Foreign Contribution (Regulation) Act, 2010 and Rules, By CA R.Durai Rengaswamy Partner Sambandam Associates Chennai

Transcription

1 Foreign Contribution (Regulation) Act, 2010 and Rules, 2011 By CA R.Durai Rengaswamy Partner Sambandam Associates Chennai 1

2 1. Formalities and Procedures 1.1. Introduction The Foreign Contribution( Regulation) Act 2010 has been enacted to regulate the acceptance and the utilization of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit acceptance and utilization of Foreign contribution or foreign hospitality for any activities detrimental to national interest and for matters connected therewith or incidental thereto. The law came into effect from 1 st May The act shall be read with Foreign Contribution (Regulation) Rules 2011 and Foreign Contribution (Regulation) amendment Rules Applicability of the law Under sub section 2 of section 1, this act is made applicable to: Whole of India Citizens of India outside India; and Associate Branches or subsidiaries, outside India, of companies or bodies corporate, registered or incorporated in India 1.3. Definition of Foreign Contribution Under Clause h of sub section 1 of Section 2, Foreign Contribution means, donation, delivery or transfer made by any foreign source of any article (not being an article given as a personal gift whose market value does not exceed a specified sum which is at present Rs 25,000) of any currency whether Indian or Foreign or of any security as defined in clause (h) of section 2 of the securities Contracts(Regulation) Act, 1956 and includes any foreign security as defined in clause (o) of Section 2 of the Foreign Exchange Management Act, The explanations 1 and 2 to the Foreign contribution are important as it discusses about deemed foreign contribution. Any Foreign contribution received from a foreign source directly or through one or more persons shall be deemed to be Foreign contribution. Interest earned on Foreign contribution funds or any other income derived from Foreign contribution is Foreign contribution. Person includes individual, Hindu undivided Family (HUF) under section 2(1)(m) of the act. It is an inclusive definition which covers association and Section 25 company 2

3 (Section 8 company) and it is not exhaustive. Any advance of Foreign contribution funds from one person to another by way of advance will be covered by definition under transfer. Explanation 3 clearly states that commercial transactions are not covered under Foreign contribution and is excluded. Amount received towards fees, Cost in lieu of goods or services rendered by such person in the ordinary course of his business, trade or commerce whether within India or outside India and Contribution received from an agent of a foreign source towards such fee or cost are not considered as Foreign contribution Definition of Foreign Source Clause j of sub section 1 of Section 2 defines foreign source which is an inclusive definition. It is advisable to refer to the above section for the list of items covered by the above definition. This definition excludes United Nations or any of its specialized agencies, World Bank, IMF or such other agency notified by the Central Government Certain persons prohibited to receive foreign contributions (Section 3) Section 3 of the Act prohibits certain persons from receiving Foreign Contribution and they are i. candidates for election, ii. correspondents, columnists, cartoonists, editors, owners, printers or publishers of a newspaper registered under the Press and Registration of Books Act, iii. Judges iv. Government servants or employees of a Government Company or Corporation owned or controlled by the Government. v. Members of any legislature vi. Political parties or their office-bearers. vii. organisation of a political nature as may be specified under sub-section (1)of section 5 by the Central Government; viii. association or company engaged in the production or broadcast of audio news or audio visual news or current affairs programmes through any electronic mode, or any other electronic form as defined in clause (r) of sub-section (i) of Section 2 of the Information Technology Act, 2000 or any other mode of mass communication; ix. correspondent or columnist, cartoonist, editor, owner of the association or company referred to in point (VIII). x. Individuals or associations who have been prohibited from receiving foreign contribution. 3

4 1.6. Persons to whom section 3 shall not apply (section 4) Prohibition not applicable for salary, wages or payments in the ordinary course of business Section 4(a) Contributions from relative Section 4(e) Scholarship, stipend or any payments of like nature- Section 4(g) In terms of Rule 6 of FCRR, 2011, any person receiving foreign contribution in excess of one lakh rupees or equivalent thereto in a financial year from any of his relatives shall inform the Central Government in Form FC-1 within thirty days from the date of receipt of such contribution Restriction on acceptance of Foreign Hospitality (Section 6) Foreign hospitality can be accepted by Member of legislature Office bearer of a political party Judge Government servant Employee of any corporations owned / controlled by government only with the prior permission of the Central Government by applying in FC-2. Exceptions Emergency medical aid To be intimated within 60 days of the receipt of hospitality in FC Transfer of Funds subject to restrictions (Section 7) An n organization registered or obtained prior permission under FCRA can transfer foreign contribution funds to another organization which has registration or obtained prior permission under the act provided the recipient organization has not been proceeded against under the act. In case a registered organization wants to transfer the funds to an unregistered organization then it can be carried out only with the prior approval of the Central Government and the application shall be made in FC-5 and the amount shall not exceed 10% of the total value of the Foreign contribution received 4

