, your application may be approved. Then a notification will be

published. The exemption is granted for a maximum period of three years. After that,

you need to apply for a renewal. The exemption can also be cancelled in some cases7.

Even if your organisations is exempt under 10(23C), you have to file a return just like

other NGOs, if the gross total income of the organisation exceeds Rs.50,000. Further,

you should also spend a minimum of 85% of your income each year on objects of the

organisation.

1Only basic information is provided here. Please consult your advisers or a lawyer before taking important decisions.

2Subject to certain conditions.

3When income (including grants) is more than the expenditure, you get a surplus.

4Tax Deduction at Source

5Income Tax Act uses the word charitable

6Pronounced as section ten [pause] twenty three see. If you want to be perfect, add clause five after you say this. If the

NGO is of national or regional importance, then you can apply under clause (iv)7

11th

proviso to section 10(23C)

Updated, based on Finance Act 2002


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(2) Exemption under section 11

It is easier to obtain exemption under section 111. For this, you have to apply for

registration to your local Income Tax Commissioner. For this you use form 10A. Ideally

you should make this application within one year of formation2.

If for some reason you have not been able to do this, then the Commissioner may

overlook this. For this you should submit a separate application3

asking that the delaymay be forgiven.

Under the revised procedure, the Commissioner has to decide on your application within

six months. For this, you may need to provide more information or attend a personal

hearing. The Commissioner now also has the power to refuse registration4.

bb)) PPeerrmmaanneenntt AAccccoouunntt NNuummbbeerr

In recent years, the Income Tax Department has been doing some serious revamping of

the Permanent Account Number system. As a result, now almost everyone has to apply

for a Permanent Account Number (PAN). Quoting this number will gradually becomeessential for almost all the important transactions. However, you will still be able to

purchase milk at the nearby dairy without providing your PAN!

Your NGO also need to apply for a PAN. Form number 49A for this will be available

with your auditors or the local Income Tax office just ask for PAN application form.

Fill up the form in duplicate and file it with the Income Tax office. One copy will be

returned to you. In some areas, separate offices have been designated for this. You will

get an acknowledgement, which you should preserve carefully.

In due course of time, you will get a laminated card showing your PAN. PAN cards for

individuals also carry their photographs. Note this number down in your diary so that

you can provide it when asked.

In some cases, PAN takes a long time to arrive. Till the time you get the PAN, you can

quote your General Index Register Number (GIR number). This number is given on your

assessment order.

Finally, a person who has neither a PAN nor a GIR number, can make a declaration to

this effect in Form 605 and complete their transaction.

cc)) SSppeecciiaall ccoonnddiittiioonnssUnder the Income Tax, there are some special conditions. If you do not follow these, you

may have to pay income tax or penalty. In some case, imprisonment is also possible.

1This is sometimes also called 12A registration

2Creation of Society or Trust

3Format in section on forms

4Section 12AA

5

Form 61 for people having agricultural income


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(2) Investments and bank accounts

You are expected to keep the funds of the NGO in bank accounts or in specified

investments1. These are listed2 below:

Government Savings Certificates (including Indira Vikas Patra and Kisan Vikas

Patra)

Post Office Savings Bank Accounts Accounts (whether fixed or savings) with any Scheduled3 Bank or any co-operative

bank

Central or State Government Securities

Units of Unit Trust of India

Shares or Deposit with anyPublic Sectorcompany

Land, buildings or other immovable property

Deposits or Bonds of approved4 Industrial Financing Corporations

Deposits or bonds of approved Housing Loan companies

Deposits etc. with IDBI

other prescribed investments (units of Mutual Funds; deposit to Public Account of

India)

However, local laws (such as Bombay Public Trust Act in Maharashtra and Gujarat) may

specify other investments. You will need to work out a common list of permitted

investments for your state before investing. Also this list may change from time to time.

Ask your auditors before investing.

