India has moved on from charity to philanthropy and more recently to venture philanthropy. However, the question remains-are the laws governing nonprofits in India enabling enough? Every one talks about the need for NGOs to become sefl-sustaining and reduce donor dependence. However, once again, does the law allow nonprofits to generate income without fear for losing tax exemption? The answer would be both, yes and no!
On one had the new Foreign Contributions Regulations ACT (FCRA) 2010 has brought some relief to nonprofits not having FCRA registration by legislating that ‘Foreign Contribution’ does not include commercial receipts. In other words under the new FCRA 2010, NGOs can now receive consultancy or other commercial receipt from foreign sources even without having FCRA registration. Even FCRA registered NGOs have been directed to receive such income in their domestic account and such commercial receipts are no longer required to be reported to the Home Ministry.
But, while the Home Ministry has encouraged NGOs to freely receive consultancy frees and commercial receipts from sale of their products, over the last few years the Ministry of Finance has not been particularly kind to certain types of NGOs.
Almost a decade ago Section 11 (4A) of the Income Tax Act, 9161 had been amended (w.e.f. 1-4-1992) such that if the income from business of the an NGO is incidental to the attainment of the objects of the organization and separate books of account are maintained by such an organization is respect of such business, the profit would not be considered for taxation. In other words, the profit is fully exempt from tax.
Also, income from a business undertaking which is itself held under trust for charitable purpose (under Section 11 (1) (a)) is tax exempt.
However, Finance Act 2008 changed the definition of “charity purpose” given under Section 2 (15) of the Income Tax Act such that “Advancement of any other object of general public utility” would not be considered as “charitable purpose” if it involves carrying on of any activities in the nature of trade, commerce or business or any charity of rendering any service in relation to any trade, commerce or business for any fee, cess or other consideration. Later, the Finance Act 2010 attempted to provide some relief by exempting the aggregate value of the receipts from such activities up to Rs. 10 lakhs and finally under the Finance Act 2011 to Rs. 25 Lakhs.
Of course, an activities resulting profit need not always be treated as income from business. For example, income of a non-profit organization from letting out halls (for private or public functions), rest houses or auditoriums does not amount to business.
Also, NGOs/NPOs established for relief of the poor, Education, Medical relief, Preservation of Environment (including watershed, forests and wildlife), Preservation of monuments or places or objects of artistic or holistic interests are not hit by the amendment introduced under the Finance Act 2008. Only NGOs/NPOs falling under the category “The advancement of any other object of general public utility”. are affected.
Take for example, a NPO like the Centre for Advancement of Philanthropy (CAP) which is otherwise a tax exempt organization. The Centre does not undertake relief work for the poor nor does it work in the field of Education or medical relief. It clearly falls under the category-“The advancement of any other object of general public utility”. Now, if the Centre charges fees to NGOs for its services it must ensure that in any given financial year of the income from such fees based services does not exceed Rs.25 Lakhs. And, of course Service Tax@ 10% would be attracted on value of the services-consultancy services for example.
Noshir Dadarwala: Nosir Dadarwala is the Chief Executive of the Centre for Advancement of Philanthropy (CAP) based in Mumbai.
(Photo by Rusen Kumar)