Impact of GST on NGOs and Charitable Trusts

Impact of GST on NGOs and Charitable Trusts. GST (Goods and Services Tax) applies to all goods and services in India unless specifically exempted or rated NIL by the GST Council. Contrary to popular belief, some services and goods provided by Charitable Trusts or NGOs may fall under GST. This article explores the GST provisions for these entities in India.
In the Finance (No. 2) Bill, 2024, Finance Minister Nirmala Sitharaman introduced key changes that will simplify procedures for charitable trusts and institutions, reduce administrative burdens, and provide greater clarity. These amendments primarily focus on streamlining the tax exemption provisions for charitable trusts under the Income Tax Act, 1961. Here's an overview of the key changes, including the rationalization of regimes and examples to illustrate the adjustments.
Key Amendments for Charitable Trusts
Merger of Two Tax Exemption Regimes
Currently, charitable institutions claim tax exemptions under two different regimes:
-First Regime: Sub-clause(s) (iv), (v), (vi), or (via) of Section 10(23C)
-Second Regime: Sections 11 to 13
To simplify the process, the government has decided to phase out the first regime and shift all institutions to the second regime.
What Changes?
-From 1st October 2024, new applications under the first regime will no longer be accepted.
-Applications submitted before this date will continue under the existing regime.
-Charitable institutions approved under the first regime can retain their exemptions until the approval expires. Once expired, they must register under the second regime (Sections 11 to 13).
-Certain investment protections under the first regime will continue under the second regime, as outlined in Section 13.

Date

Applicable Provision

Application Status

Before 1st October 2024

Section 10(23C)(iv), (v), (vi), (via)

Applications processed under existing regime

After 1st October 2024

Section 12AB

Institutions must apply under Section 12AB

Condonation of Delay in Registration Filing
Previously, charitable trusts and institutions were required to apply for registration under Section 12AB within a specific timeline. Failure to do so could result in tax on accreted income (exit tax), leading to the permanent loss of their exemption.
Amendment:
-The Principal Commissioner or Commissioner now has the authority to condone delays in filing for registration, provided there is a reasonable cause for the delay.
Rationalization of Timelines for Section 80G Applications
Section 80G provides tax deductions to donors who contribute to approved charitable institutions. Charitable trusts must apply for approval within a set timeline, or they risk losing their Section 80G benefits.
Amendment:
-The timelines for filing applications for approval under Section 80G will be rationalized, offering institutions more flexibility to maintain their Section 80G status.
Extension of Timeline for Processing Registration/Approval Applications
Currently, applications for registration under Section 12AB or approval under Section 80G must be processed within six months from the end of the month in which the application is received.
Amendment:
-This timeline has been extended to six months from the end of the quarter in which the application is received, providing the Income Tax Department with additional time to process applications.
Merger of Trusts and Exit Tax
When trusts or institutions merge with another registered entity, they may attract exit tax under Chapter XII-EB. The amendment will clarify the conditions under which such mergers will not be subject to exit tax.
Example:
-If a charitable school merges with another similar charitable institution, the merger can be exempt from exit tax, provided it meets the prescribed conditions.
Inclusion of New Clauses in Section 11(7)
Sub-section (7) of Section 11 will now reference Clauses (23EA), (23ED), and (46B) of Section 10. This amendment allows trusts registered under Section 12AB to claim exemptions under these new clauses.
Example:
-A trust registered under Section 12AB may now also claim tax exemption under Section 10(23ED), if applicable.
Criteria for GST Exemption for Charitable Trusts
A Charitable Trust or NGO can be exempt from GST if it meets the following criteria:
1. The entity is registered under Section 12AA of the Income Tax Act.
2. The services provided qualify as charitable activities.
Not all services of a Section 12AA-registered trust are deemed charitable under GST. Exempt charitable activities include:
-Public health services, such as:

Care or counseling for terminally ill persons or those with severe disabilities.

Services for individuals with HIV/AIDS or substance addiction.

Public awareness campaigns on health, family planning, or HIV prevention.

-Promotion of religion, spirituality, or yoga.
-Educational and skill-building programs for vulnerable groups like:

Orphaned or homeless children.

Abused persons, prisoners, or elderly people in rural areas.

