NGOs & Taxability

By, CA. S S Quadri, B. COM (H), FCA, DIRM (ICA), ISA (ICA), MDBA, LLB,

S S Quadri & Co., Chartered Accountants

This write up is to know about NGOs in brief and its taxability in different aspects. NGO Stands for Non-Governmental Organisations. NGO is also known as NPO ie Non-Profit Organisations. In general these are commonly known as “Trust” or “Charitable Institution”. There are basically three types of NGOs: –

• TRUST: – Registered under Indian Trust Act 1882
• SOCIETY: – Registered under The Societies Registration Act 1860
• SECTION-8 COMPANIES: – Registered under The Companies Act 2013.

There are other institutions also like WAQF, DHARMIK NIYAS etc. Charitable and religious trusts are formed with an objective of providing religious or charitable activities. The Objects of the Trust may be: –

1. Religious,
2. Relief of Poor,
3. Education,
4. Medical Relief,
5. Yoga,
6. Preservation of environment (including watersheds, forests and wildlife)
7. Preservation of monuments or Places or Objects of Artistic or Historic interest
8. Advancement of any other objects of general public utility

Various Registration & Approval: – A Trust shall get registered under various Acts: –

1. Under Section 12AB or 10(23C)of Income Tax Act
2. Under Section 80G of Income Tax Act.
3. DARPAN – it is an e-governance application offered by NITI Aayog. DARPAN Registration is now COMPULSORY for all Trusts.
4. FCRA: -Registration under Foreign contribution Regulation Act.
5. CSR Registration: -CSR is Corporate Social Responsibilities. Those Trusts who have taken registration/approval u/s 12AB & 80G may apply. It is necessary to get CSR Fund from Corporates.
6. Registration of institutions under section 35 of Income Tax Act.

Contribution or Donations: – Contribution or donations received are known as Voluntary contributions. Voluntary contributions are basically the donations received by the charitable/religious trust which form part of income of the trust. The variations of donations are:

• Capital Donation: -Donations received with specific direction (in a letter form) that they shall form part of the CORPUS FUND. Such donations are fully exempt subject to certain conditions.

• Revenue/General/Normal Donation: -Donations received without ANY specific instruction. Such donations shall form part of income of trust property and are not taxable subject to certain conditions.

• Anonymous Donations (Sec 115BBC): –
• Anonymous donations are basically the donations where the person receiving the donations doesn’t maintain or have the identity indicating the name and address of the person making such contribution and such other records as may be prescribed.
• It is taxable @ 30% subject to following conditions: –
  1. Where donations are received by trust established WHOLLY for RELIGIOUS purpose – it is fully exempt.
  2. However in case (a) above such religious/charitable trust also runs a school/medical institution/educational institution etc and the donations are received with specific direction that they are for such school/institution then such donations shall be taxable.
  3. Calculation of taxable donations are: –
     1. Step 1: Compute the total amount of anonymous donation received by the charitable/religious institution.
     2. Step 2: -Compute 5% of the total donations (corpus donations + anonymous donations + other donations not forming part of corpus)
     3. Step 3: -Select the higher of the following two: Amount computed in step 2 or 1,00,000
  4. The amount so computed in “step 3” shall be exempt and the remaining amounts of anonymous donations are taxable in the hands of such charitable/religious institution @ flat 30% (115BBC).

The advancement of any other object of general public utility: –

From AY – 2016-17, the provisions are: – that the advancement of any other object of general public utility, shall not be charitable purpose, if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to trade, commerce or business for a cess or fee or any other consideration irrespective of the nature of use or application, or retention, of the income from such activity, unless –

i) Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility, or
ii) The aggregate receipts from such activity during the previous year do not exceed 20% of the total receipts of the TRUST or Institutions undertaking such activities of that previous year.

