Non-government organisations are reeling from the shock of notices from the income-tax department.
Some of the notices are not only for taxes but for cancellation of the NGOs' registration as non-profit entities under the Income Tax Act.
Some NGOs have reported that their accounts have also been frozen.
"The government seems to be trying to destroy the best things India has. It is ridiculous," says Maja Daruwala of the Commonwealth Human Rights Initiative, after hearing the development.
". . . They (the I-T department) are on a witch hunt, I feel," said Mathew Cherian, who heads Helpage India, one of the NGOs that have received notices.
It all started along the time the Anna Hazare movement was at its peak, says Cherian, who on Monday participated in a meeting of about 15 NGOs trying to chalk out an action plan.
NGOs that receive funds from abroad and are registered under the Foreign Contribution Regulation Act have been receiving these notices since August after a 2008 amendment to Section 2(15) of the Income Tax Act.
Helpage India, which helps set up and run old-age homes, has been given a notice of scrutiny.
Development Alternatives, which works on sustainable development models, has been slapped a tax notice of Rs 5 crore (Rs 50 million).
PRIYA, which works with huge networks of grassroots organisations for rural development, for instance, has been asked to pay Rs 42 lakhs (Rs 4.2 million).
Give India, which raises funds for charities, and CUTS, which raises awareness on consumer issues, have also received notices.
About 125,000 organisations classified as "development NGOs", which receive foreign funding, have been the main target of these notices, says Rajesh Tandon, founder of PRIYA.
Helpage's Cherian said the tax department had merely said the notice was sent on the basis of last year's returns.
"We have not violated any law. It is only harassment."
The 2008 amendment narrowed the definition of charitable activity exempted from tax. What was included was mostly service-oriented work, leaving out all other fields, including advocacy, human rights, which defines the work of most NGOs, including government-funded ones.
Even NGOs that receive grants for HIV/AIDS advocacy from the health ministry would not be eligible for tax exemption under this criterion.
Only education, medical care, and poverty alleviation have been mentioned as activities exempt from tax, explains Tandon.
"So not only are others forced pay taxes, their very identity as non-profit organisations is also being questioned, as the notices are for cancellation of registration as non-profit bodies under the Income-Tax Act," says Tandon, a veteran of 50 years in the sector.
"Who will fund us if those funds are going to be used to pay taxes rather than doing work. At my age, I am thinking of winding up PRIYA and doing something else.
"That is the extent to which we are impacted. We are spending our energy trying to prove we fall under one of the activities that the Income-Tax Act considers as charitable.
"If we are training women sarpanches or are running a literacy centre, we are not eligible for an exemption," he says.
Deep Joshi, member of the National Advisory Council and founder of Pradan, said he was not aware of the notices received by the NGOs.
"As far as I know, the law taxes only income from any kind of business activity. Earlier, if the income was put into charitable activity, it was exempt," he said.
President of the Udaipur-based Seva Mandir, Ajay Singh Mehta, who was part of the NGO conclave that met to decide on a plan of action, said the narrowing of the definition of charitable purposes had led to exclusion of many activities that NGOs did.
Mostly service-oriented activities were included while others were left open to interpretation by officials.
The NGOs are also bracing themselves with an action plan to deal with what they see as anomalies in the Direct Taxes Code, which will be in force from next year.
It requires that NGOs spend their entire funds for a year within the given year and not carry anything forward to the next year, or pay 15 per cent as income tax.
NGOs consider this interference in the way they function and an ignorance of the way civil society bodies function.
"We get grants usually after October or November and we get it for two or three years, say, for building houses, or carrying out some work.
"How can we finish it in a year," asks Arun Talwar of CUTS.