5 1.9. Restrictions in utilising Foreign Contribution (Section 8) FC funds should not be used for speculative business / activity. Rule 4 stipulates the following Investments having an element of appreciation / depreciation of original investments linked to market forces investments in mutual funds or shares Investments in chits or lands or similar assets not directly linked to declared aims or objects of the association Debt based secured investments allowed (section 11(5) of the IT act to be complied). Investments register to be maintained and submitted for audit. Under Section 8(2) the administrative expenses shall not exceed 50% of the Foreign contribution received during the financial year. If it is likely to exceed 50% then prior approval of the central Government shall be obtained Power of Central Government to prohibit receipt of Foreign Contributions (Section 9) Central Government can prohibit organisations other than those specified in section 3 from accepting foreign contribution. Prior permission may be required for persons not specified in section 6 for accepting foreign hospitality Central Government may require any class of persons not specified in section 11 to furnish intimation Prior permission may be required from Central Government by organisations covered under section Registration / Prior Permission under the Act (Section 11) An association can receive Foreign Contribution for carrying out definite cultural, economic, educational, religious or social programmes. But in order to receive foreign contribution the association should have permanent registration or prior permission. The registration granted is valid for 5 years and shall be subject to renewal Registration under section 12 of the Act A Non Profit organization has to register itself under section 12 of the Act in order to receive Foreign Contribution. The application has to be made in Form FC-3 online and the concerned authorities are the FC(R) A Division of the Ministry of Home Affairs who normally scrutinizes the application and grants or refuses registration. The necessary fees 5

6 shall be paid online. Before doing so, a report is received from a government agency generally the IB although it is not in the law or rules, it is expected that the NGO should have at least been in existence for a period of 3 years and carried out activities. The time to grant registration is ninety days and in case it does not grant the same the reasons thereof shall be communicated to the organization For this purpose, the association should have spent at least Rs.10,00,000/- over the last three years on its aims and objects, excluding administrative expenditure. Statements of Income & Expenditure, duly audited by Chartered Accountant, for last three years are to be submitted to substantiate that it meets the financial parameter Non profit bodies to receive with Prior Permission If an association does not have registration or in the formative stage, then it can apply for a prior permission. Sometimes, when the organization applied for a permanent registration, the FC(R) A division refuses but suggest the organization to apply for Prior Permission. The time to grant prior permission is ninety days and in case it is not granted the reasons thereof shall be communicated to the organization The application has to be made in Form FC-3 online and the concerned authorities are the FC(R) A Division. submit a specific commitment letter from the donor indicating the amount of foreign contribution and the purpose for which it is proposed to be given; and For Indian recipient organizations and foreign donor organizations having common members, FCRA Prior Permission shall be granted to the Indian recipient organizations subject to its satisfying the following: i) The Chief Functionary of the recipient Indian organization should not be a part of the donor organization. ii) At least 51% of the office-bearers/ members of the Governing body of the Indian recipient organization should not be members/employees of the foreign donor organization. iii) In case of foreign donor organization being a single person/individual that person should not be the Chief Functionary of the recipient Indian organization. iv) In case of a single foreign donor, at least 51% office bearers/members of the governing body of the recipient organization should not be the family members and close relatives of the donor 6