-Environmental conservation, such as forest or wildlife preservation.
If a charitable trust or NGO does not meet these conditions, GST is applicable, and the entity must register under GST.
Are Services Provided by Charitable Trusts Exempt from GST?
Only certain services, as defined above, provided by a 12AA-registered trust are exempt. Any other services for consideration are subject to GST.
Are Goods Sold by Charitable Trusts Exempt from GST?
No, goods sold by a charitable trust for consideration are taxable under GST. There is no exemption for goods supplied by charitable trusts. They must pay GST on purchases and collect it on sales.
GST Registration Requirements for NGOs and Charitable Trusts
NGOs or charitable trusts with a combined annual turnover exceeding Rs. 20 lakhs (Rs. 10 lakhs for northeastern states) must get GST Registration. Even if the turnover is below this threshold, registration is required if services are provided in more than one state. If the annual revenue is less than Rs. 1.5 crores, they may opt for the composition scheme.
Exempt Services Provided by Charitable Trusts or NGOs
The following services are exempt from GST for registered charitable trusts or NGOs:
-Healthcare services from government-approved clinical facilities.
-Educational services from government-approved higher learning institutes.
-Services from organizations authorized under Section 12AA of the Income Tax Act.
-Services provided to international organizations like the UN.
-Skill-building or career training services.
-Coaching in arts, culture, or sports.
-Services for military, paramilitary, or animal care.
Is Donation Comes Eligible for Charitable Trust?
Under Section 80G of the Income Tax Act, not all donations are eligible for a 100% deduction. The eligibility for a deduction depends on the organization receiving the contribution. The tax benefit is determined based on the organization's qualifying status. Donations can qualify for either a 100% or 50% deduction, and some may come with certain conditions or limits.
The deductible amount from a donation is referred to as the "qualifying amount." To ensure accuracy in filing an income tax return, it is crucial for taxpayers to carefully calculate the eligible deduction amount.
The following organizations are eligible for a 100% tax deduction under Section 80G, with no additional qualifying limits:
-National Defence Fund (Central Government)
-Prime Minister's National Relief Fund
-National Foundation for Communal Harmony
-Universities or educational institutions of national importance
-Zila Saksharta Samiti (in districts, chaired by the district collector)
-State Government Funds for medical relief to the poor
-National Illness Assistance Fund
-National Blood Transfusion Council
-National Sports Fund
-National Cultural Fund
-National Children’s Fund
-Chief Minister’s Earthquake Relief Fund
-Prime Minister’s Armenia Earthquake Relief Fund
-Africa (Public Contributions – India) Fund
-Swachh Bharat Kosh (Effective from FY 2014-15)
-Clean Ganga Fund (Effective from FY 2014-15)
-National Fund for Control of Drug Abuse (Effective from FY 2015-16)
Taxable Services Provided by Charitable Trusts or NGOs
GST applies to the following services:
-Rental of real estate or movable property.
-Catering services at NGO-run canteens or messes.
-Administration of exams or tests.
-Sponsorship of events like sports or cultural activities.
GST Rates for Religious Trusts, Charitable Trusts, and NGOs
NGOs and charitable organizations may be exempt from GST on services tied to religion, education, or charitable activities. However, if an NGO engages in commercial activities, it may be liable for GST on those transactions. Religious trusts may also enjoy exemptions related to religious activities or maintaining places of worship, promoting financial transparency while supporting charitable efforts.
GST Input Tax Credit for Charitable Trusts and NGOs
For NGOs and charitable trusts to claim GST Input Tax Credit, they must be registered under the GST framework and engage in taxable supplies. However, organizations involved in exempted supplies (like charitable activities) cannot claim input tax credits.
Challenges of GST Exemption for NGOs and Charitable Trusts
The shift to GST has created several challenges for NGOs and charitable trusts:
-Increased Compliance Burden: The complexity of GST rules demands more administrative resources, diverting focus from core missions.
-Financial Strain: Including certain activities under GST increases operational costs, affecting the allocation of funds for beneficiaries.
-Navigating Exemptions: Understanding and complying with GST exemptions for charitable activities can be tricky, leading to potential risks.
These challenges impact the ability of NGOs and charitable trusts to serve their communities effectively.
Conclusion
NGOs and charitable trusts must understand the nuances of GST to ensure compliance while maximizing available exemptions and benefits. Key factors to consider include registration under Section 12AA of the Income Tax Act, differentiating between taxable and exempt activities, and understanding the implications of GST on input tax credit. By adhering to the GST guidelines, these organizations can navigate the complexities of the tax system, ensuring they meet their obligations while focusing on their core missions and continuing to serve their communities effectively. 
FREQUENTLY ASKED QUESTION
1. What is the charitable trust amendment in the Union Budget 2024?
Ans. The Finance Minister's proposal in the Union Budget 2024-25 aims to merge two existing tax exemption regimes for charitable trusts. The first regime for trusts, funds, or institutions will be gradually transitioned into the second regime. This move is aimed at simplifying the tax exemption process for charitable organizations.
2. Which charitable organizations are exempt from GST?
Ans. To qualify for GST exemption, a charitable trust or NGO must meet two key criteria:
-It must be registered under Section 12AA of the Income Tax Act.
-The services provided by the entity must be classified as charitable activities, such as health, education, or relief work.
3. What are the two tax exemption regimes for charities?
Ans. The two tax exemption regimes for charities are under:
-Section 10(23C): This covers exemptions for certain nonprofit organizations, including educational and medical institutions.
-Section 12A: This provides tax exemptions to trusts or institutions engaged in charitable activities, subject to registration with the Income Tax Department.
4. Is the Finance No. 2 Bill 2024 passed?
Ans. Yes, the Finance Bill (No. 2) 2024 was introduced by Finance Minister Nirmala Sitharaman on 23 July 2024. The Bill was presented for approval in the Lok Sabha on 7 August 2024 and included amendments to the original text, which were approved during the legislative process.
5. Can NGOs charge for services?
Ans. NGOs are permitted to charge fees for certain services, but charitable activities that are not commercial in nature typically remain exempt from GST. However, there is no exemption for consulting services provided by NGOs in exchange for fees.
6. How can you determine if a donation qualifies for a 50% or 100% deduction under Section 80G?
 Ans. The percentage of deduction under Section 80G depends on the eligibility of the organization receiving the donation. Donations to certain organizations qualify for a 100% deduction, while others qualify for 50%, and some might have additional conditions or limitations. It's essential to verify the status of the recipient organization to determine the applicable deduction.