Section 13: Section 11 not to apply in certain cases: Therefore in the following situation receipts become Taxable: –

a) Entire income from the property held under a trust is for private religious purposes which does not ensure for the benefit of the public at large.

b) Entire income of a charitable trust or institution created or established for the benefit of any particular religious community or caste.

c) Entire income of the following charitable/religious trust:-

i) Where any part of the income of such trust is used for the benefit of any person specified under sec 13(3) or

ii) Where any property of the trust is used for the benefit of any person specified under sec 13(3)

d)    Entire income of a charitable / religious trust whose funds are not invested in modes specified under section 11(5).

FUND/GRANT BY ONE TRUST to ANOTHER TRUST: – Donation by one Trust to another trusts are of following two types: –

1. Corpus Donation: -Any contribution by a charitable or religious trust to any other trust registered under Section 12AA or Section 10(23C) with a specific direction that it shall form part of the corpus of recipient trust is not considered as an application of income for the donor trust. Now from 01/04/2018, corpus fund will not be part of this 85 %.
2. Other Than Corpus Donation or Fund or Grant: –There is no such restriction as in (a) above. There shall be proper instruction for expenditure and Utilisation Certificate has to be obtained.

DONATION RECEIVED FOR THE PURPOSE OF SECTION 80G: –Following are the some important points to follow: –

a) For Section 80G purpose donation limit in cash is Rs. 2,000/- only.

b) Cash donation without the benefit of section 80G may be received not more than Rs. 2,00,000/- from one person. Following information of donor must be kept: –

• Copy of PAN Card
• Complete Address.
• Signature on Donation Receipts, or letter of undertaking or e-mail undertaking.

c) Any donation received by the applicant shall not be used, directly or indirectly, for the purposes of business and a certificate shall be issued to every person making a donation to the effect that the applicant maintains separate books of account in respect of the business and the donation received by it will not be used, directly or indirectly, for the purpose of the business.

d) Certificate of donation shall be issued to the donor in form no 10BE.

e) With effect from financial year 2021-22, the institutions notified under section 35 or approved under Section 80G are required to file “a statement of donation received”, in Form No. 10BD on or before the 31^st May, immediately following the financial year in which the donation is received.

f) Deduction on account of the donation shall be allowed to the donor only on the basis of the statement filed by the donee trust or institution. Hence, if a statement is not filed, the donor will not get a deduction for the donation.

g) In case of delay in filing such statement, a late fee of Rs. 200 per day shall be applicable under newly inserted Section 234G of the Income-tax Act. Further, a penalty under Section 271K, which shall not be less than Rs. 10,000 and which may extend up to Rs. 1 lakh, shall be leviable if the trust or institution fails to file such statement or fails to issue a certificate of donation

Trust having FCRA Registration: –

1. The Trust shall maintain separate Books of Accounts of the Funds received and expended.
2. Assets acquired out of Foreign Fund have to be maintained separately & properly.
3. Foreign contribution cannot be transferred to any other person. The term ‘person’ under the Act includes an individual, an association, or a registered company (Section 7).
4. A person registered under the Act and who receives foreign contribution must use it only for the purpose for which the contribution is received.  Further, administrative expense could account for only 20% of the contribution received (Section 8).
5. For any new registration application, the designated FC Bank account shall be opened with SBI New Delhi branch.
6. One or more FCRA bank A/cs may be opened at any place of choice in any Scheduled Bank.
7. Every FCRA Registered Organization has to be very much careful about – accepting FCRA Contribution, Administrative expenses, Utilization of money, keeping of vouchers and bill, maintaining Proper Books of Accounts and Filing of various FCRA Returns/Forms. FCRA amount can-not be transferred to any other Trust or Institution or any other FCRA Registered Trust. FCRA fund can only be spent for the purpose for which it is received directly by the Trust and not via media. If not, be ready for Penalty, Cancellation of Registration, Blacklisting and even Imprisonment.

