Legal compliances of non-profit companies in India

Introduction

The principle of a Non-Profit Making Company is not new in India. It was previously governed by Section 25 of the Companies Act of 1956, which is why it was known as a Section 25 Company. However, provisions relating to Non-Profit Making Companies are found in Section 8 of the Companies Act 2013, as well as Rules 19 and 20 of the Companies (Incorporation) Rules, 2014.^[1]

Under “Indian law, 3 legal forms exist for NGO or Non-Profit Organizations:

1. Trusts

2. Societies

3. Section 8 Companies.

Trust– It is a public charitable institution registered under the Charity Commissioner’s office having jurisdiction over the state. Maharashtra has adopted the Bombay Public Trust Act, 1950, which has become a model for the various other states. The law that regulates trusts are the Indian Trusts Act, 1882.”

Societies–

The Societies Registration Act (1860), a national statute, governs societies. The Act is different in each state. States have enacted their versions of the model Societies Act, 1860, according to the Societies Registration Act, 1860. A society is seen as a self-contained kind of organisation. It has a large organization that elects a governing board on a regular basis to manage the society’s business. Members hold the body responsible.

There are “multiple types of societies that may be registered under the Act which includes:

• Charitable societies;
• societies which are established for the promotion of science, literature, or fine arts, education.
• Public Art Museums, and galleries, and certain other types of museums.” 

Company–

The Indian Companies Act (2013), which primarily controls for-profit corporations, allows some companies to become “Section 8 companies,” which are not-for-profit entities. A Section 8 corporation may be founded to promote or advance trade, science, religion, research, art, social welfare, science, religion, charity, environmental protection, or any other purpose. A company’s earnings, if any, or other revenue must be used to further its objectives, and no dividends should be sent to its shareholders. The “corporation can be formed with or without share capital.”

To form a “private business and subsequently apply for a non-profit license under Section 8 of the Indian Companies Act 2013, at least two members are necessary. A Section 8 company’s founders or promoters must submit application paperwork to the Registrar of Companies. The application must contain copies of the prospective company’s memorandum and articles of organisation, as well as a number of additional papers, such as a statement of assets and a brief description of the job that will be done after registration.”

A Section 8 business, like a society (but unlike a trust), can be abolished. The cash and property of the business may not be dispersed to the members of the firm upon dissolution and after payment of all obligations and liabilities. Instead, the remaining cash and property must be handed or transferred to another Section 8 corporation, preferably one with identical goals as the dissolved firm.

Due to “better laws, Section 8 Companies have the most reliable strongest organizational structure

1. Indian Trusts have no central law.

2. Indian Societies have different legal and institutional frameworks from state to state.

3. Indian Companies (incl. Sec 8 companies), have one uniform law across the country – Companies Act, 2013.

It is this robust Act that regulates the formation, management and accountability of a Section 25 company, thus making it more closely regulated and monitored than trusts and societies, and recognized all over the world.

Through this Paper we shall talk about the basic provisions and procedure for incorporation of a Non-Profit creation Company as given in Section 8 read with Rule 19 and 20 of Companies (Incorporation) Rules, 2014.”

A “company or a non-profit organisation (NPO) is a company formed to promote trade, artwork, research, religion, charity, or any other useful goal, provided that any earnings or other money is used to promote exclusively the Company’s objects and no dividend is issued to its members.^[2] Section 8 Company requires the Memorandum of Association and Articles of Association as legal compliances. A non-profit organisation (NPO) or non-governmental organisation (NGO) can be founded to promote any desirable purpose, such as sports, education, or research activities.”

To form “a private business and subsequently apply for a non-profit license under Section 8 of the Indian Companies Act 2013, at least two members are necessary. A Section 8 company’s founders or promoters must submit application paperwork to the Registrar of Companies. The application must contain copies of the prospective company’s memorandum and articles of organisation, as well as a number of additional papers, such as a statement of assets and a brief description of the job that will be done after registration.”

Advantages of Section 8 Company

• Limited Liability
• Separate legal entity
• Perpetual Succession
• Lesser Compliances as compared to other entities
• Easy to transfer shares
• Various tax benefits.”