GST (Goods and Services Tax) applies to all goods and services in India unless specifically exempted or rated NIL by the GST Council. Contrary to popular belief, some services and goods provided by Charitable Trusts or NGOs may fall under GST. This article explores the GST provisions for these entities in India.

In the Finance (No. 2) Bill, 2024, Finance Minister Nirmala Sitharaman introduced key changes that will simplify procedures for charitable trusts and institutions, reduce administrative burdens, and provide greater clarity. These amendments primarily focus on streamlining the tax exemption provisions for charitable trusts under the Income Tax Act, 1961. Here's an overview of the key changes, including the rationalization of regimes and examples to illustrate the adjustments.

Key Amendments for Charitable Trusts

Merger of Two Tax Exemption Regimes

Currently, charitable institutions claim tax exemptions under two different regimes:

-First Regime: Sub-clause(s) (iv), (v), (vi), or (via) of Section 10(23C)

-Second Regime: Sections 11 to 13

To simplify the process, the government has decided to phase out the first regime and shift all institutions to the second regime.

What Changes?

-From 1st October 2024, new applications under the first regime will no longer be accepted.

-Applications submitted before this date will continue under the existing regime.

-Charitable institutions approved under the first regime can retain their exemptions until the approval expires. Once expired, they must register under the second regime (Sections 11 to 13).

-Certain investment protections under the first regime will continue under the second regime, as outlined in Section 13.

Date	Applicable Provision	Application Status
Before 1st October 2024	Section 10(23C)(iv), (v), (vi), (via)	Applications processed under existing regime
After 1st October 2024	Section 12AB	Institutions must apply under Section 12AB

Condonation of Delay in Registration Filing

Previously, charitable trusts and institutions were required to apply for registration under Section 12AB within a specific timeline. Failure to do so could result in tax on accreted income (exit tax), leading to the permanent loss of their exemption.

Amendment:

-The Principal Commissioner or Commissioner now has the authority to condone delays in filing for registration, provided there is a reasonable cause for the delay.

