TAX EXEMPTION FOR NON-PROFIT ACTIVITIES

FILMA VARGHESETRADE MARK DEPARTMENT

INTRODUCTIONIn India, NPOs are commonly known as Non-Governmental Organizations (NGOs).

The following laws or Constitutional Articles of the Republic of India are relevant to the NGOs:

Articles 19(1)(c) and 30 of the Constitution of IndiaIncome Tax Act, 1961Charitable and Religious Trusts Act, 1920Religious Endowments Act, 1863Charitable Endowments Act, 1890Public Trusts Acts of various statesSocieties Registration Act, 1860 Section 25 of the Indian Companies Act, 1956Foreign Contribution (Regulation) Act, 1976

STRUCTURE OF A NON PROFIT ORGANIZATION IN INDIA

NON PROFIT ORGANISATIONSPUBLIC TRUSTS:

Not-for-profit entity in India Trust established for charitable purposesBenefit of public at large or a class of beneficiariesEntitled to special treatment under the law of taxation

SOCIETIES:

Registered for charitable purposesPromotion of Literary, Scientific & Charitable purposes

SECTION 25 COMPANIES:

Promoting commerce, art, science, religion, charity or any other useful object

Apply its profits or other income for promoting its objects

COMPARISONS AMONG TRUST, SOCIETY & SECTION 25 COMPANY

TAX-EXEMPT STATUS FOR NGOsCONDITIONS:

Lawful purposeReligious or charitable purposesRegistered with the CIT under Section 12 A85% of its income in any financial year (April 1st to March 31st)Surplus income - specific projectsFunds - deposited as specified in section 11(5) of the Income Tax ActIncome or property - not be used or applied directly or indirectly File its annual income returnIncome must be applied or accumulated in IndiaTrust income may be applied outside India to promote international causes

PROVISIONS IN THE INCOME TAX ACT, 1961

The Income Tax Act gives all categories equal treatment, in terms of exempting their income and granting 80G certificates, whereby donors to non-profit organizations may claim a rebate against donations made.

PROVISIONS IN THE INCOME TAX ACT, 1961 IMPACTING TRUSTS

SECTION 2(15)Defines a charitable objectiveSECTION 10(23C)Provides exemption to educational, medical, charitable and public religious institutions, existing not for the purposes of profit.SECTION 11 - 13Provides for tax treatment in case of charitable trustsSECTION 80 GDeals with deduction in respect of donations to certain funds, charitable institutions etc.SECTION 161 - 164Deals with liability in special cases i.e. of representative assessee, which includes taxation of private discretionary trusts.

AUTHORITY TO WHOM RETURNS HAVE TO BE FILED

Not-for-profit organizations are required to file annual tax returns andaudited account statements with various agencies.

AT THE STATE LEVEL Charity Commissioner (for trusts) The Registrar of Societies (referred to in some states by different

titles, including the Registrar of Joint Stock Companies), and The Registrar of Companies (for section 25 companies).

AT THE NATIONAL OR FEDERAL LEVEL The income tax department and Ministry of Home Affairs. (only for

not-for-profit organizations receiving foreign contributions).

INCOME OF TRUST EXEMPTED UNDER SECTION 11

SECTION NATURE OF INCOME EXTENT TO WHICH EXEMPTION ALLOWED11 (1)(a) Income derived from

property held under trust wholly for charitable or religious purposes

To the extent income is applied to such charitable or religious purposes in India

Whereas such income is accumulated or set apart for such application to the extent of 15% of the income from such property

11(1)(c) Income derived from property held under trust for a charitable purpose, which tends to promote international welfare in which India is interested

To the extent income is applied to such charitable or religious purposes outside India

Exemption is available only if the Board has directed such exemption

11(1)(d) Income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution

100% exemption

NO EXEMPTION UNDER SECTION 11

SECTION NATURE AND EXTEND OF INCOME NOT EXEMPT UNDER SECTION 11

13 (1) (a) Income of private religious trust not used for public benefit.

13 (1) (b) Income of charitable trust credited for benefit for particular religious community.

13 (1) (c) Income/Property of charitable or religious trust applied for direct or indirect benefit of person referred in 13 (3).

13 (1) (d) Any income is taxable ifIf any funds are invested other than in 11 (5) Any funds invested earlier than 1983 remain invested thereafterShares and company are held after 1983

11 (4A) Income from business which is not incidental to the attainment of the objectives of the trust or in respect of which separate books of accounts have not been maintained.