(3) Separate account books for Income Generation

Do you have any income generating activities? These may be of two types: one, where

you help the villagers take up some economic activity; and two, where you yourself run

these. In the first case, the income will not come to you. No entries will be made in youraccount book.

In the second case, you will receive some income. This

may be from sale of books, honey, handloom products,

medicines or from running training programs. The

activity must be regular and structured: selling old

books once in a while is not Income Generation activity

for Income Tax purpose. But if you print books and sell

these regularly for a price, it becomes a business

activity.

Such activity is allowed under Income Tax act. If the profits from this are ploughed into

charitable activities then there is no tax on this.

However, you need to keep a separate cash book and ledger for these activities (as given

in second case). If you dont do this, you may lose your exemption under section 11.

1Section 11(5)

2NGOs exempt under section 10(23C) are allowed some additional forms of investment

3Almost all large banks are scheduled banks. In case of doubt, ask the concerned bank.

4

For section 36(I)(viii)


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The following information is given for general awareness. It is strongly recommended

that you consult your CAs or an Income Tax practitioner for filing the return.

(1) Last date and audit

NGOs filing Income Tax return are divided into two categories: small NGOs and other

NGOs. What is a small NGO? This depends on its Gross Total Income. If this is less than

Rs.50,000, then the NGO is small. This income should be calculated under the IncomeTax Act, without deducting exemptions under section 10, section 11 or section 12!

Sounds too complicated? For practical purposes, most NGOs getting grants from

Government or any Agency are not likely to fall under income tax definition of small

NGO.

(a) Small NGOs

These are not required to file an income tax return. They also do not have to get

their accounts audited.

(b) Other NGOs

Last date for filing return in form IIIA is 31st October. This means that for

financial year 1-Apr-98 to 31-Mar-99, the last date will be 31-Oct-99. Audit

report in form 10B should be attached to the return.

The complete return should be

filed with the Income Tax

Department. They will give you a

stamped acknowledgement for

this.

Before filing the return, check that

you have attached the documents

shown in the picture on the left. If you have

left out any document, make sure that it

was not required. It is possible, that the

complete Income Tax return may look like

the picture on the left.

ee)) TTDDSS

Tax-evasion is a common problem across the world. Most people who should be payingtaxes are not known to the Tax authorities. TDS is a mechanism to control this it uses

existing taxpayers to catch other potential tax payers. How does this system work?

Let us say you are an existing tax-payer running a business or an organisation. You pay

your taxes regularly. There are many people who work for your business or organisation.

This includes employees, lawyers, accountants, contractors, consultants etc. Some of

these may not be registered with Income Tax Department. Even if they are registered, the

Income Tax people think they may conceal the income (that they received from you).

To prevent this, the Department makes you responsible for collecting tax from.

Effectively, you become a small little extension of the Department itself. Once this

Audit Report(Form 10-B)

BalanceSheet

Income and

ExpenditureAccount

Receiptsand

PaymentsAccount

Registration

Certificateunder 12A

(copy)

Income TaxReturn

(Form III-A)

Resolution forAccumulat ion

Appli cation forAccu mul ationfor fi ve years

(Form 10)

A complete set of Income Tax Return

Exemptionletter under

10(23C)(copy)

or

App li cationfor carry-forward tonext year


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happens, you have to deduct tax at source from certain payments made to such people.

After deducting these, you have to deposit the tax these with the Government.

But before we make you an Income Tax Officer, you need to get registration for this.

Such registration is compulsory, if you make any payments from which tax should be

deducted (for example, if you pay fees exceeding Rs.20,000 to a consultant or

professional).

(1) TDS Registration

For TDS registration1 apply in form 49B. This application should be made within 30

days of the time you deduct tax at source. Attach a xerox copy of the TDS challan with

your application. You should file this application in the Income Tax office check with

the PRO2 for correct room number / jurisdiction.

(2) Deducting Tax at source

Whenever you make a TDSable payment3, you have to deductand deposit tax. Deduction means that you pay less money to the

receiver. For example, if your auditors have sent you a fee bill

for Rs.40,000, you should pay them 94.75% of this amount

(Rs.37,900).

