NGO Laws in India and its Legal Compliance

Last Updated at: November 23, 2020
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NGO Laws
On 9th September,2020,  the Ministry of water resources applauded the efforts of the NGO named “Paani Foundation”, an NGO by Aamir Khan and Kiran Rao . On its Twitter page, the Ministry said that the NGO, through its commendable efforts, has been transforming regions of Maharashtra from drought to prosperity. It has been making untiring efforts over the years to make Maharashtra a drought free state.

 

The word NGO (Non-Government Organization) in India refers to a body that remains detached from the Government and profit framework of usual businesses. These bodies work towards the broad advancement of the society bylaws and operate as small units which fill the gaps at places where the government cannot reach efficiently and business cannot be done with eloquent returns governed by certain NGO laws.

The term NGO is used as an umbrella to cover all legal entities that seek philanthropic and charitable funds and utilize them towards the advancement of the society without the motive to originate profit from it or use the profit from the business of the NGO and utilise the same in the implementation of its objects. An NGO can either be a Trust, a Society or a Section 25 Company.

NGO can register itself as a legal entity in three ways in India-

1)   Trust

2)   Society

3)   Section 8 Company ( this is same as the section 25 company under the 1956 Indian Companies Act)

Trust Registration-

Trusts are formed when the settler of the property transfers any property and offers its benefits for the well-being of recipients or for the practice of public purposes. The main aim of the person who registers a trust in India is to make use of the assets of the trust to attain welfare of the public at large and promote a charitable cause called a Public Charitable trust. Such trust does not possess a fixed beneficiary, but the public in huge, generally established with the common trait. A trust is irrevocable without the intervention of the court. 

Know how to register your NGO

Society Registration-

Society possesses the Memorandum of Association and Rules and Regulation or bylaws. The Society registration fees and processes need to be registered with the Registrar of Society or Commissioner of Trusts appointed by the State Government. A Society has a chance to alter its MOA and increase or decrease its objectives and working from time to time. A society must inform the Registrar annually about the changes in the quorum of the society. A society can be terminated as per the termination clause in the Bylaws and after termination, the Society will be merged with a Society of a similar object.

Section 8 Company

MOA and AOA form the legal document of a Section 8 Company. Section 8 company registration needs to be filed under the Central Government through the Registrar of Companies with required approvals. The process is similar to the formation of a Public Limited Co. or Private Limited Co. A Section 8 company is required to do the annual compliances similar to other companies.

NGO COMPLIANCES-

Many NGOs feel immune to all forms of taxation because they exist as a non-profit entity, but this is just a myth. The following section talks about important compliances that an NGO is required to do to prove its genuine in accordance to the NGO Laws:

PAN

After registration of NGO with respective Authority, the first thing is to apply for PAN of the NGO. It is mandatory to apply for the PAN after registration of an NGO.

Registration under section 12A of the Income Tax Act

The registration of NGO under Section 12A is necessary for getting some benefits of taxation. However, section 12A certificate is not a mandatory registration. The main reason for getting this registration under section 12A is to get the benefit of exemption from the Income Tax on the income of the NGO if all the rules and regulations laid down in this section are fulfilled.

The amendments made in the Finance Act 2020- 21, has made some changes for the already registered NGOs. The organizations registered under Sec. 12AA have to reapply for the validity under the Income Tax Act to continue to enjoy the tax exemptions.

Also, validity has to be renewed every five years. Previously the validity was permanent. 

Registration under section 80G of the Income Tax Act

Even the registration under this section is not mandatory. However, to give the benefit of 50% or 100% exemption on the donations to the donors, NGO should get the registration under section 80G of the Income Tax Act. It is indirectly an advantage to NGOs to raise funds.

As per the new amendment, the tax exemptions available to the NGOs are now revocable. The movable and immovable assets of the organization shall be valued at market price and taxed accordingly. This rule intends to have a check if there is a misuse of the tax exemption of charity.

Also, the persons who are donating to the NGOs will come under scrutiny, there is an assumption that in future no exemptions may be granted for charity.

FCRA Registration

The NGOs get many opportunities to receive Foreign Funds for the NGO missions once completing the NGO registration process. Post which the registration with the FCRA department, Ministry of Home Affairs is essential. Without FCRA registration, NGO cannot receive any kind of foreign donation or funds.

TAN

During the functioning of NGOs at any point of time, if NGOs become liable to remove the tax from a source, it has to first apply for TAN.