Rationalization of Timelines for Section 80G Applications

Section 80G provides tax deductions to donors who contribute to approved charitable institutions. Charitable trusts must apply for approval within a set timeline, or they risk losing their Section 80G benefits.

Amendment:

-The timelines for filing applications for approval under Section 80G will be rationalized, offering institutions more flexibility to maintain their Section 80G status.

Extension of Timeline for Processing Registration/Approval Applications

Currently, applications for registration under Section 12AB or approval under Section 80G must be processed within six months from the end of the month in which the application is received.

Amendment:

-This timeline has been extended to six months from the end of the quarter in which the application is received, providing the Income Tax Department with additional time to process applications.

Merger of Trusts and Exit Tax

When trusts or institutions merge with another registered entity, they may attract exit tax under Chapter XII-EB. The amendment will clarify the conditions under which such mergers will not be subject to exit tax.

Example:

-If a charitable school merges with another similar charitable institution, the merger can be exempt from exit tax, provided it meets the prescribed conditions.

Inclusion of New Clauses in Section 11(7)

Sub-section (7) of Section 11 will now reference Clauses (23EA), (23ED), and (46B) of Section 10. This amendment allows trusts registered under Section 12AB to claim exemptions under these new clauses.

Example:

-A trust registered under Section 12AB may now also claim tax exemption under Section 10(23ED), if applicable.

Criteria for GST Exemption for Charitable Trusts

A Charitable Trust or NGO can be exempt from GST if it meets the following criteria:

1. The entity is registered under Section 12AA of the Income Tax Act.

2. The services provided qualify as charitable activities.

Not all services of a Section 12AA-registered trust are deemed charitable under GST. Exempt charitable activities include:

-Public health services, such as:

Care or counseling for terminally ill persons or those with severe disabilities.
Services for individuals with HIV/AIDS or substance addiction.
Public awareness campaigns on health, family planning, or HIV prevention.

-Promotion of religion, spirituality, or yoga.

-Educational and skill-building programs for vulnerable groups like:

Orphaned or homeless children.
Abused persons, prisoners, or elderly people in rural areas.

-Environmental conservation, such as forest or wildlife preservation.

If a charitable trust or NGO does not meet these conditions, GST is applicable, and the entity must register under GST.

Are Services Provided by Charitable Trusts Exempt from GST?

Only certain services, as defined above, provided by a 12AA-registered trust are exempt. Any other services for consideration are subject to GST.

Are Goods Sold by Charitable Trusts Exempt from GST?

No, goods sold by a charitable trust for consideration are taxable under GST. There is no exemption for goods supplied by charitable trusts. They must pay GST on purchases and collect it on sales.

GST Registration Requirements for NGOs and Charitable Trusts

NGOs or charitable trusts with a combined annual turnover exceeding Rs. 20 lakhs (Rs. 10 lakhs for northeastern states) must get GST Registration. Even if the turnover is below this threshold, registration is required if services are provided in more than one state. If the annual revenue is less than Rs. 1.5 crores, they may opt for the composition scheme.

Exempt Services Provided by Charitable Trusts or NGOs

The following services are exempt from GST for registered charitable trusts or NGOs:

-Healthcare services from government-approved clinical facilities.

-Educational services from government-approved higher learning institutes.

-Services from organizations authorized under Section 12AA of the Income Tax Act.

-Services provided to international organizations like the UN.

-Skill-building or career training services.

-Coaching in arts, culture, or sports.

-Services for military, paramilitary, or animal care.

Is Donation Comes Eligible for Charitable Trust?

Under Section 80G of the Income Tax Act, not all donations are eligible for a 100% deduction. The eligibility for a deduction depends on the organization receiving the contribution. The tax benefit is determined based on the organization's qualifying status. Donations can qualify for either a 100% or 50% deduction, and some may come with certain conditions or limits.

The deductible amount from a donation is referred to as the "qualifying amount." To ensure accuracy in filing an income tax return, it is crucial for taxpayers to carefully calculate the eligible deduction amount.

