With the introduction of GST, even the Charitable Organisations and NGOs (hereinafter referred as “NGOs” for simplicity) had to assess applicability and impact of GST on their operations. Though all such organisation have assessed applicability of GST on their activities, the confusion regarding correctness of such assessment still prevails. This article aims to connect various dots in the GST law to determine applicability of GST to NGOs so far as the receipt of donation is concerned.
Unlike previous indirect tax laws which levied tax on “sale” or “manufacture” or “provision of service”, GST Act levies tax on “Supply”.
“Supply” is defined u/s 7(1), relevant extract of which is produced below:
For the purposes of this Act, the expression “supply” includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II (Refer Note#1).
Above three important factors i.e. Goods or Service, Consideration and Business must exist simultaneously to complete the definition of “Supply”.
(1) The definition of Goods and Services are wide enough to cover majority of activities carried out by NGOs. Therefore, let us now understand other two factors.
“consideration” in relation to the supply of goods or services or both includes––
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
Let us understand above definition through an illustration – If X Ltd sold 100 tonnes of Cotton to Mr. Y, payment for which is made to X Ltd by Mr. Z, then, amount paid by Mr. Z will be considered as Consideration for sale of 100 tonnes of Cotton to Mr. Y. And therefore, this transaction cannot escape taxability under GST.
The question that arise is, whether donation received from the donor for providing services or goods to beneficiaries is similar to above illustration and hence taxable under GST?
Under Service Tax regime, the dispute regarding levy of Service Tax on ‘Donation’ treating the same as ‘Consideration’ was put to rest through Circular No. 127/9/2010-ST dated 16-8-2010.
The principle laid down in said circular is that the ‘Donation’ cannot be treated as ‘Consideration’ as there is no relationship between donor and the beneficiary other than universal humanitarian interest. In such a situation, service tax is not leviable, since the donation or grant-in-aid is not linked to specific beneficiary. Thus, even though donor specifies the scheme or program in which donated amount should be utilised, such amount should not taxable under GST so far beneficiaries of said scheme are specifically identified at the time of making donation.
However, if the NGO is collecting any amount for provision of goods or services from the beneficiary, such amount will be treated as consideration. Where, amount recovered is 20% or 50% of cost of goods or services supplied, NGO should ensure that all the conditions relating to “pure agent” are complied or else such amount will be treated as “consideration” liable to GST.
(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
The above definition is wide enough to tax specified activities carried on with or without intention of obtaining pecuniary benefit, that is, Profits. Therefore, if an NGO is carrying out any of the above activity, it is said to be conducting business for the purpose of GST. However, it is extremely important to determine whether activities of NGO are in the nature of trade, commerce, profession, vocation etc.
From above analysis, it is pretty much clear that, since one of the three factors of “Supply”, that is, ‘Consideration’ does not come into play in case of Donations, GST should not be leviable on Donations. On the other hand, supply of goods or services to beneficiaries at free of cost should again not be liable to GST in absence of ‘Consideration’.
Note#1: Under Schedule II (ActiVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES), Transfer means:
(a) any transfer of the title in goods is a supply of goods;
(b) any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services;
(c) any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods
Owing to above, donation of Goods or Assets to NGO may be treated as “Supply” even if 3 factors of “Supply” stated above are not satisfied. Valuation in such case will be according to Valuation Rules. Till the time any clarification is issued in this regard, GST is leviable on such transaction.
For deeper discussion, author can be reached at firstname.lastname@example.org