CA Pavan Jayprakash

Pavan Jayaprakash

Introduction 

Charitable Trust, for a layman is hub of noble deeds totally outside the purview of taxation. But what’s totally outside the tea cup of layman is the term taxation & hence a layman’s understanding on tax implications of charitable trust is heading towards misconceptions in its entirety.

The most potent simplified classification of Indian Tax Structure would be Direct & Indirect taxes. Ironically half the population isn’t aware of this simplest classification! Income tax, the biggest wing of Direct taxes has laid out multiple sections, confusing clarifications & contradicting judgments relating Charitable & Religious Institutions.

Income Tax Act treats Charitable trusts as separate entity laying down unique & separate registration & recognitions. *Charitable purposes* is the pivotal term spanning across all the relevant provisions of the Act, though from the verbatim reading of such provisions, the scope of the term charitable purposes seem vast, but the judgments & advance rulings talk otherwise. GST provisions on the other hand haven’t given a separate registration status to charitable trusts. However “person” under the GST law includes “Charitable Trust” & the activities of charity are within the scope of definition of “business” under the Act.

What is the meaning of business under GST ?

As per provision of section 2(17) of CGST Act, 2017, “business” includes––

1. any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

2. any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

3. any activity or transaction in the nature of sub-clause (a), whether or not there isvolume, frequency, continuity or regularity of such transaction; 

4. supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

5. provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members; 

6. admission, for a consideration, of persons to any premises; 

7. services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation; 

8. ……

9. ……

Broadly from the above definitions ‘business’ means any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity whether or not it is for pecuniary benefits. Any activity ancillary or incidental to these activities is also covered as business. It has also been provided that any activity or transaction falling in above categories would be business whether or not there is volume, frequency, continuity or regularity in transactions.

Considering that pecuniary benefit is not the determining criterion, charitable or philanthropic activities would also get covered under the definition of business, unless the same is exempt from GST law.

Then, what are all the charitable activities which are exempt?

Supplies relating to:

  • Public healthcare & counseling and awareness programs
  • Advancement of religion, yoga, spirituality
  • Advancement of skill development/ education – abandoned, challenged, prisoners,
  • Preservation of environment
  • Renting of religious precincts to general public, however if such premises doesn’t fall within the ambit of religious precincts exemption shall not be available
  • Conduct of religious ceremony
  • Income derived from religious ceremonies organized by trust however if such income is of the nature other than religious services such income shall be taxable under GST. Ex – Advertising service, sponsorship services, services liable to RCM where in the trust is service receiver

 (Ref: Notification No 12/2017 Central Tax Rate)

The general exemptions which are not specific to charitable trusts are as below, however the activities forming the crux of the exemptions fall within the ambit of charitable purposes:

  • Training and coaching in recreational activities – arts, culture, sports covered under Sec 12AA of Income Tax Act 1961
  • Public library – General exemption
  • Healthcare and clinical establishment – General exemption

Is GST registration mandatory for charitable trust?

Sec 22 of CGST Act 2017 lays down turnover limits mandating registration – 20 lakhs (10 lakhs – for special category states). If the trust has partly exempted turnover and partly taxable turnover totaling to 20 lakhs, then, registration needs to be obtained.

I.e. if exempted turnover is 19 lakhs and taxable turnover is 2 lakhs. Then registration needs to be obtained. However, Sec 23 of the Act provides for non-registration in case of wholly exempt turnover.

Besides the above general rule, following are some cases wherein an NGO shall be liable to register under GST, even though its aggregate turnover in a financial year does not exceed Rs. 20 lakhs-

  • Charitable trust making inter-State taxable supply of goods (i.e. taxable supply of goods between 2 different States/Union Territories)
  • Charitable trust required to pay GST under reverse charge (e.g. availment of services from lawyer)
  • Charitable trust making occasional taxable supply in a State where it does not have a fixed place of business (e.g. an NGO participating in an exhibition outside)
  • NGO making supply of goods through an E-commerce operator (e.g. Amazon, Snapdeal, Flipkart etc.) who is required to collect tax at source

*special category States comprises of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand.

Is GST mandatory even in case of activities carried on by Charitable trust completely exempt from GST?

No. Charitable Organizations engaged exclusively in the business of supplying goods or services or both that are not liable to tax or wholly exempt from tax under GST law, shall not be liable for registration.

Is Charitable trust liable to pay GST on the basis of Reverse Charge Mechanism?

  • RCM will be applicable for those services covered under notification No. 13/2017. However, Services provided by any person located in a non-taxable territory generally subject to RCM (Import of Service) shall be exempt if provided to a charitable trust (vide notification no. 09/2017)

Are goods / services provided by Charitable trust free of cost liable to GST?

This would depend on facts and circumstances of each case.

To give an example if a charitable medical diagnostic lab provides facilities free of cost, it would not fall in the ambit of GST as services are being provided without consideration. However, if the services are provided at subsidized rates so as to recover only the cost or part of the cost, the activities will fall in the ambit of GST.

Is service provided to charitable trust exempt?

No. However, notification No. 12/2017 provides for exemption to educational institutions availing below mentioned services:

  • Transportation of students, faculty and Staff.
  • Catering services including mid-day meal.
  • Security and cleaning services or house-keeping services
  • Services relating to admission to, or conduct of examination by such institution., however, in the following is taxable if provided to an institution of grade beyond Higher Secondary School
  • Supply of Online education journals provided to an educational institution, further the same is taxable if provided to an institution of grade below Higher Secondary School

What are the books of accounts to be maintained by Charitable trust?

As per the provisions of section 34 of CGST Act, 2017 following are the books of accounts which need to be maintained as the principal place of business:

1. production or manufacture of goods;

2. inward and outward supply of goods or services or both;

3. stock of goods;

4. input tax credit availed;

5. output tax payable and paid;

The books of account needs to be maintained for a period of 72 months from the due date of filing the annual returns. Further, the GST law provides for that every taxable person should get his books of accounts audited by a Chartered Accountant if the aggregate turnover is more than 2 crores during the financial year.

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