7 1.14. Renewal of Registration (Section 16) As per Section 16 of FCRA, 2010 read with rule 12 of the FC(R) Rules 2011 every person who has been granted a certificate of registration under Section 12 thereof shall have such certificate renewed within six months before the expiry of the period of the certificate. The organisation shall apply for renewal online in FC-3 before the expiry period. A person implementing an ongoing multiyear project shall apply for renewal twelve months before the expiry of the renewal. The certificate is normally renewed within 90 days of the application of the renewal. In case it is not renewed the Central Government will communicate the reasons thereof to the organisation Maintenance of designated bank account Under Section 17(1) of FC(R)A, an organization is allowed to receive Foreign Contribution only through a designated bank account and is allowed to open one or more additional bank accounts for utilization in one or more banks and no funds other than Foreign contribution shall be received or deposited by transferring from the designated bank account. Any change in designated bank account or opening of additional utilization accounts shall be intimated in FC-6 within fifteen days of change. Funds shall not be transferred from one utilization bank account to another utilsation bank account. Foreign contribution funds shall be received only through designated bank account. Mixing of Local funds is a violation of the act and hence no local funds shall be deposited in the Foreign Contribution designated bank account and utilization bank account linked to the designated bank account Maintenance of books of accounts An organization receiving foreign contribution is required to maintain a separate set of books of accounts as required under section 19 read with rule 11 of the Foreign Contribution (Regulation) Rules In other words, the accounts of Foreign Contribution should not be mixed with the general or local accounts. If an organization is receiving funds for more than one project or from multiple sources, then on the principles of fund accounting, a separate set of books has to be maintained for each project / fund / source. All the funds shall be received through the designated bank account. 7

8 1.17. In Kind Contribution The organization has to intimate on line in Form No. FC-1 for In Kind Contributions. 2. Compliance aspects 2.1. By the Organisation Audit of accounts under section Under Rule 17(5) of the Foreign Contribution (Regulation) Rules 2011, a certificate has to be issued by a Chartered Accountant along with a Balance Sheet and Receipts and Payments Accounts and the financial year for the same is April to March Filing of Annual Return in Form No. FC 4 Under Rule 17(1), every organization receiving Foreign Contribution has to furnish its annual return in Form FC-4 to the FC(R)A division by 31 st December. Submission of a NIL return, even if there is no receipt/utilization of foreign contribution during the year, is mandatory. However, in such case, certificate from Chartered Accountant, audited statement of accounts is not required to be uploaded. The following documents shall be uploaded on line. 1. Certifcate issued by the Chartered Accountant 2. Foreign Contribution (FC) Audited financial statements only - FC Receipts and Payments account, FC Income and Expenditure account and FC Balance sheet, 3. Bank statements of the whole financial year both for the designated bank account and utilization accounts. 4. Signature of the chief functionary and seal of the organization Intimation of changes (Rule 17A) Intimation online in FC-6 within 15 days would suffice for the following changes under the amendment rules Change of Association name For change in designated bank account For opening utilisation accounts For more than 50% change in board members For change in aims and objectives For change in address within the State 8

9 Mandatory uploading of quarterly remittance information in the website (Rule 13(b)) Foreign contribution received in a quarter of the financial year should be placed on the official website or on the website as specified by the Central Govt. within 15 days following the last day of the quarter in which it has been received. For instance, the information for the quarter ending 31st March 2017 has to be uploaded on or before 15th April The above information should contain details of donors, amount received and date of receipt Mandatory uploading of Annual information without financial limit (Rule 13(a)) Annual audited statements of accounts on receipts and utilisation of foreign contribution, including Income and Expenditure Account, Receipts and Payments Account and Balance Sheet for every financial year beginning on the 1st day of April within 9 months of the closure of the financial year should be placed on its official website or on the website as specified by the Central Govt Reporting of financial transactions by Banks Banks are required to report to the Central Government all transaction in respect of receipt or utilisation of foreign contribution by any person whether or not such person is registered or granted prior permission under the Act. The time limit for such reporting is forty-eight hours. In this case, not only foreign contributions by Associations registered or having obtained prior permission but also by any person even if such person has not registered or obtained prior permission will be reported by banks to the Central Government. 3. Implications of non-compliance The Foreign Contribution Regulation Act is meant for dealing with security issues of the country. Hence any violation of provisions of the above act is viewed by the Government as serious Suspension of certificate (Section 13 read with Rule 14) The central Government for reasons recorded in writing pending consideration of cancellation of certificate shall suspend the certificate for a period not exceeding 180 days. 9

