No GST on Adoption Fees
The Authority for Advance Ruling (AAR), Maharashtra in its Order dated 4th October 2019 has Ruled that the activities conducted by ‘The Children of the World (India) Trust’ are “Charitable Activities” and exempted under Notification No: 12/2017 Central Tax (Rate) dated 28.06.2017 as amended and consequently the receipt of Adoption Fees paid under Regulation 46 of the Adoption Regulations, 2017 by the Prospective Adoptive Parents to the Trust is exempted from the levy of Goods and Services Tax. This order comes as a huge relief to adoption agencies across the state.
AAR’s Order
AAR Maharashtra’s Order under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 clarifies that:
a) The activities conducted by the applicant are “Charitable Activities” which are exempted under Notification No.12/2017- Central Tax (Rate) dated 28.06.2017 as amended.
b) The receipt of the Adoption Fees paid under Regulation 46 of the Adoption Regulations, 2017 by the Prospective Adoptive Parents to the applicant is exempted from the levy of Goods and Services Tax exempted under Notification No.12/2017- Central Tax (Rate) dated 28.06.2017 as amended.
The full text of the Order can be read or downloaded at:
Children of the World India Trust
The application to the AAR was filed under Section 97 of the Central Goods and Services Tax Act, 2017 (CGST) and the Maharashtra Goods and Services Tax Act, 2017 (MGST) by Children of the World India Trust (herein after referred to as the trust) which is registered as a Public Charitable Trust in Mumbai. The trust is also registered under Section 12 AA of the Income Tax Act, 1961 as the Trust’s purpose, objects and activities are covered under “Charitable Purpose” as laid down u/s 2(15) of the Income tax Act.
The trust has established Vishwa Balak Kendra in its own building constructed at Nerul in Navi (New) Mumbai, where they provide shelter to abandoned, orphaned or homeless children.
All aspects regarding admission, registration, maintenance, nutrition, health, process of adoption (including fees on adoption) and handing over of the adopted children to the adoptive parents is strictly regulated by the Government of India under various provisions of the ‘Juvenile Justice (Care and Protection of Children) Act, 2015’ (JJ Act) read with the ‘Juvenile Justice (Care and Protection of Children) Model Rules, 2016’ (JJ Rules) as well as the ‘Adoption Regulations, 2017’.
Specialized Adoption Agency
The trust is registered as a Specialized Adoption Agency (SAA) under Section 41 of the JJ Act read with Rule 21 of the JJ Rules.
Section 2(57) of the JJ Act defines “Specialized Adoption Agency’ as an institution established by the state government or by a voluntary or non-governmental organization and recognized under Section 65 for housing orphans abandoned and surrendered children placed there by order of the Committee for the purpose of adoption.”
As such, the trust is a voluntary non-governmental organization recognized by the Government as “agency to implement the provisions of the JJ Act and the JJ Rules and the Adoption Regulations for housing, restoring & protecting, and facilitating adoption of the children on behalf of the Government and the society at large.
Government control over every aspect
As an agency of the Government the trust has no control over the admission of a child in the SAA, nor has any control over selection of a child for adoption, nor has any control over selection of the prospective adoptive parents or their selection of any adoptive child, nor has any control over approving the adoption application. Every aspect is controlled and processed by the Government through its organ – Central Adoption Resource Agency (CARA) established by the Government under Section 68 of the JJ Act.
Under the said SAA registration, the trust is obliged, and duty bound to house the abandoned, orphaned or homeless children (as “The Adoptive Children”) only if approved by the CARA in the age group of 0-6 years.
From the time of admission of a child till he/she is given in adoption or transferred to other Government Organization, the trust provides shelter, food, clothing, foster care, maintenance, medical treatment and schooling to these “Adoptive Children”. The trust also looks after the mental, physical as well as psychological needs of these Adoptive Children for their social integration.
Fee is in the nature of reimbursement
Based on the conjoint reading of the JJ Act, the JJ Rules, Regulation 46 of The Adoption Regulations and Schedule 13 of the Guidelines, the trust submitted that the ‘adoption fee’ under the JJ Act and the Child Care Corpus (CCC) under the old Guidelines are pari-materia i.e. both refer to the reimbursement of adoption expenses.
Thus, in the scheme of the JJ Act, adoption fee is nothing but a partial reimbursement of the expenses incurred by the SAA and not a consideration for any services rendered.