Procedure for Incorporating a Section 8 Company:

1. Application for Registration: To the registrar of companies, an application for availability of name must be filed in the required form no. 1A, together with a cost of Rs.500/-. In the event that the initial name provided is rejected by the registrar, it is best to provide a list of three other names for the firm.^[3]

• Three printed or typewritten copies of the proposed company’s memorandum and articles of organisation, fully signed by all promoters with complete name, address, and occupation. A declaration by a lawyer or a tax accountant that the memorandum and articles of association have been drawn up in accordance with the Act’s provisions and that all of the Act’s and its rules’ requirements in respect of registration and matters incidental or supplementary thereto have been duly met.
• Three “copies of a list of the promoters’ (and, where a firm is a promoter, each partner in the firm’s) names, addresses, and occupations, as well as the members of the proposed board of directors’ names, addresses, and occupations, as well as the names of companies, associations, and other institutions in which such promoters, partners, and members of the proposed board of directors are directors or hold responsible positions,if any, with description of the positions so held.”
• A detailed description of the association’s assets (with estimated values) and liabilities as of the date of the application or within seven days of that date.
• An estimate of the prospective company’s projected yearly revenue and spending, including the sources of income and the purposes of expenditure.

2. Once the availability of a name has been confirmed, a written application should be submitted to the regional director of the company law board. The following papers should be included with the application.

3. Applicants must additionally provide a copy of the application and any other papers submitted with the regional director of the company law board to the registrar of companies (of the state in where the proposed company’s registered office is to be, or is located).

4. The applicants must also publish a notice in the prescribed manner at least once in a newspaper in a principal language of the district in which the proposed company’s registered office is to be situated or is situated and circulating in that district, and at least once in an English newspaper circulating in that district, within a week of filing the application with the regional director of the company law board.

5. After evaluating any complaints submitted within 30 days of the notice’s publication in the press, and after contacting any authority, department, or ministry as he sees fit, the regional director may determine whether the licence should or should not be issued.

6. The “regional director may also direct the company to insert in its memorandum, or in its articles, or in both, such conditions of the licence as may be specified by him in this behalf. Hence, from the above, it is concluded that Section 8 Company is the most reliable source of establishing a Non-Profit Organization because of Central recognition and better laws as mentioned.”

A lot “of people think that NGOs are immune to all forms of taxation by all the means because they believe that as they exist only for Non-profit activities as an entity. However, we understand that this is a myth only. The following requirements& talk about relevant Legal compliances for NGOs is obligatory to do to prove it’s honest and genuineness in accordance to the NGO Laws in India.”

 PAN Application

The “very first Legal Compliances is to apply for PAN registration of the NGO after registration of NGOs with respective Authority. It is categorically essential to mention the PAN number in the accompanying archives all the banking and money transactions for income-tax assesses, including NGOs under the current Income Tax Act.”^[4]

Section 12A Registration under Income Tax Act

Intended “for getting some benefits of taxation, the registration of NGOs under Section 12A is very compulsory under its Legal Compliances for NGOs. Conversely, section 12A certificate is not an obligatory registration. The primary reason for getting this registration under section 12A is to get the benefit of exemption if all the rules and regulations laid down in this section are fulfilled from the Income Tax on the Income/revenue (Legal Compliances for NGOs).”

Section 80G Registration under Income Tax Act

The registration “under this section is not compulsory under its Legal Compliances for NGOs. However, to give the benefit of ‘50% or 100%’ exemption over the donations to the donors, it is needed to get the registration under section 80G of Income Tax Act.^[5] It is indirectly a huge benefit to NGOs to raise funds.

FCRA Registration under Income Tax Act

Once the registration procedure for an NGO is done, there will be opportunities to receive Foreign Funds for the missions of NGO. Post only essentials to the registration with FCRA department under Ministry of Home Affairs. NGO cannot get any kind of foreign donation or funds without FCRA registration. Depending upon the type of registration and Legal Compliances, following are the key requirement for applying FCRA Registration.

TAN under Income Tax Act

It has to first apply for TAN for its Legal Compliances, if NGOs become liable to remove the tax from a source during the functioning of NGOs at any point of time.

No specific document or proof of identity is needed for TAN registration. Form 49 B needs to be filled and submitted for obtaining TAN.”

GST Registration

NGO “has to firstly apply for the GST registration as a Legal Compliance if the gross revenue from works crosses the basic exemption limit of GST and if the NGO is providing services like research activity or consultancy work etc.”