How do we get the figure of 94.75%? The TDS rate for payments under section 194J is

5%. The current surcharge is 5%. Surcharge is calculated on the amount of tax. So the

total TDS and surcharge comes to 5.25%. The balance 94.75% only should be paid.

The rates of TDS and surcharge keep changing your auditors will be able to guide you

on this.

(3) Depositing the TDS

Deposit the balance Rs.2,100 with the Government within seven days4. This is done

using a challan (ITNS 271). This has three parts. Take the filled up challan along with

the cheque to a local bank which accepts Government payments5. The cheque6 should be

made out as Name of the bank7 a/c Govt. Dues Income Tax. Some banks prefer a

different way of doing this and you should check with them.

When you deposit the challan, the bank will give you a paper token (or a pay-in-slip

counterfoil). Two or three days later, you can return to the bank and collect two parts of

1Section 203A

2Public Relations Officer

3The proper phrase is payment liable to deduction of tax at source

4The time limit varies from case to case. A seven-day rule is simple and easy to follow.

5In most cities, SBI will accept such payments.

6Making the payment by cheque is preferable if you lose the challan by mistake, you can get a bank certificate.

7Where the cheque is being deposited. For example, if you are depositing this in SBI, you can say SBI a/c Govt. Dues

Income Tax


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the challan one part is retained by the bank. Your copies of the challan will carry the

banks stamp as well.

Of the two parts you get, one will eventually be filed with your TDS return and the other

will be retained on your own files.

(4) Issuing TDS certificates

Whenever you deduct tax at source, you have to issue a TDS certificate to the employee,

contractor, consultant etc. This certificate is used by them to claim a refund or credit of

tax.

For employees, this certificate is issued in form 16. This can be purchased from the

market or typed on plain paper or your letterhead. It is issued once each year, within one

month of closing. For example, for financial year ending on 31 st March 1999, you will

have to issue this certificate by 30th April.

For others, the certificate is issued in form 16A. This can be issued separately for each

payment, within one month1 of payment.

If you are making regular payments to a consultant or contractor, you can issue one

consolidated certificate (in form 16A) at the end of the year. This will save you the

trouble of issuing certificates again and again. For this, the concerned consultant should

simply make a request to you. Time limit for issuing this certificate is one month from

the end of the year.

(5) Filing TDS returns

You need to file a separate return at the end of the year for each category of payment.

There are different forms for this and different dates.

Payment TDS required if Return Form Last date

Salary (sec. 192) Salary exceeds taxable

limit after deductions

Form 24 31st May

Payment to contractors

(sec. 194C)

The contract value

exceeds Rs.20,000

Form 26C 30th June

Rent (sec. 194-I) Rent exceeds Rs.120,000in the financial year

Form 26J 30th

June

Professional fees (sec.

194J)

Fees paid during the

financial year exceed

Rs.20,000

Form 26K 30th June

1Rule 31(3). This is a complicated rule. One month interpretation is safest. In case of year-end credits, time-limit is two

months.


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ff)) AApppprroovvaall ffoorrddoonnaattiioonnss

If you want to raise money from public or friends, people may ask you whether they will

get a tax-deduction. If you are not approved under section 80-G or section 35AC, your

answer should be no. Remember, registration under section 12 makes you (NGO)

exempt from tax it does not give any advantage to the donors.

If you want to offer tax advantage to your donors, you should get approval under section80G or under 35AC

(1) 50% under section 80G

For this approval you have to apply in form 10G to the local1 Income Tax Office.

Normally this approval is granted for 2-3 years at a time but can be renewed. This is a

general approval and you can raise money for money for any charitable purpose.