The trust runs a charitable, philanthropic and social welfare activity with no business or commercial interest at all.
Finally, a child under the JJ Act is neither ‘goods’ nor is any service rendered to that child a ‘supply of service’.
Position under GST law
The Central Government has, pursuant to the powers vested under Section 11 of the CGST Act, issued a Notification No. 12/2017-Central Tax Rate dated 28.06.2017 whereby an exemption as specified therein is granted for intra-state supply of services of the services specified therein.
The said Exemption Notification provides that: Services by an entity registered under section 12AA of the Income Tax Act, 1961 (charitable activities) are exempt from whole of the GST.
However, section 2(r) of the said Exemption Notification defines “charitable activities” by way of activities relating to:
- Services relating to public health like:
- Care or counseling of terminally ill persons or persons with severe physical or mental disability;
- Persons afflicted with HIV or AIDS;
- Persons addicted to a dependence-forming substance such as narcotics drugs or alcohol;
- Public awareness of preventive health, family planning or prevention of HIV infection.
- Advancement of religion, spirituality or yoga;
- Advancement of educational programmes or skill development relating to:
- Abandoned, orphaned or homeless children;
- Physically or mentally abused and traumatized persons;
- Prisoners; or
- Persons over the age of 65 years residing in a rural area;
- Preservation of environment including watershed, forests and wildlife.
The trust therefore claimed that it is a charitable trust registered under Section 12AA of the Income Tax Act and the activities are “charitable activities” under the GST Act.
The trust also submitted that it is NOT engaged in any business.
Adoption of a child cannot be a business in view of the strict provisions of the JJ Act and the JJ Rules. In fact, if there is any element of business in the adoption activities, the trust would have to face criminal proceedings for violation of the JJ Act.
What is business?
Section 2(17) of The CGST Act defines the term Business to include:
- any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
- any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
- any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;
- supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;
- provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;
- admission, for a consideration, of persons to any premises;
- services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;
- activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and
- any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities,
The trust also argued that adoption activity is not covered within the scope of the term ‘SUPPLY’ as provided vide Section 7 of the CGST Act, 2017.
What is Supply (of service)?
(1) For the purposes of GST Act, the expression “supply” includes:
- all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
- import of services for a consideration whether or not in the course or futherance of business, [and]
- The activities specified in Sch. 1, made or agreed to be made without a consideration;
(1A) where certain activities or transactions, constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.
The trust argued that:
- the activity of placing a child in adoption does not qualify either as supply of goods or services;
- complying with the legal formalities of adoption process in terms of the provisions of Adoption Regulations, 2017 and or the JJ Act, 2015 cannot be construed as an activity in the course or furtherance of business nor is it made for any consideration;
- the adoption activity can’t be said to be covered under Schedule 11 of the CGST Act which enumerates “Activities (or Transactions) to be treated as supply of goods or supply of services.
What is consideration?
The term ‘Consideration’ is defined under Section 2(31) of the CGST Act, 2017.
“Consideration” in relation to the supply of goods or services or both includes:
- any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
- The monetary value of any act or forbearance, in respect of, in response to, or for the inducement of the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.
It was submitted that though the trust does not receive any consideration as defined in the GST Act, the adoption activity is not covered under the Schedule I (i.e. “activities to be treated as supply even if made without a consideration”).
The activities of child adoption and/or legal compliance undertaken in relation to the Adoption by the Applicant do not fall under any of the above categories.
Adoption fees prescribed by CARA under the authority of JJ Act, 2015 read with the Adoption Regulation, 2017 cannot considered as a consideration against the business activity.
There are two important limbs of any supply under GST:
- consideration and
- in the course or furtherance of business.
Where the consideration is not present in a transaction (e.g. placing a child in adoption) that transaction does not fall within the ambit of the definition of supply.
But, in certain scenarios as elucidated in Schedule 1 of the CGST Act, the key element of consideration is not required to be present for treating certain activities as supply. However, Adoption activity is NOT an activity covered under said schedule I.
Invoice
Another key element is whether any invoice is issued by the supplier in the transaction.
GST Invoice is essentially a business instrument (also called bill) issued by a supplier or a seller to the recipient or the buyer of goods and services. Such a document indicates the names of the parties involved as well as the details of goods or services supplied under a given transaction.
The trust stated that it does not issue any invoice and therefore does not qualify as “supplier”.