Professional Tax Registration

Professional “Tax is an accountability of NGO to deposit to the Government and deduct from the pay of employee. Different states of India have different Legal Compliances&rules and regulations for Professional Tax, in consequence Professional Tax is said to be State Government.”

Retirement Advantage

If NGO “develops and the size of employees are more than the prescribed limit in this acts, in that case the Retirement benefits like Provident Fund^[1], Gratuity, ESIC,etc. gets pertinent under its Legal Compliances.”

Shops and Establishment License

NGO must fetch a License under the Shops and Establishments Act, if an NGO employs any person in their office to carry out any work pertaining to the NGO According to the NGO laws in India.”

In case “of encounters of any non-compliance with the procedures, the Ministry of Corporate Affairs has the ability to impose certain penalties.”

Penalties “to be imposed.

• If it has been found that the organization is working falsely or in a way violative to the object of the organization, then the Central Government may reject the permitallowed to the organization.
• The administration of the Institution will be culpable with fine, which will not be under ten lakh rupeesand can be overextended out to Rs. one crore.
• Each official along with the chiefs of the organization who is in default will be culpable with detainment for a term which may bounce out to twenty-five lakh rupees or it can be both.^[6]
• Every official in default must be at risk for activity under area 447 if in the event that it is discovered that the issues of the organization were directed falsely.”

In India, the legal structure regulating society is expanding rapidly, so there is a complexity of rules affecting non-profit taxation, fundraising, governance. The India Philanthropy Law Report 2019 by the International Institute for Not-for-Profit Legal dissects these laws, emphasizing major regulatory advancements and evaluating their significance for running of non-profits Indian. The following are 8 important areas from the report: –

1. In India, non-profit groups can adopt one among three standard legal documents. 

Section 8 businesses, public charity trusts, societies, and are all options for non-profits.

2. It takes four months to incorporate a non-profit organization.

Furthermore, to provide tax free status under Section 12AA of the Income Tax Act, 1961, the ” Income Tax Department” may take 4 to 7 months and process tax breaks for donations mentioned in Section 80G^[7].

3. The types of activities that organisations are permitted to engage in are limited.

In India, non-profits are barred from participating in a broad variety of political operations, particularly direct political advocacy and political campaigning.

4. To improve compliance with corporate social responsibility (CSR)The Companies Act of 2013 has been revised.

Companies with an annual turnover of Rs 10 billion net wealth of Rs 500 billion or are required by the Companies Act of 2013 to pay the equivalent of 2% of its average pre-tax income on CSR activities each financial year.^[8] The registration of a non-profit can be cancelled if it has engaged in activities not listed in its founding documents

5. Section 44 of the Lokpal and Lokayuktas Act, 2013 mandates public workers to register their holdings to the Home Ministry Affairs.

Officers and Trustee of non-profits may be obliged to disclose the holdings underneath Lokpal and Lokayuktas Act, 2013.

6. Non-profit organisations in India aren’t licensed to run worldwide, and their revenues should be used solely in India.

Non-profits in India suffer constraints not only in terms of how and where they operate, but also in terms of accepting foreign funds.

Instructions for complying with FCRA, which warns non-profits with FCRA accounts against using cash payments and debit-card withdrawals of more than Rs 2,000 as issued by the Ministry of Home Affairs.

7. Donors to selected organisations are eligible to a 100 % tax deduction.

Donors can deduct payments to section 8 corporations, trusts, and societies that have been given non-profit status in general.

8. Foreign donations are not same as Foreign – invested receipts.

Domestic charitable groups that do not have an FCRA registration may collect foreign funds in exchange for commercial service and reporting this to the FCRA department not necessary.

Advantages of Non-Profit Company/Section 8 Company Registration:

1. Separate Legal Entity (Separate Ownership and Management):

The Companies Act of 2013 established the Non-Profit Company as a separate juristic and legal person. As a result, a corporation has a broad variety of legal capabilities, and its representatives are not legally responsible to the company’s creditors and givers for its shortfalls or obligations.^[9]

2. Perpetual succession ensures the long-term viability of a business:

8th section In, addition, the company has ‘perpetual succession,’ which implies it will continue to exist until it is officially liquidated. A business, as a separate legal entity, is undisturbed by the other departure of any of its members or deaths, and it continues to exist regardless of ownership changes.

