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

By Piyush Jain

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

Impact on CSR funding

The de-monetization is going to adversely affect NGOs. How? Cash strapped donors means individual giving, which is primarily offline, will decrease considerably. In turn, this means that reliance on CSR funding will increase for most NGOs, with total CSR spend by corporates already exceeding Rs5,000 crores.

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

NGOs must accelerate online giving transition

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

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

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

Religious institutions to see a temporary boost

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

Increase in anonymous donations for non-religious charitable institutions

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

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

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

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

(B) one lakh rupees, and

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

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

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

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

About the Author:

Piyush Jain is the Co-Founder and CEO of Impact Guru, an online fundraising and crowdfunding platform that helps non-profits, social enterprises, startups, and individuals raise money or donate to causes or projects. Piyush, a Starting Bloc Fellow, has over 7 years of M&A, investment banking, management consulting, Silicon Valley, nonprofit, working with J.P.Morgan, Boston Consulting Group, Ernst & Young, SoFi.com, Instiglio, and Govt. of India. Piyush is an alumnus of Wharton, University of Pennsylvania, and Kennedy School of Government, Harvard University. At Harvard, he assisted Professor Thornburg in teaching a class on Financial Management in Nonprofit Organizations. He has co-authored a paper at Harvard Business School on innovative ways to finance entrepreneurial and social ventures.

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