K. R. Sreedhar
CBEC has come out with an excellent flyer on the subject “GST on Charitable and Religious Trusts” clearly enunciating the provisions of the GST Act and exemption notifications and highlighting the fact that NOT all services provided by such entities are exempt from GST. The last para of the Flyer is given below.
“There is no exemption on supply of goods by charitable trusts. Thus any goods supplied by such charitable trusts for consideration shall be liable for GST. For instance, sale of goods shall be chargeable to GST”.
The last sentence gives an impression as though all the sale of goods for consideration by an NGO are chargeable under GST. However, the author begs to differ. Only those sale of goods which are made in the course of business or for the furtherance of business are subject GST (as per the definition of “Supply” given in section 7 (1) of CGST Act.“). In other words, if the sale by an NGO is not in the course of business, then GST is not applicable. The key question whether a sale is in the course of business or not, has to be decided as per the principles enunciated by Supreme Court in the case of CST Vs Sai Publication Fund (2002) 258 ITR 70 / 122 Taxman 437. This article discusses the principles enunciated in the above decision.
Brief summary of the facts of the case are as under.
The NGO Sai publication was set up by devotees of Shirdi Sai baba with the objective of spreading his message through various modes and one of them being the sale of booklets, photos, stickers and other publications containing the message of Sai Baba. The question that arose was whether the above sale is subject to Sales Tax under the Bombay Sales Tax Act, 1959 [as amended by Maharashtra Tax Laws Levy, Amendment and Repeal) Act, 1989].
The important definition of the Bombay Sales Tax Act, 1959, which is relevant for our discussion is given below.
Section 2(5A)- “Business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make gain or profit and whether or not any gain or profit accrues from such trade, commerce, manufacture, adventure or concern and any transaction in connection with, or incidental or ancillary to, the commencement or closure of such trade, commerce, manufacture, adventure or concern;…
Please note the highlighted phrase i.e., “whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make gain or profit”, the spirit of which is reflected in the definition of “Business” as per the GST Act. Section 2 (17) of the CGST Act, which defines the word “Business” is reproduced below.
2 (17), Business Includes
(a) Any trade, commerce, manufacture, profession, vocation, adventure, wager or any similar activity, whether or not it is for any pecuniary benefit.
(b) Any activity or transaction in connection with or incidental or ancillary to sub clause (a)
The highlighted phrase in the above definition under GST “whether or not it is for any pecuniary benefit”, carries the same intent and spirit of the definition under Bombay Sales Tax Act, 1959, expressed with the phrase “whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make gain or profit”.
Hence, the principles laid down, for deciding whether a sale is in the course of business or not by Supreme Court in the above case are very much applicable for the GST Act also.
Here are the principles laid down by Supreme court, in words directly quoted from the above judgement.
a) The words “carrying on business” require something more than merely selling or buying etc.
b) If legislature intended to tax every sale or purchase irrespective of the object of the activities out of which the transaction arose, then it was unnecessary to state that the person must “carry on business” of selling, buying etc
c) From the very definition of dealer, it follows that a person would not be a dealer in respect of the goods sold or purchased by him unless he carries on the business of buying and selling such goods.
Authors’ Note: In the context of wording of taxability of a transaction under GST, the above principle would be reworded as “from the very definition of the word supply, it follows that a transaction would not result in a supply ( chargeable under GST ) in respect of goods sold or purchased, unless the transaction is carried out in the course of business “.
d) if the main activity was not “business”, then the connected, incidental or ancillary activities of sales would not normally amount to “business” unless an independent intention to conduct “business” in these connected, incidental or ancillary activities is established by the Revenue.
Based on these principles, Supreme Court held that the Sai Publication is NOT A DEALER under the Bombay Sales Tax Act, 1959 [as amended by Maharashtra Tax Laws Levy, Amendment and Repeal) Act, 1989] and hence the subject sales in question is not subject to VAT under the relevant Act.
Hence, NGOs can take the support of the above supreme court decision and pay GST only on the sales which took place in the course of business. If the main activity of NGO is not business, and if the sale is just an incidental or ancillary activity arising out of the main charitable activity, then such sale is “not in the course of Business and hence GST is not applicable.
For example, take the case of an NGO running free Industrial Training Institutes for the poorer section of society, which involves training the students in operation of CNC machines. The sale of metal scrap generated during the practical training given to students, obviously is connected, incidental or ancillary activity to the main activity of training the students, which is not in course of business. Since the sale of scrap just cannot be a separate business line, there cannot be an independent intention to conduct the business of sale of scrap. Applying the principle enunciated by Supreme court as discussed above, such sale of scrap is not in the course of business and hence is out side the scope of the definition of “Supply” as per GST Act and hence is not subject to GST.
The second example could be a case where just to uphold the dignity of the beneficiary and to prevent, wastage and misuse by beneficiaries, an NGO collects about Rs. 5/- meal from a poor, as against its actual cost of Rs. 15/- and makes up the deficit of Rs 10/- meal, by means of donations and Government Grant. Here obviously the entire activity is aimed towards eradication of hunger utilizing the resources raised from Govt and society at large, and collection of money from the beneficiary is just to make sure that resources are not wasted and dignity of the beneficiary is upheld.
In fact in the Sai publication case, the supreme court observed as follows. “It may be stated that the question of profit motive or no profit move would be relevant only where person carries on trade, commerce, manufacture or adventure in the nature of trade, commerce etc.”.
In the above example, NGO is not in the business of catering but is only conducting a noble activity of removing hunger among the poorest section of society, which cannot be considered as an activity in the course of trade, commerce or manufacture. Applying the above principles, such a nominal amount collected from the beneficiaries of highly subsidized food is also “not in the course of business “ and hence should not be subject to GST.
Hence, it is clear that not all the sales by NGOs are subject to GST and hence, one would request the CBEC to kindly correct their flyer to bring out the above legal position. NGOs can take advantage of the above Supreme court decision and not pay GST on Sales which are not in the course of business.