Taxation of NGOs

V. B. PRABHU VERLEKAR, elaborates on the tax laws needed to be followed by Non Government Organisations in order to attain public trust and fulfill legal compliances.

It is reported that as per data provided by Central Bureau of Investigation (CBI) to Supreme Court, there are two Non Government Organisations (NGOs) for every policeman in the county. However, out of the 30 lakh NGOs operating, not even 10% have filed statement of accounts with the Registrar of Societies which is a mandatory requirement. The situation in Goa is no different. It is alleged that some of the prominent NGOs like Ford Foundation, Oxfarm India, Society for Peace and Justice, India Eye International Human Rights, violate laws by engaging in anti-social and anti-national activities by misusing exemption provisions of the charitable trusts and Foreign Contribution Regulations Act. Government has amended tax laws on charitable trusts w.e.f. 1st April, 2021 to make it more stringent with provisions for cancellation of registration certificates.

For the purpose of Income Tax, NGOs cover all charitable and religious institutions like temples, churches and organisations in the field of education, art, culture, environment, yoga, etc. They are treated as Charitable Trusts under Income Tax law.

It is estimated that there are over 4,000 NGOs also known as Non Profit Organizations (NPOs) in Goa operating in different fields. There is general misconception that since NGOs are working for the benefit of public without any profit motive, they are immune from taxation and other regulatory requirements.

Barring a few professionally managed NGOs, there is lack of awareness and ignorance about various legal obligations that are required to be complied with under Societies Registration Act, Income Tax Act, Goods & Service Tax Act, Foreign Contribution Regulation Act, etc. This lack of compliance can put NGOs into serious trouble. Fortunately, there is no Charity Commissioner in Goa as in other states and presently they are not also on the radar of Income Tax department.

To seek exemption from Income Tax, certain conditions are mandatorily required to be fulfilled. The NGO should either be constituted as Public Charitable Trust or as a Society under Societies Registration Act or as a company under section 8 of new Companies Act 2013. A one man NGO or NGO of a group without constitution are ineligible for exemption.

Secondly the objects of the NGO should fit into the definition of “Charitable Purpose” as defined in section 2(15) of the Income Tax Act, which covers relief of the poor, education, medical relief, promotion of science, literature, education, sports, yoga environment etc.

NGOs are covered under section 11, 12, 12A, 12AA, 12AB, 13 of the Income Tax Act. Special provisions exist in section 10(23C) for exemption of institutions existing solely for educational and medical purposes substantially financed by Government and where aggregate annual receipts do not exceed Rs 5 crore.

With effect from 1st April 2021, to claim exemption, all NGOs whether new or existing must register with Principal Commissioner of Income Tax u/s 12AB (new) of the Act within specified period in advance and registration is valid for five years which was earlier perpetual. Same is the case with Approval for donations under section 80G which enables donors to claim deduction for tax purposes.

Every financial year, institution should utilise 85% of the income on objects of the organisation. Subject to certain conditions, relaxation is available for utilisation of income in subsequent five financial years. No part of the income or property can be applied directly or indirectly for benefit of founders, trustees, or members of managing committee.

There are also restrictions on investments made u/s 11(5) of the Act. It is important to note that in order to avail these exemptions, the NGO has to file its income tax returns and auditors report within the due date.

Anonymous donations received by any organization (other than religious) in excess of 5% of total donations or Rs 1,00,000, where identity of the party is unknown, are taxable at highest rate of 30% u/s 115BBC. This is not applicable for religious trusts. NGOs are liable for audit if their income exceeds Rs 2.50 Lakhs. Tax returns in ITR 7 are required to be filed online by 31st October of every year and the auditor’s report by 30th September of every year in audit cases; otherwise the due date for the same is 31st July. NGOs are also subject to all other obligations as are applicable to any other tax payer regarding TDS, Advance tax etc.

Most of the goods and services provided by NGOs are liable for GST if gross value of goods and services in a financial year exceeds Rs 20 Lakhs. Every society registered under Societies Registration Act is required to renew its registration certificate every 5 years; otherwise the Society is treated as defunct. An NGO cannot accept any donation either in cash or in kind from any foreign source including foreign citizens of Indian origin (PIO) or registered overseas citizen of India (OCI) unless NGO is registered under Foreign Contribution (Regulation) Act with Ministry of Home Affairs, New Delhi.

It is advisable for office bearers of NGOs to know where exactly they stand in terms of maintenance of proper day to day accounts and carrying out timely legal complicated compliances to get public trust and avoid trouble with authorities.

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