3. Recognition on a global scale through charitable and human welfare activities:

A Non-Profit Company/ Section 8 Company is engaged in or trying to carry on social welfare and charity activities, whether alone or in partnership with or assigning to any other similar organization, not only in India, but also around the world, with the assistance from some globally identified authority such like the United Nations Foundation, World Health Organization, Amnesty International, UNESCO, UNICEF and ors.

4. Property ownership in one’s own name:

As an artificial person, or Section 8 Company or Non-Profit Company can obtain, own alienate property in its own name. college, Schools, art galleries, centres of experiment, facilities of training, refreshment and amusement.

5. Exceptional Tax Savings:

To receive the exemptions and deductions linked to charity and welfare activity, charitable businesses incorporated under section 8 of the Companies Act, 2013 are required to register under 80G of the Income Tax Act, 1961 and sections 12A. In addition, under Section 135 of the Companies Act, 2013 section 8 companies are permitted to collect gifts and cash for CSR initiatives (CSR) from other public or private limited companies.

Number of directors in Section 8 company

Section 149(1) of the Companies Act 2013 established a maximum of 15 directors and minimum of 3 for private and public limited companies, respectively.

However, there is no such thing as a minimum or maximum prescription for a section 8 corporation.

The second proviso to section 149(1) mandates the appointment of a female director in a certain class of businesses.^[10]

Every company must have resident directors, according to Section 149(3) of the Companies Act 2013.

Director position in Section 8 Companies would not be added up whenever the overall number of directors on the board is determined, i.e. it will not be counted while sticking to the upper allowed of 20 directorships as provided in the Act, according to Section 165 of the Companies Act, 2013.

Section 149(1) of the Companies Act, 2013 states that Section 8 companies are not required to nominate an independent non – executive and are exempt from any resultant rules relating to independent directors, as indicated in an exemption notification dated June 5, 2016.

According to Section 149(3) – Section 8, an organization should have one Resident Director, defined as a director who has spent at least 182 days in India during the prior fiscal annum.

Quorum and Total Number of Board Meetings in Section 8 Company 

According to clause 173(1) and 174 of the exemption notification (1), Section 8 businesses hold nearly 1 meeting every six months, and for committee meetings quorum is either eight directors or a quarter of their entire capacity, whichever is smaller. The quorum, on the other hand, must include nearly minimum 2 employees.

STATUS OF PUBLIC BENEFIT

A not-for-profit organisation must be founded philanthropic reasons or for religious purpose to be qualified for tax exemption under the Income Tax Act (1961). Relief for the, yoga, education, poor, education, healthcare alleviation, progress any other point of wider populace versatility, environmental preservation and conservation of monuments or places or items of historic or artistic interest are all examples of charitable purposes.

By definition, charity organization trusts must the general public must be beneficial. Organizations can be formed for a variety of reasons, including charitable purposes. Section 8 corporations founded for the specific purpose of promoting religion, research, social welfare, art, charity, business, sports education, environmental protection, science or any similar objective.

Activities of Section 8 Company

1. Activities in the Economic Sector

No “limitations on an Indian NPO’s coincidental corporate, Economic, commercial activity as long as the NPO was founded for and predominantly runs programmes for poverty relief or medical education relief. Profits, on the other hand, must be used entirely for philanthropic purposes. If it is not being done, then the NPO’s income tax exemption will be lost, and its earnings will be subject to taxation at the highest marginal rate of 30%. In addition, the NPO must set up different books of account for its economic, commercial, business activities.

A NPO could obtain money from commerce, trade, or other economic activities if the revenue is taken from an action that supports an objective of “general public usefulness” and income doesn’t exceed 20% of the NPO’s total income Finance Act (2015).”

2. Activities Related to Investment

The types of investments that Indian non-profits can make are restricted by state and national rules. NPOs in India, for example, are not permitted to invest in stock of private or public limited corporations. Furthermore, Indian-registered non-profits are prohibited from investing in foreign. The Finance Act of 2007 modified Section 13(1)(d)(iii) with historical application to April 1, 1999, enabling non-profits to participate in and purchase equity interests of a depository in public corporations.

