Companies should refrain from deducting TDS on Grants and not insist on GST registration for NGOs!
There should be no Tax Deduction at Source (TDS) nor should there be insistence on compliance under the Goods & Services Tax (GST) on ‘GRANTS’ (whether CSR grants or regular grants) made by any company or corporate trust/foundation to NGOs.
However, there seems to be a trend among
some companies in India to treat NGOs (be they charitable trusts, societies registered
under the Act of 1860 or Section 8 Companies) as ‘vendors of professional
(commercial) services’ or the company’s ‘contractors/sub-contractors’. This is
patently wrong and this practice should be stopped immediately.
some companies in India to treat NGOs (be they charitable trusts, societies registered
under the Act of 1860 or Section 8 Companies) as ‘vendors of professional
(commercial) services’ or the company’s ‘contractors/sub-contractors’. This is
patently wrong and this practice should be stopped immediately.
Unfortunately, the stakes are so
high, that some NGOs, because of their dire need for funds are succumbing under
corporate pressure and accepting the dictates of these companies, little
realizing the vicious trap that they are falling into – potentially
jeopardizing their very tax exempt status. What’s worse, because of the mistakes of a few, the entire sector gets tarred with the same brush!
high, that some NGOs, because of their dire need for funds are succumbing under
corporate pressure and accepting the dictates of these companies, little
realizing the vicious trap that they are falling into – potentially
jeopardizing their very tax exempt status. What’s worse, because of the mistakes of a few, the entire sector gets tarred with the same brush!
NGOs should understand that when
they sign business/commercial/professional contracts with companies and accept
their position as vendors of business/commercial/professional services, with
TDS deducted for professional or consultancy services (u/s 194J), they are
exposing themselves as deemed business/commercial operators of professional/consultancy services. This
would not only jeopardize their tax exempt status u/s 12AA, but, also require
them to register under GST if the turnover from such professional or
consultancy services exceeds Rs. 20 Lakhs during the financial year.
they sign business/commercial/professional contracts with companies and accept
their position as vendors of business/commercial/professional services, with
TDS deducted for professional or consultancy services (u/s 194J), they are
exposing themselves as deemed business/commercial operators of professional/consultancy services. This
would not only jeopardize their tax exempt status u/s 12AA, but, also require
them to register under GST if the turnover from such professional or
consultancy services exceeds Rs. 20 Lakhs during the financial year.
What
is a Grant?
is a Grant?
It is important for both companies as well as NGOs to understand the nature of a grant.
A grant is in the
nature of a ‘gift’ and contractual or an agreement only
to the extent of being given for a specific (charitable) purpose with specific
terms & conditions regarding use of the gift (E.g. use the grant only to
provide education to girls, do not spend more than five per cent of the grant
on travel or overheads, spend only as per agreed budget lines, provide
quarterly reports etc. etc.)
nature of a ‘gift’ and contractual or an agreement only
to the extent of being given for a specific (charitable) purpose with specific
terms & conditions regarding use of the gift (E.g. use the grant only to
provide education to girls, do not spend more than five per cent of the grant
on travel or overheads, spend only as per agreed budget lines, provide
quarterly reports etc. etc.)
A ‘Donation’ too is in the
nature of a gift, but, it is ‘unrestricted’. A grant on the other hand is
a restricted donation or gift, with conditions set by the donor and accepted by
the NGO under a grant agreement.
nature of a gift, but, it is ‘unrestricted’. A grant on the other hand is
a restricted donation or gift, with conditions set by the donor and accepted by
the NGO under a grant agreement.
In the case of a ‘grant’ various
prerequisites are attached to the grant prior to the NGO receiving
the gift, often with specific expenditure requirements / limitations and
reporting guidelines. However, this does not make a ‘grant agreement’ into a
‘professional service or consultancy contract’ liable
to TDS and compliance under GST.
prerequisites are attached to the grant prior to the NGO receiving
the gift, often with specific expenditure requirements / limitations and
reporting guidelines. However, this does not make a ‘grant agreement’ into a
‘professional service or consultancy contract’ liable
to TDS and compliance under GST.
Even the earlier ‘Technical
Guide to Service Tax’ issued by CBEC in 2012 makes it clear:
“Conditions in a grant stipulating merely proper usage of
funds and furnishing of account also will not result in making it a
provision of service.”
Guide to Service Tax’ issued by CBEC in 2012 makes it clear:
“Conditions in a grant stipulating merely proper usage of
funds and furnishing of account also will not result in making it a
provision of service.”
NGOs
Exist for ‘charitable’ and not ‘commercial’ purpose’
Exist for ‘charitable’ and not ‘commercial’ purpose’
An NGO having registration u/s
12AA is Tax Exempt and is recognized by the tax authorities as an organization
established for ‘charitable purpose’.