The donors get a deduction of 50% from their taxable income. Note this carefully: they

get a deduction of 50% from their income, not from their income tax. Most people find

this confusing so lets look at an example:

Ms. Anju gives a donation of Rs.1,000 to Lok Jagran Manch under section 80G. Anjus

total taxable income for 98-992 is Rs.100,000. Tax on this comes to Rs.9,000. Because

she has given this donation, her income will be reduced to Rs.99,500. The tax on this

will be Rs.8,900. So her tax saving is only Rs.100.

She will be able to claim this deduction only if you give her a receipt. The receipt should

show the 80-G approval number also. Try to get the donation by cheque this will help

her prove the donation to herIncome Tax officer.

(2) 100% under section 35AC

If you get approval under section 35AC, Anju can save a little more money. The same

donation of Rs.1,000 under 35AC will allow her to claim a deduction of Rs.1,000 from

her income. Her net income will be Rs.99,000. Tax on this will be Rs.8,800. So she will

save Rs.200.

Approval under 35AC is centralised at Delhi3. You have to fill up a separate application

form (see form on page 80). The approval is given for a specific project and carries a

limit on how much funds you can raise. Approval is now available for corpus based

projects as well. Remember that the Ministry will not give you any funds only approval

to raise tax-deductible donations.

The approval is usually for 2-3 years but can be extended. You have to give each donor a

certificate in form 58-A without this form, the donor can not claim deduction. You also

have to file periodic progress reports with the National Committee.

1Confirm jurisdiction with your CAs or tax advisers.

2Financial year

3Apply to The Secretary, National Committee for Promotion of Social and Economic Welfare, Department of Revenue,

Ministry of Finance, Room No.149, North Block, New Delhi-110 001


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88.. FFCCRRAA CCoommpplliiaannccee

FCRA stands for Foreign Contribution (Regulation) Act. Passed in 1976 to monitor the

flow of foreign funds to India, its provisions are unclear to most people. This makes it

mystical and fearsome for most.

It is estimated that around 23,000 NGOs1 are registered under FCRA. No all of these

receive foreign funds. In 96-97, about 12,000 NGOs reported that they had received

about Rs. 2,600 crores.

Implementation of the FCRA is with Ministry of Home Affairs. It has only one central

office but operates in close co-ordination with State Intelligence Bureau. Its office islocated near Khan Market in central Delhi. There are limited visiting hours and you need

to make a visitors pass to go in. However, you can do most of your work through

correspondence. The postal address is:

The Secretary, Govt. of India,Ministry of Home Affairs,(Internal Security Wing FCRA),

9th

Floor, Lok Nayak Bhawan,Near Khan Market, New Delhi

Phone (Reception): 4697018

When economic liberalisation started, FERA2

provisions were gradually relaxed. Thisled to an expectation among NGOs that FCRA will also be scrapped or relaxed. This is

very unlikely. The reason is that FERA is an economic legislation, whereas FCRA is

designed for internal security. This is also the reason why FCRA implementation can not

be transferred to Ministry of Finance.

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FCRA covers both NGOs as also public servants and political parties. While the

provisions of the Act appear to be very simple, these are incredibly tight. There are three

key phrases relevant to NGOs:

Foreign Source includes all foreigners and organisations which are controlled by

foreigners. A company registered in India, but controlled by foreign shareholders3, will

be a foreign source. A foreigner who has settled down in India, but does not have an

Indian passport, will be a foreign source.

Foreign source does not include Indian citizens living or working abroad. It also does notinclude UNO, its agencies, World Bank and IMF. Apart from this some other

organisations have also been notified by the Government as exempt from this definition4.

1Including branch offices of funding agencies

2Foreign Exchange Regulation Act, 1973

3More than 50% shares are held by foreigners

4AccountAid Kit nos. 40 and 41 provide a listing of foreign and non-foreign sources.


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Foreign Contribution means any article, funds or shares received from a foreign source.

Free contribution of services is not included in the definition.

Association means practically any organisation, whether registered or not, whether a

society or not, which has an office in India. The definition is wide enough to include

companies, business-houses, firms, clubs and even Mahila Mandals.