10 Suspension in writing for which no opportunity of being heard is provided Grounds for cancellation can be used for suspension of certificate. The suspension period can be a maximum period of one hundred and eighty days. FC funds cannot be received during the suspension period. Funds can be received only with the Central Government approval Up to 25% of the unutilized amount shall be spent with the prior approval of the Central Government. 75% can be spent only after the revocation of the suspension 3.2. Cancellation of certificate (Section 14 read with Rule 15) The Central Government can cancel the certificate for the following reasons. Application for registration / renewal is incorrect or false. The holder of the certificate has violated any terms and conditions of the certificate. Necessary to cancel in public interest. Violation of the act, rules or order made under the act. If the holder of the certificate fails to carry out any reasonable activity for 2 consecutive years or has become defunct No order of cancellation of certificate shall be made unless the other person is being given an opportunity of being heard. Eligibility for registration or prior permission after cancellation After a period of 3 years only the organization is eligible for obtaining registration or prior permission. The unutilized amount is vested with the banking authority till the Central Government gives further direction. If an Organization whose certificate has been cancelled transfers the funds to any other person, the funds of the transferee will be vested with the banking authority 3.3. Receiving foreign contribution without prior permission or registration If an organization accepts Foreign Contribution without registration or prior permission then the currency or article received by the organization can be seized by the Central Government under section 36 of the act. In addition, the Central Government can initiate prosecution proceedings under section 35 of the act Delayed or false returns to the Ministry of Home Affairs Audit by Central Government under section 20 of the Act If an organization fails to furnish any intimation within the stipulated time or the intimation so furnished is not in accordance with law or there is reasonable cause to believe 10

11 contravention of the law, then under section 20 Central Government may authorize a gazetted officer to audit the books of accounts Penalty for Non Furnishing of Annual Returns If the annual return is not furnished within the stipulated time period then in terms of Gazette Notification S.O (E) dated , the quantum of penalty is as under: Non-furnishing of return up to ninety days after 31st December every year: - Penalty of two per cent of the amount received during the Financial year or rupees ten thousand, whichever is higher. Non-furnishing of return after ninety days up to one hundred and eighty days after 31st December every year: Penalty of three per cent of the amount received during the financial year or rupees twenty thousand, whichever is higher. Non-furnishing of return after one hundred and eighty days after 31st December every year: Penalty of five per cent of the amount received during the financial year or rupees fifty thousand, whichever is higher, with rupees five hundred per day of delay after one hundred and eighty days Possession of article in contravention of the Act (Section 25) Under Section 25, if a person is found possessing any article exceeding Rs.25,000/- in value or in any currency in contravention of the Act, then the Central Government can seize such an article or currency Making of false statement, declaration or delivering false accounts (Section 33) Any person, subject to this Act, who knowingly, gives false intimation under sub-section (c) of section 9 or section 18; or seeks prior permission or registration by means of fraud, false representation or concealment of material fact, shall, on conviction by a court, be liable to imprisonment for a term which may extend to three years or with fine or with both. Compounding of Offences (section 41) The offences that can be compounded are as under: Acceptance of foreign contribution without registration/prior permission Non-furnishing of annual return within the stipulated time period. 11

12 An application has to be made with appropriate fees shall be made to the Secretary, MHA for compounding of the above offences. In case the penalty levied is not paid then prosecution of the person will be initiated. 4. Audit and Auditors responsibilities Issue of Audit certificate in Form No. FC-4 -under Rule 17 (5) of the Foreign Contribution Rules 2011 The Foreign Contribution Regulation Act is a national security regulation. Therefore non profit organizations are expected to exercise proper care in complying with the provisions of the Act. In view of the above, the Chartered Accountants who audited the accounts of the above organizations are also expected to exercise great caution in dealing with the audit of Foreign Contribution Accounts. Separate set of books are required to be maintained for Foreign contribution and Local Contribution The most important responsibility for the Auditor is to certify the Audit Report in Form No. FC-4. While doing so, the Auditor has to ensure the following: a. That the organization has received funds after obtaining prior permission or registration and for the purpose mentioned in the registration. b. In case there are renewals the same shall be examined. c. That the organization has operated its designated bank account and using additional bank accounts which has been intimated to the MHA. d. It shall be examined whether only Foreign Contribution funds alone are deposited and no local fund is mixed up. e. The interest earned on Foreign Contribution is also incorporated in the accounts and in the report f. Details regarding donor wise break-ups and purpose for which it is received are properly provided and duly verified. g. Ensure that the administrative expenses are less than 50% of the receipts. h. There is circular dated 21 st October 2014 with an advisory to incur expenditure above Rs 20,000 by A/c Payee cheques or drafts. i. Several Foreign contributions are from specific donors, there are special conditions attached by the donors, the auditor is expected to verify and report whether such conditions are fulfilled. 12