GST Registration

If the NGO is providing services like research activity or consultancy work etc. and if the gross revenue from such work crosses the basic exemption limit of GST, then NGO has to first apply for the GST.

Professional Tax

Professional Tax is the liability of an NGO to deduct from the pay of an employee and deposit to the Government. It is a state government thing and thus different states of India having different rules and regulations for Professional Tax.

Retirement Benefit

Retirement benefits like Provident Fund, Gratuity, ESIC etc. are applicable to the NGO when it develops and the size of employees is more than the prescribed limit in these acts.

Shops and Establishment License

According to the Indian NGO laws, if an NGO employs any individuals in their office to carry out any work pertaining to the NGO, then the said NGO shall obtain a license under the Shops and Establishments Act.

Specific Questions Regarding Local NGO Laws

Below are the topics on the local NGO laws that people usually question:

1. Inurement

Public charity trusts trustees can not commit self-dealing.

The Societies Registration Act does not preclude any private owner or entity from inuring any society earnings. Such a corporation may not deserve tax exemption though.

Article 8 of the Indian Companies Act (2013) requires that a private, non-profit corporation (“Section 8 business”) shall channel all earnings towards the accomplishment of the company’s goals and forbids the paying of any dividends to its shareholders.

In all instances, the Income Tax Act explicitly allows for a non-profit corporation to forfeit its tax-exempt status if they gained any financial gain from the creator, promoter, or any trustee or their spouse. 

2. Proprietary Interest

The trustees keep trust assets on behalf of the public charity fund. Thus, although trustees have legal title to the trust ‘s assets, they hold those assets for the trust’s beneficiaries. But they have no ownership interest in the assets. Representatives of the board of trustees or board of directors of a society or Section 8 business still possess the securities of their organization. But they may not have any financial interest in the assets whatsoever.

3. Dissolution

Indian charitable public trusts are usually irrevocable. If a trust becomes inactive due to its trustees’ negligence, the Charity Commissioner may take measures to rekindle the trust. When its too difficult to fulfil the goals, the official may apply the doctrine of cy pres to change them. The doctrine of cy pres means “as near as possible”.

Except for trusts, the societies and Section 8 firms can be dissolved.

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NGO Laws in India and its Legal Compliance

12587
On 9th September,2020,  the Ministry of water resources applauded the efforts of the NGO named “Paani Foundation”, an NGO by Aamir Khan and Kiran Rao . On its Twitter page, the Ministry said that the NGO, through its commendable efforts, has been transforming regions of Maharashtra from drought to prosperity. It has been making untiring efforts over the years to make Maharashtra a drought free state.

 

The word NGO (Non-Government Organization) in India refers to a body that remains detached from the Government and profit framework of usual businesses. These bodies work towards the broad advancement of the society bylaws and operate as small units which fill the gaps at places where the government cannot reach efficiently and business cannot be done with eloquent returns governed by certain NGO laws.

The term NGO is used as an umbrella to cover all legal entities that seek philanthropic and charitable funds and utilize them towards the advancement of the society without the motive to originate profit from it or use the profit from the business of the NGO and utilise the same in the implementation of its objects. An NGO can either be a Trust, a Society or a Section 25 Company.

NGO can register itself as a legal entity in three ways in India-

1)   Trust

2)   Society

3)   Section 8 Company ( this is same as the section 25 company under the 1956 Indian Companies Act)

Trust Registration-

Trusts are formed when the settler of the property transfers any property and offers its benefits for the well-being of recipients or for the practice of public purposes. The main aim of the person who registers a trust in India is to make use of the assets of the trust to attain welfare of the public at large and promote a charitable cause called a Public Charitable trust. Such trust does not possess a fixed beneficiary, but the public in huge, generally established with the common trait. A trust is irrevocable without the intervention of the court. 

Know how to register your NGO

Society Registration-

Society possesses the Memorandum of Association and Rules and Regulation or bylaws. The Society registration fees and processes need to be registered with the Registrar of Society or Commissioner of Trusts appointed by the State Government. A Society has a chance to alter its MOA and increase or decrease its objectives and working from time to time. A society must inform the Registrar annually about the changes in the quorum of the society. A society can be terminated as per the termination clause in the Bylaws and after termination, the Society will be merged with a Society of a similar object.

