Applicability of Service Tax to NGOs/NPOs
Several NGOs/NPOs continue to live under
the myth that because they are tax exempt under 12AA or 10(23C) they would also
be exempt automatically under Service Tax. Some clarifications from our legal head Noshir Dadrawala.
the myth that because they are tax exempt under 12AA or 10(23C) they would also
be exempt automatically under Service Tax. Some clarifications from our legal head Noshir Dadrawala.
It is important for all NGOs/NPOs to know
and understand that while Income Tax Act is a Direct Tax, Service Tax is an
indirect tax.
and understand that while Income Tax Act is a Direct Tax, Service Tax is an
indirect tax.
If an NGO/NPO offers a service that is
not listed in the ‘Negative List’, such as, for example, ‘consulting service’,
service tax would apply if consideration from such service exceeds ten lakhs of
rupees in any financial year. The current service tax rate is 14%.
not listed in the ‘Negative List’, such as, for example, ‘consulting service’,
service tax would apply if consideration from such service exceeds ten lakhs of
rupees in any financial year. The current service tax rate is 14%.
The
term ‘Service’ means:
term ‘Service’ means:
·
any activity
any activity
·
for consideration
for consideration
·
carried out by a person for another
carried out by a person for another
·
and includes a declared service
and includes a declared service
Therefore, an
activity for consideration carried out by a person for another person
can be included as service and it may also include a declared service. In other
words, any service provided for a fee or when something is received in return
would be considered as a service. All services except those provided in the
negative list would be considered as taxable services.
activity for consideration carried out by a person for another person
can be included as service and it may also include a declared service. In other
words, any service provided for a fee or when something is received in return
would be considered as a service. All services except those provided in the
negative list would be considered as taxable services.
The Service Tax Act has made all services
taxable except those services which are specifically exempted. Under current
law, almost all services rendered by NGOs on commercial basis or on consultancy
contract are taxable under Service Tax.
taxable except those services which are specifically exempted. Under current
law, almost all services rendered by NGOs on commercial basis or on consultancy
contract are taxable under Service Tax.
Only some NGOs (not all) registered under
Section 12AA of Income Tax Act, 1961 are totally exempted from Service Tax.
Section 12AA of Income Tax Act, 1961 are totally exempted from Service Tax.
Earlier, NGOs engaged in “advancement of
any other object of general public utility” were exempt up to a certain limit
of taxable services in addition to the blanket exemption of Rs. 10
Lakhs. However vide Notification No.33/2012-ST dated 20/06/2012 the special
exemption given to this category of NGOs has also been withdrawn, meaning
thereby there is no special exemption for NGOs engaged in “advancement of any
other object of general public utility” though, to repeat, they can avail the
basic service tax exemption of Rs. 10 Lakhs.
any other object of general public utility” were exempt up to a certain limit
of taxable services in addition to the blanket exemption of Rs. 10
Lakhs. However vide Notification No.33/2012-ST dated 20/06/2012 the special
exemption given to this category of NGOs has also been withdrawn, meaning
thereby there is no special exemption for NGOs engaged in “advancement of any
other object of general public utility” though, to repeat, they can avail the
basic service tax exemption of Rs. 10 Lakhs.
It is critical to note that the Service Tax
law has taken a narrow definition of the term ‘charitable purpose’ which is
different from the definition of charitable purpose under section 2(15) of Income Tax Act 1961.
law has taken a narrow definition of the term ‘charitable purpose’ which is
different from the definition of charitable purpose under section 2(15) of Income Tax Act 1961.
Service tax exemption has been provided
to only those NGOs which are registered under section 12AA of the
Income Tax Act, 1961 and carrying on one or more of the following charitable
activities:
to only those NGOs which are registered under section 12AA of the
Income Tax Act, 1961 and carrying on one or more of the following charitable
activities:
(1) NGO engaged in public health by way
of:
of:
(a) care or counseling of (i) terminally
ill persons or persons with severe physical or mental disability, (ii) persons
afflicted with HIV or AIDS, or (iii) persons addicted to a dependence-forming
substance such as narcotics drugs or alcohol; or
(b) public awareness of preventive
health, family planning or prevention of HIV infection;
(2) NGO engaged in advancement of
religion:
(3) NGO engaged in advancement of
educational programmes or skill development relating to:
(a) abandoned, orphaned or homeless
children;
(b) physically or mentally abused and
traumatized persons;
(c) prisoners; or
(d) persons over the age of 65 years
residing in a rural area;
(4) NGO engaged in preservation of
environment including watershed, forests and wildlife.
Therefore, in light of the above
definition, Service Tax is applicable to:
definition, Service Tax is applicable to:
a) NGOs which are not registered u/s.
12AA of the Income Tax Act, 1961.
12AA of the Income Tax Act, 1961.
b) NGOs which are engaged in relief to
poor, preventive health, informal education programs, etc.
poor, preventive health, informal education programs, etc.
c) NGOs which are engaged in “advancement
of any other purpose of public utility”.
of any other purpose of public utility”.
Some
of the services covered in the Negative list include:
of the services covered in the Negative list include:
a)
Services by way of:
Services by way of:
i)
Pre-school education and education up to higher secondary school or equivalent;
Pre-school education and education up to higher secondary school or equivalent;
ii)
Education as a part of a curriculum for obtaining a qualification recognized by
any law for the time being in force;
Education as a part of a curriculum for obtaining a qualification recognized by
any law for the time being in force;
iii) Education as a part of an approved
vocational education course
vocational education course
(Hence, non-formal education is not covered under
the exempt category of Service Tax and therefore any collection from non
formal, program would be subject to service tax.)
the exempt category of Service Tax and therefore any collection from non
formal, program would be subject to service tax.)
b)
Services by way of renting of residential dwelling for use as residence;
Services by way of renting of residential dwelling for use as residence;
(I.e.
if the NGO is renting out properties for
non-residential purpose then this rent income would become service subject to Service Tax.
if the NGO is renting out properties for
non-residential purpose then this rent income would become service subject to Service Tax.
CAP offers legal and other compliance advisory to nonprofits and the social sector. For further queries, contact – connect@capindia.in
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