Charitable activities are defined differently under the Income Tax Act (IT) and Goods & Service Tax Act (GST) Acts and are taxed differently. In this issue, we’ll analyse tax liabilities under the direct and indirect tax regime of entities carrying out charitable activities.
Under the Income Tax Act since ‘object of general public utility’ can be interpreted widely to include a plethora of activities. Therefore the scope of “charitable activities” is certainly broader under the IT Act than GST Act.
As per the Notification No. 12/2017 - Central Tax (Rate) dated 28/06/2017[1], under Entry 1 the services by an entity registered under Section 12AA[2] of the Income Tax Act by way of charitable activities are exempted from GST. It is essential for the entity to be engaged in ‘charitable activities’ to claim exemption. As per Section 23(1)(a) of GST Act a person engaged in the business of supplying goods or services or both that are not liable to tax or wholly exempt from tax are not liable for registration.
In the latest case of Re All India Disaster Mitigation Institute[3],(vide advance ruling) the Memorandum of Association and the bye-laws of the trust reflected that it was engaged in training/ research relating to disaster prevention, mitigation and management. Such activities qualified as charitable activities. The trust was also registered as a charitable trust under Section 12AA and Section 80G[4] of the IT Act. This meant that the entire income of the trust was exempt from income tax. Therefore, it was held that a non-profit entity engaged in charitable activities which attracts a nil rate of GST is not liable for GST registration. Taxability of Corpus Grants under IT Act: Entities carrying out charitable activities receive voluntary contributions in multiple forms that form the basis for either levy of taxes or exemption from taxes. One such form of contributions is corpus donations.
Section 11(1)(d)[5] enumerates that the voluntary contributions made with a specific direction that they shall form part of the corpus of the institution shall be excluded from the computation of total income.
The question of corpus donation came before the Income Tax Appellate Tribunal in the recent case of Income Tax Officer (Exemption) v Hosanna Ministries[6] wherein the tribunal while reflecting upon the nature of corpus donations opined that it denotes a form of voluntary contribution wherein the donor provides specific directions to the donee on the purpose and use of funds. It indicates that the funds should not be depleted and retains its original character as a principal amount. It is for the Assessing Officer to examine if the donations received are voluntary in nature and for a specific purpose. Thereafter, the officer should decide the nature of donations being in the nature of corpus donation or income.
As per Section 12A[7], to assert the exemption to corpus donation under Section 11(1)(d), the non-profit entity must be registered under Section 12AA of the Act. If the entity is not registered under Section 12AA, reference can be made to Section 12[8] which excludes contributions made with a specific direction that they shall form part of the corpus from the ambit of “income” of the entity.
This was upheld by ITAT Pune Bench ‘B’ in the case of ITO (Exemptions), Ward-2, Pune v. Serum Institute of India Research Foundation[9] that corpus specific voluntary contribution being in the nature of capital receipts cannot be computed as income and taxed even if the trust is not registered under Section 12AA of the Act. The exemption to corpus donations can be claimed by virtue of Section 12 and it is in the nature of capital receipts even if received prior to the registration. Therefore, if a non-profit entity has received voluntary contributions with a specific direction that they shall form a part of the corpus of the trust or institution can claim the exemption even if not registered under Section 12AA of the Act.
