Formation and Taxation of NGOs in India

  • Blog|Income Tax|
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  • By Taxmann
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  • Last Updated on 23 July, 2022

Charity means giving something to those in needs without expectation or wanting something back in return. It is doing something good to others without expectations.   Charity is a selfless act. There are a lot of ways of doing charity. The people who are keen to do good for others need not necessarily to have a good bank balance. The intent to do charity is more important than the healthy bank balance. Thus, many people run Non-Governmental Organizations (NGO’s) to help the society in various ways. NGO’s mainly have charitable objects. These organizations do not exist for the profit motive, hence also called as Non-Profit Organizations (NPO’s).  The World Bank defines NPO’s as “private organizations that pursue activities to relieve suffering, promote the interests of the poor, protect the environment, provide basic social services or undertake community development.” There are many registered and unregistered NGO’s in India working for the welfare of society. However, it is always advisable to register your NGO to avail the various benefits and have legal status. 

 
Taxation of Trusts & NGOs

Forms of Constitution:

NGO’s have multiple options to select the form of constitution. The different forms of the constitution which can be chosen are as below:
  1. Public Charitable Trust.
  2. Society.
  3. Section 8 Company.

Each form of the constitution has its own enactment and the provisions contained therein would apply to the respective form.

1. Public Charitable Trust:

Trust is created for the purpose of charitable and religious purposes. Trust can be constituted by Trust deed. In the case of formation of trust, there are no specific statues available.    However, charitable endowment act’1890 and Charitable and religious act’1920 have bearing on the formation of a charitable trust. The state of Maharashtra, Rajasthan, Gujarat and Madhya Pradesh etc. have their own state Acts.

2. Society:

Society is an association of persons who come together by mutual consent to act jointly for a common purpose. The compliance has to be made under the Societies registration act’1860. Minimum 7 members in state level and minimum of 9 members in National level society are required for the formation of society. The requisite documents are to be submitted in the office of the registrar. After the verification of the documents, a certificate of registration is issued along with the certified copy of the bye-laws of the Society.

3. Section 8 Company:

Company Act’2013 applies in case of a registration of Section 8 Company. The main object of the company is to give benefit to the public. It is a company formed for charitable objects. Minimum 2 members are required in a Private and 7 members in a public company. 2 directors are required for the formation of the private company and 3 directors in a public company. 

Comparison between Trust, Society & Sec 8 Company:

The selection of particular legal form depends on various factors like Size of the institution, Cost, Number of persons, Compliance, global appearance and availability of funds etc.  Apart from it, there are various other factors which may be considered while selecting a particular form for NGO.    Here is the comparison between the Trust, Society and Section 8 Company on the basis of various factors.

 

Basis

Trust

Society

Section 8 Company

Basic Document

Trust Deed

Bye-Laws (MOA & AOA)

MOA & AOA

Formation

Very Easy

Easy

Little Hard

Governing Legislation

Relevant State Trust Act

Societies Registration Act’1860

Companies Act’2013

Authority for Registration

Sub-Registrar

Registrar of Society

ROC

Management Board

Trustees

Governing Body

Board of Directors

Meetings

Board of Trustees

Governing Body meeting as per bye-laws

Board of Directors

No. of Members Required

2

7

2

Compliance

Low

Medium

High

Annual Filing

No such requirement

Filing of Audited Financials & list of Governing Body

Audited Financials & Annual Return

Voting Rights

Equal Rights to All Trustees

Equal Rights to All Members

As per Shareholding

 

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Taxation of NGO:

Charitable or Religious trusts are constituted to promote the welfare of public and hence, Income tax law provides exemptions to any income derived from property held under such trusts if it is not misused or diverted to non-charitable objects. The sections 11, 12, 12A, 12AA and 13 constitute a complete code governing the grant or withdrawal of registration and its cancellation, providing exemption to income, and also the conditions under which a charitable trust or institution needs to function in order to be eligible for exemption. They also provide for withdrawal of exemption either in part or in full if the relevant conditions are not fulfilled.

Registration u/s 12AA:

It is important to note here that notwithstanding the fact that trust, society and section 8 companies are registered as per their respective acts, the registration under section 12AA is necessary to claim exemption under Income Tax Act. Trust, Society and Section 8 Company can seek registration u/s 12AA to claim exemption under provisions of Income Tax Act’1961 if certain conditions are satisfied. Application for registration is to be made online through e-filing account in Form 10A with CIT(Exemptions) and it should be accompanied by the prescribed list of documents. The order granting or refusing registration shall be passed before the expiry of six months from the end of the month in which the application was received.

Registration u/s 80G:

The charitable organizations also need to apply for registration u/s 80G of the income tax act. It provides deduction while computing the total income in the hands of the donor. If the registration is granted under section 12AA, it does not mean that section 80G approval is to be given i.e. registration under section 12AA will not provide automatic approval under section 80G. These both registrations are completely separate. Further, section 80G applies only to charitable trusts or institution. It does not apply to religious trust or institutions. No deduction shall be allowed to the donee under section 80G in respect of donation of any sum exceeding INR 2,000 unless such some is paid by any mode other than cash. Rule 11AA of the Income Tax Rules’1962 provides procedure for seeking approval under section 80G. The application for approval of any institution shall be made online through e-filing account in form no. 10G. There is no requirement of renewal of registration under section 80G i.e. the perpetuity of approval has been provided until the commissioner withdraws the exemption i.e. there is no need for periodical renewal under present law.

Registration under FCRA:

NGO’s that receive foreign contribution or donation from foreign sources are required to obtain registration under Foreign Contribution Regulation Act, 2010. This is law is regulated by Ministry of Home Affairs (MHA). There is a condition that NGO must be in existence for minimum 3 years while making the application for FCRA registration.    Application for FCRA registration is made online through FCRA portal in Form FC-3. The registration once granted is valid for a period of five years. An application for renewal of FCRA registration can be made 6 months prior to the date of expiry, to keep the registration valid. The registered entities are required to make annual & quarterly compliances of FCRA. 

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