Taxation for NGO’s

This article is written by Bhavna Arul, a fourth-year law student from Symbiosis Law School.

INTRODUCTION

Non-Government Organizations are formed with the intention of solving socio-economic issues in a country.  They can be in the form of a Trust, Company (Section 8 company) or a Society. These organizations often get a tax exemption as the finances of these organizations are directed towards benefitting the public in the same manner the government utilizes taxes. An NGO to be recognized by the tax authorities as an NGO must register itself under S.12A of the Income Tax Act.

 Even charitable works by individuals and companies are eligible for tax exemption. For individuals and companies, there is a prescribed set of funds that when donated to, exempts the individual from paying tax.

Fundamental Taxing for NGO’s

All voluntary or charitable organizations as defined U/S.2(15) of the Act have the liability to pay service tax on the income received by them, except for that donation which has been specified to be ‘corpus’ by the donor in writing. However, the interest or dividend accrued on such funds can also be utilized for taxing.

As provided by the Act only 85% of the total income received by an NGO is to be utilized and the remaining 15% is accumulated for later use and corpus fund forms a part of such remaining income. And this accumulated income can be used within the next five years and if not used then shall be considered as the income of the eleventh year.

A public trust with an income of 50,000 rupees or more needs to file an annual income. Further, if the voluntary organization in question has not been registered U/S.12A of the Act and earns an income that exceeds the minimum taxable limit then its total income and the corpus fund will be taxable on the amount excess. Any organization not registered under S.12A is not considered as an NGO by the Income Tax Act and hence no relaxation in tax is given to such organizations.

In addition to all these, what has been made taxable are the kind of anonymous donations made by any organization or institutions or individual to a charitable organization at a rate of 30%. However, the Constitution of India has made such donations to religious institutions non-taxable.

Rules Applied During Profit

When the revenue of the NGO exceeds its expenses, then such organization is deemed to earn a profit. Generally, NGOs work with the plan of utilizing most of their funds. It is rare for an NGO to be making profits as it fundamentally clouds the idea of an institute working towards socio-economic development. Profits earned by NGOs can be channelized in the most effective way if such an idea is desired for.

The surplus income can be utilized to carry on activities towards the fulfilment of the objective of the NGO. The surplus can either be carried forward to the succeeding years without any kind of limitation or accumulated for a specific purpose. However, the DTC proposes for the utilization of the 15% of the surplus or 10% of the receipts within three years in order to restrain the accumulation for a longer period and in such case where the surplus is not utilized it shall become taxable at a rate of 15%.

Profits earned by any charitable trust from a construction project cannot be subjected to exemption under S.11, however, it is entitled to deduction under S.80B(10). However, an exception for this rule is if an NGO working for women empowerment earns profit by selling off the handicrafts made by the women employed by them shall not be made taxable.

List of Exceptions and Conditions

Category of incomeIncome subject to taxTaxability
Donations/voluntary contributionsVoluntary contributions with a specific direction to form part of corpus of trust or institutionExempt* 
Voluntary contribution without such specific directionForms part of income from property held under trust
Anonymous donations i.e., donations where donee does not maintain record of identity/any particulars of the donorDonation exceeding higher of:i) 5% of total donations received by trust orii) Rs 1,00,000Taxed at 30%
Anonymous donation received by trust established wholly for religious and charitable purpose onTaxable in the same manner as voluntary contributions (without specific direction) as above
Income from property held under trust for charitable or religious purposeIncome applied for charitable or religious purpose in IndiaExempt*
Income accumulated or set aside for the application towards charitable or religious purpose in IndiaExempt* to the extent of 15% of such income. This means at-least 85% of income from property to be applied for charitable and religious purposes in India as above and a balance 15% can be accumulated or set aside. [See below comment on 85%]
Income from property held under trust created for charitable purpose which tends to promote international welfare in which India is interestedCBDT either by general or special order has directed that such income shall not be included in the total income of trustExempt*
Capital gain from asset held under trust in wholeNet consideration is utilised fully for acquiring another capital assetEntire capital gain is deemed to have been applied for charitable and religious purpose and hence is exempt*
Net consideration is utilised partially for acquiring another capital assetCapital gain utilised in excess of cost of old asset transferred is considered to have been applied for charitable and religious purpose and is exempt*

*Only Charitable/ religious trust or institution registered under Section 12AA enjoys the exemption

CONCLUSION

When discussing the development of a country, we are referring to a very inclusive definition that includes development in all hemispheres i.e., social, economic, environmental and political growth. It generally is the duty of the government to look into all these aspects of development within a country. However, it often so happens that the government is unable to address certain issues and need help from external agencies. 

When a country faces the problem of corruption, NGO’s are the most effective solution to continue social and economic growth in a country. NGO’s are more trusted than governments as they generally are more transparent with their work and show results. They provide quicker reliefs than governments and often on a long run also assist the government in aspects such as policy making and reforms.    

To prevent NGO’s to be a cover for corruption and still promote the work done by NGO’s the Indian Tax system has cleverly devised measures to keep checks and balances on these NGO’s. The progressive tax system that India follows has led to immense development in the country and has always supported the economic growth of the nation.

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