The Act then creates a sub-category of Associations. These are Associations which have

a definite cultural, economic, educational, religious or social program. In practical terms,this means that all NGOs are covered.

For this sub-category, there is a restriction. They can not receive foreign contribution

without registration under FCRA. If they are not registered, they should get prior-

permission for each grant of foreign contribution.

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For getting registration under FCRA, you have to apply in form FC-8 to the FCRAoffice. Form FC-8 was revised in December 96 and on 5th

January 99. It has been

revised again on 24th January 2000. Normally, NGOs who have been formed recently are

not granted registration for at least three years.

If you can not get registration, you can apply for prior permission using form FC-1A.This application is usually processed within 90 or 120 days. Form FC-1A was revised on

5th January 99 and has been revised again on 24th January 2000.

The Act prescribes severe penalties, including jail, for violation of FCRA provisions.

Some orders of the FCRA office can be appealed in the High Court or sessions court.

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If an individual receives more than Rs.36,000 in a year as scholarship or stipend etc.

from a foreign source, then they have to give intimation to the FCRA office within 30

days of receipt. Form FC-5 is to be used for this.

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Before you apply for FCRA registration, you have to open a separate bank account. For

opening the account, you can deposit a small amount from local funds. Do not use this

account till you get FCRA registration. Once you are registered, you will have to use thisexclusively for foreign contribution. You can not change this bank account unless the

FCRA office gives you specific permission for change.

If you have receive funds through prior-permission, these should also be deposited in a

separate bank account. The number of this account is to be given in form FC-1A whenapplying for permission.


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If you receive foreign funds, you have to maintain a separate set of books (cash book and

ledgers) exclusively for such funds. Many funding agencies ask for separate accounts

this usually means separate ledger accounts. This does not mean you can open upseparate FCRA cash book for each agency. The FCRA inspectors usually object if you

have more than one cash book for FCRA.

If your FCRA project involves local contribution element, do not bring the local

contribution into FCRA accounts take this to your Indian cash book.

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If you also receive foreign contribution in kind (materials etc.), you will have to maintain

a kind of stock register (FC-6) for this. The format for this stock register is given in form

FC-6. This register should be maintained in your office and need not be sent to FCRA

office.

A summary of this register is incorporated each year in the form FC-3. This serves as a

report to the FCRA.

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Once you are registered under FCRA, you have to file an annual return. The return

contain information on how much funds and material you received from foreign sources

during the period 1st April to 31st March next. This has to reach the FCRA office by 31 st

July each year. You have to file this form even if you did not receive any foreign

contribution in the year.

NGOs which receive foreign funds or material under prior permission also have to file

this form. They have to keep filing this form till all the funds received have been fully

utilised.

Along with form FC-3, you have to file audited Balance Sheet and a Receipts &

Payments Account. These should relate to FCRA funds only. Do not include Indian

funds in this. Income & Expenditure account is not required.

Form FC-3 also includes an audit report by your auditors. This part should be filled and

signed by them when they complete the audit.

Send the completed form along with the audited accounts to the FCRA office by

registered post. Attach an A/D1 card so you can get proof of delivery. Send the form well

in advance so it will be delivered by 31st

July.

If you are unable to file the form by 31st

July for any reason beyond your control, write aletter to FCRA office explaining the problem. Give the date when you think you will be

able to send in the form. While there is no provision for extension of date, usually the

Department does not take action against the NGO if there is a genuine reason for delay.

1Acknowledgement Due


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Do not transfer FCRA funds under any circumstances to

an NGO which does not have FCRA registration or priorpermission. If the FCRA office finds out, you may lose

your own FCRA registration and face other penalties.

Remember that it is illegal to use arrangements like legal project holder, cash transfers,

shadow-lending, network funding etc. if the receiver does not have FCRA registration or

prior permission. Also remember that FCRA investigation is not limited to accountbooks they can go the field and make inquiries. They also have access to information

with local intelligence officials.

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SIDA Accounting Manual

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