Introduction
The Global Innovation Index (GII) serves as the most comprehensive gauge of a country’s ability to innovate and its output activities. It assesses a range of factors such as human capital, investments in research, policy infrastructure, and the creation of products and services. In the GII 2024, India’s social entrepreneurship is one of the defining attributes of its developmental story, which explains why the country’s absolute increase in rankings is noteworthy. Social entrepreneurship refers to the use of business approaches to tackle social problems in a sustainable, self-revenue-generating manner. This article analyses the current India’s approach to social entrepreneurship from a legal perspective, as well as the existing regulatory framework, and the judicial activism that has impacted its development.
Understanding Social Entrepreneurship and Its Role in India
Social entrepreneurship is the practice of developing, funding, and implementing ventures that aim to address social, environmental, or economic issues while also making a profit. Unlike ordinary businesses where the main goal is profit, social enterprises strive to make a difference and solve very important problems like poverty, education, health care and climate change.
Considering the diverse population, economic gap, and environmental issues, India is an apt case study for social enterprises. Such activities range from delivering reliable health services to rural communities to generating jobs for disadvantaged people. Social enterprises make up for the inadequacies of governmental interventions and market systems. An enabling legal framework is very important because it allows these enterprises to grow while making sure they meet national and international requirements.
India’s Regulatory Framework on Social Entrepreneurship
Available Legal Structures for Social Enterprises
At present, India does not have a social enterprise law that deals exclusively with social enterprises. These entities, however, operate as any other organization under a variety of legal forms each having its own pros and cons. A majority of social enterprises are registered as non-profit organizations under the Societies Registration Act of 1860 or the Indian Trusts Act of 1882. Such laws are appropriate, if not perfect for purposes, for non-profit organizations as they provide tax exemption and make it easier to raise money through donations.
Similarly, social enterprises frequently register as Section 8 companies under the Companies Act, 2013. These companies have the profitability of non-profit institutions, along with the societal focus of for-profit companies. While they are allowed to earn revenue, they are compelled to reinvest the profits in furtherance of their goals. This approach is more commonly used by social entrepreneurs who value accountability and transparency.
Social entrepreneurs also make use of profit-making business entities such as private limited companies and limited liability partnerships (LLPs). Although these frameworks help to capture equity investment, a problem they face is the overemphasis on profit at the expense of social objectives. Despite these limitations, the flexibility offered by such structures is invaluable for enterprises seeking to scale and innovate.
Tax Obligations and Benefits for Social Enterprises
India’s taxation system has several provisions aimed at promoting the development of social enterprises. Non-profit organizations and Section 8 companies qualify for tax exemptions under the Income Tax Act, of 1961. Sections 11 and 12A grant exemption from income tax for the income of a trust for charitable purposes, and it is extended to Section 80G, which allows deduction for qualifying contributions made to non-profit organizations.
As with other social services such as healthcare and education, social enterprises are assisted under the GST framework. Yet, taxation footsies is a puzzle even for many small social enterprises, especially those that are financially and administratively constrained.
Financing And Fundraising Regulations
For social entrepreneurs in India, capital is perhaps the biggest challenge. Non-profits are predominantly reliant on grants and donations, usually covered under the Foreign Contribution Regulation Act (FCRA), 2010. Although the FCRA enables receipt of foreign aid, its more recent changes have made compliance complex, particularly for smaller entities.
To meet some of these difficulties, the government has designed novel instruments such as the Social Stock Exchange (SSE) under the regulation of the Securities and Exchange Board of India (SEBI). The SSE allows social enterprises to issue social impact bonds or equity to raise funds. The platform assists in raising funds by requiring specific and detailed impact reports which socially responsible investors look for. The SSE is still in its infancy; however, it represents a step towards meeting the funding gap for social enterprises.
Judicial Interventions Shaping Social Entrepreneurship
Judicial bodies have always been at the forefront concerning the social enterprises’ laws, ensuring they are protected as well as held accountable. Multiple landmark judgments have dealt with issues as diverse as tax exemptions and regulatory compliance, which have shaped the legal framework of the sector.