Section 8 Company

MOA and AOA form the legal document of a Section 8 Company. Section 8 company registration needs to be filed under the Central Government through the Registrar of Companies with required approvals. The process is similar to the formation of a Public Limited Co. or Private Limited Co. A Section 8 company is required to do the annual compliances similar to other companies.

NGO COMPLIANCES-

Many NGOs feel immune to all forms of taxation because they exist as a non-profit entity, but this is just a myth. The following section talks about important compliances that an NGO is required to do to prove its genuine in accordance to the NGO Laws:

PAN

After registration of NGO with respective Authority, the first thing is to apply for PAN of the NGO. It is mandatory to apply for the PAN after registration of an NGO.

Registration under section 12A of the Income Tax Act

The registration of NGO under Section 12A is necessary for getting some benefits of taxation. However, section 12A certificate is not a mandatory registration. The main reason for getting this registration under section 12A is to get the benefit of exemption from the Income Tax on the income of the NGO if all the rules and regulations laid down in this section are fulfilled.

The amendments made in the Finance Act 2020- 21, has made some changes for the already registered NGOs. The organizations registered under Sec. 12AA have to reapply for the validity under the Income Tax Act to continue to enjoy the tax exemptions.

Also, validity has to be renewed every five years. Previously the validity was permanent. 

Registration under section 80G of the Income Tax Act

Even the registration under this section is not mandatory. However, to give the benefit of 50% or 100% exemption on the donations to the donors, NGO should get the registration under section 80G of the Income Tax Act. It is indirectly an advantage to NGOs to raise funds.

As per the new amendment, the tax exemptions available to the NGOs are now revocable. The movable and immovable assets of the organization shall be valued at market price and taxed accordingly. This rule intends to have a check if there is a misuse of the tax exemption of charity.

Also, the persons who are donating to the NGOs will come under scrutiny, there is an assumption that in future no exemptions may be granted for charity.

FCRA Registration

The NGOs get many opportunities to receive Foreign Funds for the NGO missions once completing the NGO registration process. Post which the registration with the FCRA department, Ministry of Home Affairs is essential. Without FCRA registration, NGO cannot receive any kind of foreign donation or funds.

TAN

During the functioning of NGOs at any point of time, if NGOs become liable to remove the tax from a source, it has to first apply for TAN.

GST Registration

If the NGO is providing services like research activity or consultancy work etc. and if the gross revenue from such work crosses the basic exemption limit of GST, then NGO has to first apply for the GST.

Professional Tax

Professional Tax is the liability of an NGO to deduct from the pay of an employee and deposit to the Government. It is a state government thing and thus different states of India having different rules and regulations for Professional Tax.

Retirement Benefit

Retirement benefits like Provident Fund, Gratuity, ESIC etc. are applicable to the NGO when it develops and the size of employees is more than the prescribed limit in these acts.

Shops and Establishment License

According to the Indian NGO laws, if an NGO employs any individuals in their office to carry out any work pertaining to the NGO, then the said NGO shall obtain a license under the Shops and Establishments Act.

Specific Questions Regarding Local NGO Laws

Below are the topics on the local NGO laws that people usually question:

1. Inurement

Public charity trusts trustees can not commit self-dealing.

The Societies Registration Act does not preclude any private owner or entity from inuring any society earnings. Such a corporation may not deserve tax exemption though.

Article 8 of the Indian Companies Act (2013) requires that a private, non-profit corporation (“Section 8 business”) shall channel all earnings towards the accomplishment of the company’s goals and forbids the paying of any dividends to its shareholders.

In all instances, the Income Tax Act explicitly allows for a non-profit corporation to forfeit its tax-exempt status if they gained any financial gain from the creator, promoter, or any trustee or their spouse. 

2. Proprietary Interest

The trustees keep trust assets on behalf of the public charity fund. Thus, although trustees have legal title to the trust ‘s assets, they hold those assets for the trust’s beneficiaries. But they have no ownership interest in the assets. Representatives of the board of trustees or board of directors of a society or Section 8 business still possess the securities of their organization. But they may not have any financial interest in the assets whatsoever.

3. Dissolution

Indian charitable public trusts are usually irrevocable. If a trust becomes inactive due to its trustees’ negligence, the Charity Commissioner may take measures to rekindle the trust. When its too difficult to fulfil the goals, the official may apply the doctrine of cy pres to change them. The doctrine of cy pres means “as near as possible”.

Except for trusts, the societies and Section 8 firms can be dissolved.

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