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GST on NGOs - Distrust of Trusts

Jaswant Kaur Jaswant Kaur
29 Nov 2021
Civil Societies distribution of ration, oxygen cylinders, concentrators, psycho-social support to the Covid-19-hit families or mobilising people for vaccination, the sector played its role beyond its limited capacity.

The last few days have been shocking for civil society. One, national security adviser Ajit Doval while addressing the passing out parade at the Hyderabad-based Sardar Vallabhbhai Patel National Police Academy said, “It is the civil society that can be subverted… that can be divided, that can be manipulated to hurt the interests of a nation. You are there to see that they stand fully protected.” 

The statement is atrocious, to say the least. Doval did not think twice before labelling NGOs as a threat to law and order. It seems he forgot the unconditional appreciation the sector received from none other than the prime minister. When the country was reeling under the first and second waves of the pandemic, all government departments, including the disaster management authorities in almost all states, were urging the civil society sector to come forward and initiate activities to mitigate the pandemic’s effect. 

Be it distribution of ration, oxygen cylinders, concentrators, psycho-social support to the Covid-19-hit families or mobilising people for vaccination, the sector played its role beyond its limited capacity. But when statements like this are made, it only points at the government’s real intention and their perception about the sector.

It is being treated like a scapegoat, blamed for everything wrong that happens around us and is being targeted as per the whims and fancies of the powers that be. But the moment there is an emergency-like situation, the babus suddenly are reminded of the civil society. Incidentally, the sector is doing what a welfare government is supposed to do.

Another event that brought shock waves to the sector was the recent ruling by Maharashtra Authority for Advance Ruling (MAAR) in the case of Jayshankar Gramin Va Adivasi Vikas Sanstha Sangamner, a charitable Trust registered under the Maharashtra Public Charitable Trust Act, 1950.

The Trust wanted a clarification whether it is liable to pay Goods and Services Tax (GST) on the grants and donations it received from the state and the Central Government. The NGO has been running an orphanage and has been providing services to 50 orphan children. These services include shelter, education, clothing, food and health. The Trust received a grant of Rs. 2,000 per child per month for providing these services from the Maharashtra Women and Child Welfare Department.

Clearly, the objectives and activities of the Trust are charitable in nature to the best knowledge of this writer. Being the executive director of another organisation that runs a larger children’s home, it can be easily said that this grant is grossly insufficient. In fact, it is a cumbersome task to get this grant. With several legal formalities, inadequate funds and resources, it is a challenging task to run such homes.  

Instead of focusing on the nature of the activity, the MAAR held that such grants should be taxed at the rate of 18 percent! Strangely, it ruled that if the purpose of donation is philanthropic and does not lead to any commercial gain, it will not attract GST. In all other cases, it will attract GST at the rate of 18 percent. The ruling is based on the contention that donations which are voluntary and unconditional in nature are not subject to tax. While grants given with a specific purpose are! What kind of logic is this?

Now the question is: whether running a home for destitute or orphan children falls under the definition of charitable activity. If one strictly goes by the notifications issued under GST, the activity does not fall within the purview of exempted activities. However, the MAAR did not take into account the nature of this activity. These services are not provided in furtherance of business under the GST Act. Nor does it provide any benefit to the donor.

Simply put, the MAAR should have asked certain pertinent questions before giving this ruling. Does the release of money by the department concerned to the Trust promote business? Has it been done for earning profit? Was the money used to provide services to the WCD? 

Instead, the authority completely ignored the wider definition of charitable activity under the Act. It took a minute view of specific activities listed in the notification. Clearly, the ruling seems to be flawed and will put the Trust and similar organisations under a disadvantage, despite having a charitable status under the Income tax Act. In fact, charitable organisations may be forced to deposit GST with retrospective effect.

A circular issued by the Ministry of Finance, Government of India, listed three conditions for an institution to avail of exemption under GST. One, the gift or a donation has been made to a charitable institution. Two, the purpose is philanthropic and not meant for commercial gain. Lastly, it does not advertise about the activities of the donor.

The last point is really crucial. Many a time, NGOs and corporate foundations or philanthropists place the board of the donor or acknowledge the contribution in some manner or the other. In such cases, the entire grant may be construed as an advertisement for the donor, putting the NGOs at risk.

The circular also states that “there should be no obligation in the nature of quid pro quo on the part of the recipient of the donation or gift for supply of service”. In the current case, the Advance Ruling has completely ignored the fact that the services rendered are not in the nature of quid pro quo and also does not result in commercial gain to either the donor or the donee.

The only relief is that it can be challenged and questioned at the appropriate appellate authority. If one goes by a few judgements given by the Supreme Court, the matter will certainly be in favour of the Trust. APITCO Ltd. vs. Commissioner of Service Tax, Hyderabad is a case in point. 

Although the ruling came when the GST Act was not promulgated, it can be extended to the current scenario as it deals with service tax or indirect taxation. The court in this case ruled out the existence of any relationship between a service provider and a client when the subject company implemented certain welfare schemes for the benefit of the poor on behalf of the state government. It was held that the grant released for the purpose of implementation of such activities is not subject to tax.

Yet, the matter is of grave concern as many authorities in other states may also take it as a precedent. The Trust in this case may file an appeal against the MAAR ruling. However, it is certainly not an easy task. Even for filing an appeal, the Trust may have to take the services of a lawyer. Incidentally, legal services come under the purview of GST. Not only this, it falls under the reverse charge mechanism, which means that the liability to pay tax lies on the recipient of services, instead of the supplier. In other words, the Trust will have to pay GST to save itself from the GST application!

In a nation of 1.38 billion people, where some have invested at least Rs. 60,000 crore in unrecognised and unregulated currencies, known as cryptocurrencies, and made huge profits, the civil society sector has to undergo several levels of harassment for doing good and serving the society. What can be more ironic than this?
(The writer, a company secretary, can be reached at jassi.rai@gmail.com)



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