CHARITABLE TRUST OR INSTITUTIONS & GST: -Some of the Provisions are: –

a) Donations received by a Trust are exempt from GST, if there is no obligation.

b) Services by an Entity registered under section 12AA now 12AB of Income Tax Act, 1961 by way of charitable activities is exempt from GST.

c) All services provided by such entities are not exempt. Notification No.12/2017-Central Tax (Rate) dated 28th June 2017 exempts services provided by entity registered under Section 12AA of the Income-tax Act, 1961 by way of charitable activities from whole of GST vide entry No. 1 of the notification.

d) Entry No.13 of notification No.-12/2017-Central Tax (Rate) dated 28^th June, 2017, provides exemption to entities registered under Section 12AA of the Income Tax Act.

e) Entry No.-80 of notification No.-12/2017-Central Tax (Rate), provides the following exemption to an entity registered under Section 12AA.

f) Entry No. 10 of Notification No.-9/2017-Integrated Tax (Rate) dated 28.06.2017, if charitable trusts registered under Section 12AA of Income-tax Act receives any services from provider of services located in non-taxable territory, for charitable purposes such services received are not chargeable to GST under the reverse charge mechanism.

g) Service covered in notification No. 9/2017-Integrated Tax (Rate) or 12/2017-Central Tax (Rate), but will be exempt under entry 66 of notification No.12/2017-Central Tax (Rate).

h) GST on running of public libraries by charitable trusts – is specifically excluded by way of entry No. 50 of Notification No. 12/2017- Central Tax Rate.

i) GST on hospital managed by charitable trusts is specifically excluded by way of Entry No. 74 of Notification No. 12/2017-Central Tax Rate.

j) Services provided to charitable trusts are not out of ambit of GST for Supplier of Service.

k) There is no exemption from GST for supply of goods by charitable trusts Supplier of goods.

OTHER COMPLIANCES: -Following are some important provisions a TRUST has to comply: –

a) Expenditure in cash is allowed to the maximum of Rs. 10,000/- for one event or transaction

b) Advance limit in cash is below Rs. 20,000/- in a year to a person.

c) Unsecured Loan or Advance limit in cash is below Rs. 20,000/- in a year from a person.

d) Provision of Tax Deduction at Source (TDS) has to be followed.

e) The Trust/ Society/ Non Profit Company shall maintain accounts regularly and shall get these accounts audited in accordance with the provisions of the section12A(1)(b) of the Income Tax Act, 1961.

f) Separate accounts in respect of each activity as specified in Trust Deed/ Memorandum of Association shall be maintained. A copy of such account shall be submitted to the Assessing Officer.

g) A public notice of the activities carried on/ to be carried on and the target group(s) (intended beneficiaries) shall be duly displayed at the Registered/ Designated Office of the Organisation.

h) Separate accounts in respect of profits and gains of business incidental to attainment of objects shall be maintained in compliance to section 11(4A) of Income Tax Act, 1961.

i) The registered office or the principal place of activity of the applicant should not be transferred outside the jurisdiction of Jurisdictional Commissioner of Income Tax except with the prior approval.

j) As and when there is a move to amend or alter the objects/rules and regulations of the applicant, prior approval of the Commissioner of Income Tax shall be sought along with the draft of the amended deed and no such amendment shall be effected until and unless the approval is accorded.

k) Maintain proper documents of Receipts & payments and all books of accounts. Income Tax department is now Face-Less.

l) All Audit Report must have UDIN generated by CA. Also UDIN must be verified from UDIN-ICAI web site.

m) Explanation 3  to sub-section (1) of section 11 by the Finance Act, 2018, w.e.f. 1-4-2019: –

• For the purposes of determining the amount of application under clause (a) or clause (b), the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.

• Section 40(a)(ia): – the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,— thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139

• Section 40A(3) / (3A) & Rule 6D: –

(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, [or use of electronic clearing system through a bank account, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure.

(3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft,  [or use of electronic clearing system through a bank account], the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds ten thousand rupees.

By, CA. S S Quadri, B. COM (H), FCA, DIRM (ICA), ISA (ICA), MDBA, LLB,

S S Quadri & Co.

Chartered Accountants

M. No. 99735 37886

501, 503 Jagat Trade Centre

Fraser Road, Patna-800001.e-Mail: – office.ssq@gmail.com