12 (2) Value of medical/educational services provided to specified services by trust running hospital and educational institution shall be income of trust and will be chargeable in the year in which services are provided and chargeable to tax, despite section 11(1).

ANONYMOUS DONATIONS

Anonymous donations – Taxed at the rate of 30% - U/s 115 BBC

Any trust or institution referred to in section 11;

Any university or other educational institution referred to in section 10(23C)(iii ad) and (vi) i.e. its annual receipts is less than or more than Rs. 1 core

Any hospital or other institution referred to in section 10(23C)(iii a e) and (iv a) i.e. its annual receipts is less than or more than Rs. 1 core

Any fund or institution referred to in section 10(23C)(iv); (established for charitable purposes

Any trust or institution referred to in section 10 (23C) (v); (established for public religious purposes or public religious & charitable purposes)

LEGAL COMPLIANCESBasis of Difference Section 10(23C) Section 12 AA Section 80 G

When is Application to be made?

Required to be made by educational institution where:Gross annual receipt exceeds Rs1 crore It is not substantially financed by the Government.

Required to be made by all NGOS in order to claim exemption u/s 11

Required to be made by all NGOS which wishes to take the benefit under the section

Form for the above application

Form 56 D Form 10 A Form 10 G

Rules applicable 2CA 17 A 11 AA

Time limit for filing application

Before the end of previous year

Before the end of previous year

NA

Time period for approval Within 12 months from the end of the month in which application is received

With in 6 months from the date of application

With in 6 months from the date of application

Time period for exemption

Life time Lifetime Life time

Withdrawal of approval By CCIT By CCIT BY CCIT

LEGAL COMPLIANCESBasis of Difference Section 10(23C) Section 12 AA Section 80 G

Exemption w.e.f. The year in which it is granted and thereafter

The year in which it is granted and thereafter

As specified in order

Appeal on rejection Not provided Lies to appellate tribunal

Lies to appellate tribunal

Form of Audit report Form 10BB (Rule 16CC)

Form 10B (Rule 17B)

Form of application for accumulation

Not prescribed Form 10

Last date of filing of form for accumulation

Before the due date of filing return u/s 139

Before the due date of filing return u/s 139

Power to condone belated application

No No

Form for filing of return

ITR 7 ITR 7

TAXABILITY OF PUBLIC TRUST AT A GLANCE

CUSTOMS DUTY

NPO’s involved in relief works, distribution of relief supplies to the needy – 100% exempted on the import of food, medicine and clothing.

Exemption for scientific/technical equipment and components intended for Research Institutes.

CASE STUDIESCIT Vs Oxford University Press (Bom) 221 ITR 77

As per wider and extensive meaning, the word ‘education’ would connote every acquisition of further knowledge. However section 10 (22) of the I. T. Act, which grants exemption to the income of a ‘university or other educational institution, existing solely for educational purposes not for profit’ the word ‘education’ would connote the process of training and developing the knowledge, skill, mind and character.

Institute of Mining and Mines surveying Vs. CIT, (1994) 208 ITR 608 (Pat)

The coaching of students in an institution is not imparting education, which can be said to be a process of training and developing of students and character of students by normal schooling. A coaching institution cannot be said to be an institution where normal schooling is done. Coaching institute was held not to be entitled to exemption from Income Tax U/s 10 (22) of the Act.

CASE STUDIESCIT Vs. Bar Council of Maharashtra (1981) 130 ITR (SC)

The State Bar Council is a body constituted for general public utility since the advancement of any object beneficial to even a section of public as distinguished from an individuals would be an object of public utility and consequently a charitable purpose.

CIT Vs. Jodhpur Chartered Accountants Society (2002) 258 ITR 548 (Raj.)

Society of Chartered Accountants being engaged in activities of general public utility is a charitable trust.

CIT Vs. St. George Forana Church (1988) 170 ITR 62 (Ker.)

Rent derived from additions to trusts buildings is exempt from tax when rent was used for religious purposes.

CASE STUDIES

CIT Vs. Ganesh Ram Laxminarayan Geol (1984) 147 ITR 468 (MP)

It has been held that letting of Dharmashala’s, auditoriums, running of libraries, etc could not be considered as business activities and any income generated from such be considered as income from properties held under trust. It was held that letting out of dharmashala’s was an activity towards attainment of the objects of the organization and profit making was not the profit motive and therefore it could not be considered as business activity.

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