NGOs’ enterprise exercise places charity on backseat, taxpayers ought to be careful

It is a well known incontrovertible fact that non-governmental organizations (NGOs) declare tax exemption beneath part 11 of the Income Tax Act on the incomes and donations obtained for charitable actions undertaken by them. Their philanthropic actions prolong past the fields of schooling and healthcare and are primarily geared toward offering aid to the poor.

Educational establishments, together with medical schools, are exempt from taxes if they’re registered beneath part 10(23C) or part 11 of the I-T Act. Yet, they’re allowed to cost charges for providing their providers to the needy. Though such charges is meant to recuperate their working prices, at occasions, these actions generate earnings. These earnings, if used once more for charitable functions, are additionally entitled for tax exemption. Donations paid to establishments registered beneath part 10(23C) or part 11 are additionally tax deductible within the palms of the donors. Taxpayers can declare deduction beneath part 80G for any such donations whereas submitting their revenue tax returns (ITR).

Commercial earnings entitled to exemption

The scenario turns into tough when charges and prices collected by the charitable establishments for the service rendered are of business requirements or if the earnings that they generate are very excessive. The supreme courtroom and excessive courts have hitherto held that even when any enterprise exercise is carried out by the NGOs, an exemption wouldn’t be denied so long as the earnings generated from their enterprise exercise is used for charitable functions.

SC ruling on extreme earnings by charitable establishments

The Supreme Court not too long ago revisited its earlier judgement and, on 19 October 2022, held that academic establishments, which search approval or exemption u/s. 10(23C) of the I-T Act, ought to ‘solely’ be involved with schooling or education-related actions. Further, if the target of the establishments seems to be profit-oriented, they might not be entitled to tax exemptions. In one other judgement delivered on the identical date, within the context of establishments claiming exemption u/s. 11/12, the courtroom acknowledged that charging any quantity for any service or charitable exercise on cost-basis or nominally above value will not be a enterprise exercise; but when the costs are considerably excessive, it could tantamount to enterprise exercise. These observations are more likely to have an effect on the tax exemptions claimed by the establishments.

These two current choices of the Supreme Court have overturned the authorized ideas thus far adopted by authorities assessing the revenue of those NGOs. It has additionally narrowed the scope of enterprise actions that the establishments have been hitherto eligible for. Perhaps, that’s the explanation why the supreme courtroom has expressly declared that the stated choices won’t have an effect on any previous offers and can solely be relevant to future transactions.

Effect of the ruling on the donations made by taxpayers

These findings of the courtroom would have far reaching implications not solely on the exemptions claimed by NGOs, but in addition on the deductions claimed by donors u/s. 80G. Though the courtroom has laid down broader ideas, there seems to be no readability as to what degree of earnings would represent a enterprise exercise and the way such earnings could be computed. There stays a gray space on the style by which the stated directives of the courtroom could be utilized by the executive authorities.

It is essential that NGOs avail of tax exemptions for people to be eligible for deduction u/s. 80G. In view of the Court ruling, donations made to an establishment held to be finishing up industrial exercise will not be exempt from deductions Though deduction u/s.e 80G will not be withdrawn in respect of previous donations, such safety beneath the regulation shouldn’t be free from doubt and might result in unintended litigation.

Taxpayers ought to due to this fact watch out and make correct enquiries in regards to the tax exemption standing of establishments earlier than making donations. They can even examine on the I-T portal at https://incometaxindia.gov.in/Pages/ utilities/exempted-institutions.aspx whereby the names of the tax exempted establishments are supplied.

Dharmesh Shah is a chartered accountant

Catch all of the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint.
Download The Mint News App to get Daily Market Updates.

More
Less

Topics