Taxation and Charitable Status
Trustees of the Tribune Press v. CIT (1939) was the first case where public benefit was considered as a complete basis for determining charitable status. In the same vein, this case also remains at the heart of the many tax exemption provisions for social enterprises. In a similar vein, the Supreme Court in CIT v. Surat Art Silk Cloth Manufacturers Association (1980) ruled that welfare activities are charitable, even if some profits are made, so long as these profits are used for the organization.
Compliance with Foreign Funding Regulations
The Supreme Court in INSAF v. Union of India (2017) reaffirmed the tough requirements of FCRA compliance for foreign funding and in the process reinforced the need for accountability. This judgment marked a middle ground between the regulatory requirements and the flexibility permitted to non-profits while trying to ensure innovation without accountability.
Focusing on Social Impact While Innovating
During the Novartis AG v. Union of India (2013) case, the Supreme Court of India refused to give a patent for a claims medicine because they needed to focus on public health rather than finances. This meets the objective of strengthening India’s affordable healthcare initiatives and motivates social innovators in the healthcare sector to devise novel and efficient products and services.
Other Initiatives Aimed at Fostering Social Entrepreneurship
The Indian government has tried to implement some programs aimed towards social entrepreneurship. The Atal Innovation Mission (AIM) focuses on innovative and entrepreneurial skills with the help of incubators and funds. Skill India, like the Pradhan Mantri Kaushal Vikas Yojana (PMKVY), seeks to build enterprise-level social project skilled manpower so that social enterprises can easily expand their services.
Another flagship initiative, called Startup India, helps emerging businesses with tax exemptions, credit for new enterprises, and easy follow-up regulations for new enterprises. By including social enterprises under these programs, then the government makes it possible for the enterprises to use and increase their coverage and for innovation to take place at the community level.
Social Stock Exchange: A Revolution
The Social Stock Exchange is a copybook initiative intended to solve the funding problems of social enterprises. The SSE, under the purview of SEBI, enables these enterprises to seek funding from impact investors. The issuing of social impact bonds or listing equity gives enterprises the capital necessary to scale their operations.
One of the more important things about SSE is that it places great value on impact evaluation. Social enterprises must report to the SSE clients on social results achieved, which guarantees some accountability. This shift to focus on impact has created overwhelming interest from investors trying to integrate altruism into their investing.
Obstructions and the Call for Modification
The Indian ecosystem of social entrepreneurship has developed significantly during the years, and yet, certain issues need to be addressed. It is still trying to build a dedicated legal framework, which can often worsen the situation by causing ambiguity about compliance and reporting processes. Say for instance that social enterprises attempt to self-identify, social enterprise social enterprises try to self-identify and are confined by legal structures that have their boundaries.
Moreover, access to capital continues to remain a prominent challenge. While the SSE has the potential to change the funding landscape fundamentally, compliance costs and lack of awareness from the investor side make it ineffective. In addition, there are no standardized measurements for social impact, thus making it impossible to assess and compare the social effectiveness of different enterprises.
Additionally, India could develop more social enterprises by adopting a legal framework similar to the UK’s Community Interest Companies (CICs.) Such initiatives would grant the social enterprises the structure they desperately need, bounded by for-profit flexibility and the non-profit’s responsibility. Changing the regulatory framework and providing support for impact investors would also enhance the growth of the sector.
India’s Performance on the Global Innovation Index 2024
India continues to invest in the nation’s development which is reflected in its rank on the Global Innovation Index 2024. India continues to rise in the GII owing to its relatively strong performance in knowledge diffusion, export of ICT services, and the level of sophistication of the market. Social entrepreneurship has been instrumental, in illustrating the relationship between innovation and societal change.
India has performed well in the recent GII due to harnessing digital transformation and grassroots innovations. Legal reforms which favour social enterprises have greatly advanced these goals showing policy and Developmental goals are not fundamentally opposing.
Conclusion: Strengthening Social Entrepreneurship for Sustainable Growth
There is a clear correlation between the rise of social entrepreneurship in India and the solving of social problems as India’s rank on GII increases. There have been active legal reforms, policy initiatives, and judicial activism that have enabled this sector. For continued growth in other sectors, the regulation must be adjusted to continue to meet changing demands. If India wants to reduce social problems along with increasing innovation, then fostering social enterprises will achieve both aims. The future requires holistic participation by policymakers, judges, as well as active members of the business community to create a favourable environment for social enterprises to thrive and have a positive impact.