In fact, under the JJ Act, the trust is prohibited to do so.
The amount to be reimbursed towards Adoption Expenses by the Prospective Adoptive Parents is prescribed under Rule 46 of the JJ Rules and the trust has no control or discretion on deciding such amount.
Summing up
- The adoptive child is not “Goods” in terms of section 2(52) of the CGST Act;
- No taxable supply of services as defined in section 2(108) is made by the trust to the Adoptive Child, and or to the Government and or to Prospective Adoptive Parents;
- The activities of the trust are “Charitable Activities” in terms of the GST Exemption Notification No. 12/2017;
- No consideration is received by the trust. What is received is only a partial reimbursement of the expenses up to the limit prescribed by the Government and nothing more.
- In terms of the provisions of Regulation 46(1) of the Adoption Regulations as per CARA what is contemplated as ‘Adoption Fee’ is “the adoptive parents shall bear the expenses for adoption as prescribed by the Authority”.
- The Applicant is not engaged in any Business at all.
AAR’s observations & findings
The applicant trust has submitted that ‘Children’ are neither “goods” nor is there any “service” provided by them to the adoptive parents and therefore the essential element of supply namely “in the course or furtherance of business” is missing from the chain of activities, because their activities neither answer the definition of ‘business’ under section 2(17) of the CGST Act nor do the fees received from the adoptive parents to be a ‘consideration’ under the Section 2(31) of the CGST Act.
On careful consideration of the definitions of ‘business’, ‘supply’ and ‘consideration’ contained in the CGST/SGST Act, we are of the opinion that the applicant, along with providing for advancement of educational programmes or skill development relating to abandoned, orphaned or homeless children, is also providing a ‘service of facilitating adoption’ and receiving consideration in the form of adoption fees for such facilitation services rendered by them. Therefore we hold that their activities are covered within the scope of CGST/SGST Act.
We further find that their activities which are in the nature of “Charitable Activities”, also consists of advancement of educational programmes or skill development relating to abandoned, orphaned or homeless children. Such activities are clearly covered under Sr. No. 1 of Notification No.12/2017- C.T. (Rate) dated 28.06.2017 as amended from time to time and the applicant being an entity registered under Section 12AA of the IT Act, such activities carried out by the applicant are exempted by the said notification.
The applicant is a Charitable Trust registered as a “Specialized Adoption Agency” and is an institution recognized under Section 65 of the said Act, for housing orphans abandoned and surrendered children placed there by order of the committee for the purpose of adoption. Every aspect of their activity is controlled and processed by CARA.
The applicant does not and cannot take any remuneration, donation or any other amount other than the Adoptions fees paid to them. The Adoption Fees as on the date is affixed amount of Rs. 40,000/- for Intra Country and US$ 5,000/-, in case of Inter-Country Adoption.
In this context, we find from the FAQs issued by CARA (Central Adoptive Resources Agency) in their official website cara.nic.in that the adoption fee collected by the institute is strictly in terms of guidelines fixed by the Adoption Regulations, 2017 issued under the JJ Act.
As per the Regulations, a Specialized Adoption Agency (SAA) can charge a fee of Rs. 40,000.00 under the head Child Care Corpus from the adoptive parents.
The applicant, being a SAA, charges fees of Rs. 40,000.00 as a corpus which in turn is used for shelter, food, clothing, foster care, maintenance, medical treatment and primary education and basic computer skills of these abandoned children/orphans in their Bal Vikas Kendra till the time they are adopted.
In view of the submissions made by the applicant and the observations made by us, we find that their activities, including the activity of facilitating the adoption of the children by the Adoptive parents, are in the nature of “Charitable Activities”, which also consists of advancement of educational programmes or skill development relating to abandoned, orphaned or homeless children. Such activities are clearly covered under Sr. No. 1 of Notification No. 12/2017- C.T. (Rate) dated 28.06.2017 and are exempted by the said notification.
Therefore the receipt of the Adoption Fees by the applicant from the Prospective Adoptive Parents to the Trust is exempted from the levy of Goods and Services Tax.
Our analysis
- AAR has taken the view that the activities of the trust are covered within the scope of CGST/SGST Act.
- However, GST will not apply simply because the activities are covered under the exempt category under Sr. No. 1 of Notification No. 12/2017- C.T. (Rate) dated 28.06.2017.
Noshir H. Dadrawala