12AA is Tax Exempt and is recognized by the tax authorities as an organization
established for ‘charitable purpose’.
Under Section 2(15) of Income
Tax Act 1961, “charitable purpose” includes:
Tax Act 1961, “charitable purpose” includes:
1) Relief of the poor,
2) Education, Yoga
3) Medical relief,
4) Preservation of Environment (including watersheds, forests and wildlife)
5) Preservation of monuments or places or objects of artistic or historic
interest”
interest”
6) The
advancement of any other object of general public utility.
advancement of any other object of general public utility.
Thus, how can an organization established
for relief of the poor, advancement of education, medical relief etc., be a
“vendor of (commercial) service/s” as understood in business or
commercial terms?
for relief of the poor, advancement of education, medical relief etc., be a
“vendor of (commercial) service/s” as understood in business or
commercial terms?
To repeat, NGOs exists for
“charitable purpose” as per objects enshrined in their trust deed or
memorandum of association. An NGO generally sustains its work with the aid
of grants and donations and not through commercial
work contracts!
“charitable purpose” as per objects enshrined in their trust deed or
memorandum of association. An NGO generally sustains its work with the aid
of grants and donations and not through commercial
work contracts!
Therefore, we, at the Centre for
Advancement of Philanthropy (CAP) always advise companies to sign ‘grant
agreements’ and treat NGOs as their ‘CSR program partners’ instead of
preparing vendor agreements and treating NGOs as
their service contractors.
Advancement of Philanthropy (CAP) always advise companies to sign ‘grant
agreements’ and treat NGOs as their ‘CSR program partners’ instead of
preparing vendor agreements and treating NGOs as
their service contractors.
All the companies that we at CAP
advise and work with and which includes large finance,
banking, pharmaceutical, engineering, textile and trading companies follow the
process of sanctioning ‘grants’ without TDS or insisting on GST
compliance for the NGO.
advise and work with and which includes large finance,
banking, pharmaceutical, engineering, textile and trading companies follow the
process of sanctioning ‘grants’ without TDS or insisting on GST
compliance for the NGO.
No
tax should be deducted at source on grants because:
tax should be deducted at source on grants because:
a) A grant is a gift, albeit
restricted or conditional
restricted or conditional
b) NGOs exists for
‘charitable purpose’ and they are not ‘commercial providers of service/s’
‘charitable purpose’ and they are not ‘commercial providers of service/s’
c) A ‘grant agreement’ can have
various conditions and stipulations as also specific expected deliverable, but,
that does not make it a ‘commercial contract’.
various conditions and stipulations as also specific expected deliverable, but,
that does not make it a ‘commercial contract’.
d) NGOs under CSR Rules are
“Implementing Agencies” or ‘CSR implementing partners’ of companies
and not the company’s ‘commercial contractors’ or ‘vendors’
“Implementing Agencies” or ‘CSR implementing partners’ of companies
and not the company’s ‘commercial contractors’ or ‘vendors’
Clearly, therefore, companies should desist
from viewing and treating NGOs registered and existing for ‘charitable purpose’
as ‘commercial contractors’ or ‘vendors of commercial services’.
from viewing and treating NGOs registered and existing for ‘charitable purpose’
as ‘commercial contractors’ or ‘vendors of commercial services’.
Benefit
to the company
to the company
Companies should also realize
and understand that as per Finance Act 2014: ‘CSR Expenditure’ shall not be allowed as ‘Business Expenditure’ under
section 37 of Income Tax Act, 1961. However, any CSR expenditure which is allowed as deduction under other
sections (e.g. u/s 80G) would be permissible!
and understand that as per Finance Act 2014: ‘CSR Expenditure’ shall not be allowed as ‘Business Expenditure’ under
section 37 of Income Tax Act, 1961. However, any CSR expenditure which is allowed as deduction under other
sections (e.g. u/s 80G) would be permissible!
In other words by entering into
commercial CSR contracts or vendor agreements with NGOs, companies gain no tax
advantage, because, such expenditure would not be deductible as business
expenditure or write off. On the other hand, if it is a grant agreement and the
funds are given by way of grant (i.e. specific / conditional / restricted
contribution) and the NGO has 80G tax deduction certificate, the company can
enjoy fifty per cent tax deduction.
commercial CSR contracts or vendor agreements with NGOs, companies gain no tax
advantage, because, such expenditure would not be deductible as business
expenditure or write off. On the other hand, if it is a grant agreement and the
funds are given by way of grant (i.e. specific / conditional / restricted
contribution) and the NGO has 80G tax deduction certificate, the company can
enjoy fifty per cent tax deduction.
Noshir H. Dadrawala