NGOs stand for non-governmental organisations. In a general term, a non- governmental organisation is the one that operates independently of any government, typically one whose purpose is to address a social or political issue.
For example, an NGO taking initiative by providing medical and educations awareness facilities in rural areas which benefit the society and provide a better health structure immensely and can make way for a brighter future generation. Hence, the government encourages such type of initiatives by providing some relaxations, benefits or subsidies. For this, various exemptions are given in Income Tax Act, 1961.
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Forms of Constitution of Non Government Organisations:
NGO’s can be constituted in various forms. Below are the different forms in which NGO’s can be constituted:
1. Charitable Trust under “The Indian Trusts Act, 1882” and similar other States Trust Acts.
2. Society under “The Societies Registration Act, 1860”
3. Section 8 Companies under “Companies Act 1956”.
Each form of the constitution has its own enactment and the provisions contained therein would apply to the respective form.
1. Public Charitable Trust:
Trust can be constituted by Trust deed. In the case of formation of trust, there are no specific statues available. Public charitable trust is governed by the public trust Act of that state and The Indian Trusts Act, 1882.
However, charitable endowment act’1890 and Charitable and religious act’1920 have bearing on the formation of a charitable trust. Few states such as Maharashtra, Rajasthan, Gujarat and Madhya Pradesh etc. have their own state Acts.
2. Society:
Society is an association of persons who come together by mutual consent to act jointly for a common purpose. The compliance has to be made under the Societies registration act’1860.
Minimum 7 members in state level and minimum of 9 members in National level society are required for the formation of society. The requisite 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.
3. Section 8 Company:
Company Act’2013 applies in case of a registration of Section 8 Company. As per Sub section 1 of Section 8 of Companies Act 2013, Registrar shall, on application, in the prescribed form, register such person or association of persons as a company under this section. If they have in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object and intends to apply its profits, if any, or other income in promoting its objects; with a restriction on payment of any dividend to its members and addition to its name of the word “Limited”, or as the case may be, the words “Private Limited”
The main object of the company is to give benefit to the public. It is a company formed for charitable objects.
Minimum 2 members are required in a Private and 7 members in a public company. 2 directors are required for the formation of the private company and 3 directors in a public company.
The selection of particular legal form depends on various factors like Size of the institution, Cost, Number of persons, Compliance, global appearance and availability of funds etc. Apart from it, there are various other factors which may be considered while selecting a particular form for NGO.
Applicability of Income Tax Act on NGO:
Section 2(15) of Income Tax Act, 1961 defines the word “charitable purpose”. As per the section, “charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:
Above section also provides that activities are not considered as charitable purpose in case activities are carrying out in the nature of trade, commerce or business or any activity of rendering any services to any trade, commerce or business.
Sections 11, 12, 12A, 12AA and 13 of the Income –tax Act, contains the provisions that deals tax exemption applicable on the income of charitable or religious trusts/institution. It also provides the procedures and conditions for grant, withdrawal and cancellation of registration and also the mandatory requirements under which a charitable trust or institution needs to function for being eligible for exemption.
It is important to note here that exemption under income tax Act is available to the assessee irrespective of the type of the constitution he constituted i.e. trust, society or section 8 companies (as mentioned above), however, the only pre condition to claim exemption is registration under section 12A of the Income Tax Act, 1961.
Procedure for Registration under Section 12A
Procedure for registration under Section 12A has been defined in section 12AA of the Income tax Act 1961. As per sec 12AA of Income Tax Act, 1961
The Principal Commissioner or Commissioner, on receipt of an application for registration of a trust or institution made under, shall—
A. call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and
B. After satisfying himself about the objects of the trust or institution and the genuineness of its activities, he—
– shall pass an order in writing registering the trust or institution;
– shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution,
and a copy of such order shall be sent to the applicant:
Provided that no order for refusing registration shall be passed unless the applicant has been given a reasonable opportunity of being heard.
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 as mentioned below
1. Certified copy of the instrument under which the trust/institution was created/established, if applicable
2. Certified copy of the document evidencing the creation of the trust or the establishment of the institution, if applicable
3. Certified copy of registration with RoC/Registrar of Firms & Societies/Registrar of Public Trusts, whichever applicable
4. Certified copy of the documents evidencing adoption or modification of the objects, if any
5. Certified copy of the annual reports of the trust/institution for a maximum three immediately preceding financial years, if applicable
6. Note on activities
7. Certified copy of existing order granting registration under section 12A or section 12AA, if any.
8. Certified copy of order of rejection of application for grant of registration under section 12A or section 12AA, if any.
9. Any other (Please Specify)”
Registration under Foreign Contribution Regulation Act, 2010:
NGO’s that receive foreign contribution or donation from foreign sources are required to obtain registration under Foreign Contribution Regulation Act, 2010. This is law is regulated by Ministry of Home Affairs (MHA). There is a condition that NGO must be in existence for minimum 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 once granted is valid for a period of five years. An application for renewal of 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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