Mutual funds are legal to invest in, albeit the (FCRA) of 2010 prohibits and do so with money from outside the United States.

3. Activities in Politics

In India, non-profits are prohibited from participating in political campaigns or lobbying for legislation. However, Indian not-for-profit organisations may “campaign” for non-political issues if the activity serves “wide public benefit” and is ancillary to the charity’s objectives. The dissemination of political education may be a primary goal for societies (Societies Registration Act Section 20). [9] Furthermore, under the FCRA, not-for-profit organisations that engage in political operations are prohibited from receiving foreign funds.

Tax Laws Applicable to Section 8 Companies

EXEMPTIONS FROM TAXES.

1. Overall Structure

• Not-for-profit organisations are excluded from paying taxes under the Income Tax Act of 1961. Companies may qualified for fee status if the conditions are met. , according to the Act, which is a national statute that applies throughout India:
• The organisation must be founded on religious or benevolent principles;
• During any fiscal year (April 1 to March 31), the organisation should spend 85 % of its money on its objectives. The institution has 12 months from the end of the fiscal year to meet with this obligation, and it must submit a specific online form with special online application. ^[11]
• The organization’s funds must be paid in accordance with Section 11(5) of the ITA.
• The organization’s no part income or assets could be used or tried to apply indirectly or directly again for advantage of the trustee, founder, relatives of the founder, or an individual who had given more than Rs 50,000 to the institution in an economic year;
• The institution must register its yearly income taxes on time. However, with the permission of the government, trust revenue can be used beyond India to promote worldwide issues wherein India has an involvement without being taxed.

2. Financial Assistance

When calculating the overall income of the organisation, capital donation or contributions to an investment should be excluded. Endowments must invest donations in recognised assets in accordance with Clause 11(5) of the ITA, according to the Finance Act of 2021.

3. INCOME FROM BUSINESS

A NPO isn’t taxed on the earns from a company it runs that is ancillary to the achievement of the NPO’s objectives, according to changes to Section 11(4A) of the ITA, as long as the organization keeps different books and accounts for the business. Moreover, several profit-generating activities, such as renting out lecture halls or cultural halls aren’t considered commercial income.

Institutions established for a “charitable purpose” aimed at advancing “some other entity of general populace functionality” will indeed end up losing their tax-free condition under the Finance Acts. if about their economic activity had to have an average value of much more than Rupees 2.5 million.

4. EXEMPTION BY DISQUALIFICATION

Private charitable trusts and religious trusts or institution formed from April 1, 1962 for said welfare of any group or religious community aren’t eligible to claim relief.

An exception is an organisation or trust established for the benefit of “backward classes, women, Scheduled Castes, Scheduled Tribes and minors.” A trust or corporation like this is not excluded, and its revenue is tax-free.

Conclusion

It can “be concluded that legal compliance of NGOs is mandatory. The NGO, such as registered as the Company has to follow the Section 8 Annual Compliance. Section 8 companies have to follow annual compliance. Legislations like the Income Tax Act play a significant role, as it provides deductions to the donors. The donations from foreign contributions are necessary to be registered, as foreign incomes/donations for Non-Governmental Organisations. Other registrations related to PAN and TAN are mandatory. Under the Income Tax Act, 1961 the definition of income states that ‘no income is exempt unless provided’, so donations are not always 100 % exempted.”

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^[1] ‘The Laws That Govern India’s Nonprofits – India Development Review’ (India Development Review, 2022) <https://idronline.org/the-laws-that-govern-indias-nonprofits/> accessed 21 April 2022.

^[2] Sonal Pruthi and Sonal Pruthi, ‘Legal Compliance Of NGO Laws In India – Enterslice’ (Enterslice, 2022) <https://enterslice.com/learning/legal-compliance-of-ngo-laws-in-india/> accessed 27 April 2022.

^[3] ‘Not For Profit Organizations: What The Companies Act, 2013 Says’ (Corporate Law Reporter, 2022) <http://corporatelawreporter.com/2016/03/01/not-for-profit-organizations-what-the-companies-act-2013-says/> accessed 21 April 2022.

^[4] ‘Non-Profit | Section 8 Company Registration | NGO Registration | Legalraj.Com’ (Legalraj.com, 2022) <https://legalraj.com/services/section-8-non-profit-company-registration> accessed 27 April 2022.

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