The following organizations are eligible for a 100% tax deduction under Section 80G, with no additional qualifying limits:

-National Defence Fund (Central Government)

-Prime Minister's National Relief Fund

-National Foundation for Communal Harmony

-Universities or educational institutions of national importance

-Zila Saksharta Samiti (in districts, chaired by the district collector)

-State Government Funds for medical relief to the poor

-National Illness Assistance Fund

-National Blood Transfusion Council

-National Sports Fund

-National Cultural Fund

-National Children’s Fund

-Chief Minister’s Earthquake Relief Fund

-Prime Minister’s Armenia Earthquake Relief Fund

-Africa (Public Contributions – India) Fund

-Swachh Bharat Kosh (Effective from FY 2014-15)

-Clean Ganga Fund (Effective from FY 2014-15)

-National Fund for Control of Drug Abuse (Effective from FY 2015-16)

Taxable Services Provided by Charitable Trusts or NGOs

GST applies to the following services:

-Rental of real estate or movable property.

-Catering services at NGO-run canteens or messes.

-Administration of exams or tests.

-Sponsorship of events like sports or cultural activities.

GST Rates for Religious Trusts, Charitable Trusts, and NGOs

NGOs and charitable organizations may be exempt from GST on services tied to religion, education, or charitable activities. However, if an NGO engages in commercial activities, it may be liable for GST on those transactions. Religious trusts may also enjoy exemptions related to religious activities or maintaining places of worship, promoting financial transparency while supporting charitable efforts.

GST Input Tax Credit for Charitable Trusts and NGOs

For NGOs and charitable trusts to claim GST Input Tax Credit, they must be registered under the GST framework and engage in taxable supplies. However, organizations involved in exempted supplies (like charitable activities) cannot claim input tax credits.

Challenges of GST Exemption for NGOs and Charitable Trusts

The shift to GST has created several challenges for NGOs and charitable trusts:

-Increased Compliance Burden: The complexity of GST rules demands more administrative resources, diverting focus from core missions.

-Financial Strain: Including certain activities under GST increases operational costs, affecting the allocation of funds for beneficiaries.

-Navigating Exemptions: Understanding and complying with GST exemptions for charitable activities can be tricky, leading to potential risks.

These challenges impact the ability of NGOs and charitable trusts to serve their communities effectively.

Conclusion

NGOs and charitable trusts must understand the nuances of GST to ensure compliance while maximizing available exemptions and benefits. Key factors to consider include registration under Section 12AA of the Income Tax Act, differentiating between taxable and exempt activities, and understanding the implications of GST on input tax credit. By adhering to the GST guidelines, these organizations can navigate the complexities of the tax system, ensuring they meet their obligations while focusing on their core missions and continuing to serve their communities effectively.

FREQUENTLY ASKED QUESTION

1. What is the charitable trust amendment in the Union Budget 2024?

Ans. The Finance Minister's proposal in the Union Budget 2024-25 aims to merge two existing tax exemption regimes for charitable trusts. The first regime for trusts, funds, or institutions will be gradually transitioned into the second regime. This move is aimed at simplifying the tax exemption process for charitable organizations.

2. Which charitable organizations are exempt from GST?

Ans. To qualify for GST exemption, a charitable trust or NGO must meet two key criteria:

-It must be registered under Section 12AA of the Income Tax Act.

-The services provided by the entity must be classified as charitable activities, such as health, education, or relief work.

3. What are the two tax exemption regimes for charities?

Ans. The two tax exemption regimes for charities are under:

-Section 10(23C): This covers exemptions for certain nonprofit organizations, including educational and medical institutions.

-Section 12A: This provides tax exemptions to trusts or institutions engaged in charitable activities, subject to registration with the Income Tax Department.

4. Is the Finance No. 2 Bill 2024 passed?

Ans. Yes, the Finance Bill (No. 2) 2024 was introduced by Finance Minister Nirmala Sitharaman on 23 July 2024. The Bill was presented for approval in the Lok Sabha on 7 August 2024 and included amendments to the original text, which were approved during the legislative process.

5. Can NGOs charge for services?

Ans. NGOs are permitted to charge fees for certain services, but charitable activities that are not commercial in nature typically remain exempt from GST. However, there is no exemption for consulting services provided by NGOs in exchange for fees.

6. How can you determine if a donation qualifies for a 50% or 100% deduction under Section 80G?

Ans. The percentage of deduction under Section 80G depends on the eligibility of the organization receiving the donation. Donations to certain organizations qualify for a 100% deduction, while others qualify for 50%, and some might have additional conditions or limitations. It's essential to verify the status of the recipient organization to determine the applicable deduction.