tax problem for NGO
I have a NGO that takes care of street children. Off late I have been having tax problems. Could you please tell me which laws will apply to me in regards my NGO?
NGO may be formed either as a Trust, as an Association of Persons or as a Body of Individuals but they are liable to all taxation provisions whether it is Income Tax or Sales Tax or Service Tax. The taxation of a society, trust, association or institution or a company licensed under section 25 of the Companies Act, formed or created for charitable or religious purposes or for promotion of science, literature, education, sports, fine arts, etc. is governed mainly by sections 11, 12, 12A, 12AA and 13.
For the purposes of taxation under the Income Tax Act, income derived from property held under a trust wholly for charitable or religious purposes enjoys exemption from tax by virtue of section 11 of the Act. Section 11(1) sub-section (a), (b) & (c) refer to ‘income derived from property held under trust’ whereas sub-section (d) in addition to the word ‘trust’ refers to the word ‘institution’ as well. In effect, exemption under section 11 is available not only to trusts, institutional settlements and endowments but also to a company incorporated under section 25 of the Companies Act 1956 without a profit motive, or a society formed under Societies Registration Act 1860, provided the purpose of the company or society is for charitable, public or religious purposes. As per section 13(1) (b), trusts created or established for the benefit of any particular religious community or caste are not eligible for exemption from tax. Section 13 (2) provides that trusts created for benefit of scheduled castes, backward classes, scheduled tribes or women and children are not considered as one ‘created or established for the benefit of any particular religious community or caste’.
Also, to be eligible to get the exemption under section 11, the first step is to apply for registration with the commissioner in accordance with section 12A, read with rule 17A, then the department is bound to give effect to the same and, in case departmental authorities conclude in any subsequent year that the assesse had violated provisions of section 12A, they could cancel the said registration, but existing benefit cannot be denied. Exemption is available only if not less than 85 per cent of income sought to be exempted is applied to such charitable or religious purpose. Section 11 (2) allows some relaxation to this condition with certain restrictions. Exemption from application to the extent of 15 per cent of income is to be computed on ‘commercial’ basis and not on ‘total income’ as computed under the Income Tax Act.
There is no restriction to a trust for running a business. Profits earned from that business would be liable to tax under the head ‘Income from business or profession’. According to section 11(4A), if such business is incidental to the attainment of the objectives of the trust’ or ‘the institution’, profits derived from that business would also be eligible for exemption. The condition of application of the income to the extent of 85 per cent for charitable or religious purposes will apply to such business also. If the transactions relating to business activities are merged with the charitable activities, it will create complications and even benefits of exemption from tax to trust from incomes other than from business activities will also be difficult to quantify.
Sanjay K. Agarwal, “Taxation Issues and Planning for NGOs/NPOs” The Chartered Accountant June 2006 p. 1749 available at http://www.icai.org/resource_file/100721749-1753.pdf
 Id. p.1750
Id. p. 1752
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