Formation, Registration and Taxation of NGOs

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• March 27, 2020

Charity denotes a selfless act. Charity means giving something to those in needs without expecting anything back in return. It is doing something good to others without any expectations in return. People form Non-Government Organizations (NGOs) for doing the charities and social welfare.

NGO’s are formed with the aim to help the society in many different ways. NGO’s mainly have charitable objects and objects to advancement of general public utility. These organizations do not operate with the motive of earning profit. There are many NGO’s operating in India with the aim of welfare of society some are registered and some are unregistered. Registration on a NGO must be done if the NGO desires to avail benefits such as exemption from its income, deduction under section G to donor along with a legal status which also creates a faith in the mind of the donor on the NGO.

Forms of Constitution
A NGO can be formed under three different types of constitution:

1. Section 8 Company under the Companies Act 2013
2. Public Charitable Trust
3. Society

Each form of the constitution has its own laws and regulations contained in their respective enactments.

1. Section 8 Company: It is a company which is formed under section 8 of the companies act 2013 not with the motive of earning profits but with the aim of promoting commerce, art, science, sports, charity, protection of flora and fauna or any such other similar object where the profits, if any, or other income is applied only for promoting the objects of the company with no distribution of profits to its members.
   

2. Public Charitable Trust: The responsibility of a trustee involves protecting the rightful ownership in the property owned or controlled by the trust, the preservation of the property owned by the trust and using the income from the property held by the trust in accordance with its objective. A Trust is an commitment attached to the holding of property which arises out of a assurance reposed in which is accepted by the owner or declared and accepted by him for beneficiary as stated under The Indian Trusts Act, 1882.
   

• Author of the Trust- One who reposes or declares the confidence.
• Trustee- One who accepts the confidence.
• Beneficiary- For whose benefit the trust has been formed.
• Trust Property or Trust Money – The main subject of the trust.
• Trust Deed – The document or instrument by which the trust gets its status.

Trust is created for of charitable and religious purposes. Trust can be constituted by Trust deed. There are no specific statues available for formation of trust. Charitable endowment act, 18 and Charitable and religious act, 1920 states compliance on the formation of a charitable trust. However, the state of Maharashtra, Rajasthan, Gujarat and Madhya Pradesh etc. have their own state Acts.

3. Society: Under the Societies registration act, 1860, an association of persons who come together by mutual consent to act jointly for a common purpose is called Society. The minimum number of members in state level is 7 and minimum of 9 members are required in formation of National level society. The required 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.
   

Comparison between Trust, Society & Section 8 Company
To select a legal form, we need to analyse various factors like size of the institution, cost, number of persons, Compliance, global appearance and availability of funds etc. Also, there are various other factors which may be considered while selecting a particular form for NGO.

Following is a comparison between the Trust, Society and Section 8 Company

Taxation of a NGO
Charitable or Religious trusts are formed to promote the welfare of public and therefore the Income Tax Law provides exemptions to any income from property held under such trusts provided it is not misused or is used for non-charitable objects.

The sections 11, 12, 12A, 12AA and 13 comprise a complete code that governs the grant, withdrawal and cancellation of its registration, providing exemption to income, and also lays down the conditions under which a charitable trust or institution needs to conduct their operations in order to be eligible for exemption under section G. Also, they provide for withdrawal of exemption either in part or in full if the relevant conditions are not fulfilled.

Registration u/s 12AA
The registration under section 12AA is necessary to claim exemption under Income Tax Act irrespective of the fact that Trust, Society and Section 8 companies are registered as per their respective acts. 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 by the commissioner before the expiry of 6 months from the end of the month in which the application for the registration was received by the commissioner.

The documents required for registration u/s 12 of Income tax act are as follows:

• Certified copy of-
  • instrument under which the trust/institution was created/established, if applicable
  • document providing proof of creation of the trust or the establishment of the institution, if applicable
  • registration with RoC / Registrar of Firms & Societies / Registrar of Public Trusts, as the case may be
  • documents evidencing adoption or modification of the objects, if any
  • annual reports of the trust/institution for a maximum three immediately preceding financial years, if applicable
  • order of rejection of application for grant of registration under section 12A or section 12AA, if any
• Note on activities
• Duly filled form 10A

Registration u/s G
The charitable organizations also need to apply for registration u/s G of the Income Tax Act under which the donor can claim deduction for the amount of donation to such organization. It provides deduction while computing the total income in the hands of the donor. If the registration under section 12AA has been granted it does not mean that the institution is eligible for providing deduction under section G i.e. registration under section 12AA does not mean that the institution is also approved under section G. These both registrations are completely separate. Further, section G applies only to charitable trusts or institution and does not apply to religious trust or institutions. No deduction shall be allowed to the person who has made a donation to the institution registered under section G in respect of donation of any sum exceeding INR 2,000 if such amount is paid by cash.

For the purpose of getting approval under section G Rule11AA of the Income Tax Rules, 1962 provides procedure for seeking such an approval. 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 G until the commissioner withdraws the exemption under the current statute.

List of documents and information required for registration in G:

• Self-attested copies of MOA or trust deed
• Proof of registered office
• PAN Card of your NGO
• Copy of water bill, electricity bill or house tax receipts
• Form 10G provided by us, duly filled in
• Proof of welfare activities performed, either since it started or during the last 3 years.
• Books of accounts, Income Tax Returns and the Balance Sheet for last 3 years or since it started with the objectives of the institution
• List of donors
• PAN and the address of donors
• Names of trustees and board members

Registration under FCRA
NGO’s that receive donation from foreign sources are required to obtain registration under Foreign Contribution Regulation Act, 2010. The aforementioned law is regulated by Ministry of Home Affairs (MHA). A NGO must be in existence for minimum period of 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 remains valid for a period of five years. Further, for renewal, an application with 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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