Numerous misconceptions prevail in the social sector regarding the applicability of GST to Not-for-profit concerns (hereinafter referred to as ‘NGOs’). They can lead to penal non-compliance or misinterpretation of the law. Here are some of the most common beliefs, now exposed:
Misconception #1 – Understanding of the term ‘Charitable activities’
One of the grievous misconceptions in the sector is the common assumption that all the charitable activities carried out by an NGO are exempt from GST. In reality, this understanding may not be true in all the cases.
The GST law specifically defines the term ‘charitable activities’ and grants certain exemptions only to NGOs carrying such ‘charitable activities’. The conditions for claiming exemption with respect to charitable activities are as under–
Condition 1 - Services provided shall be by way of charitable activities as per GST law
Condition 2 - Entity should be registered under section 12AA of the Income tax Act, 1961
Both the above conditions should be fulfilled for availing the exemption benefit.
Further, the GST law provides an exhaustive list of the activities which could be considered as ‘charitable activities’ to avail the exemption. The list of such activities is enumerated below-
(I) Public health services by way of care or counselling 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
(II) Spreading public awareness of preventive health, family planning or prevention of HIV infection
(III) Promotion of religion, spirituality or yoga
(IV) Promotion of educational programmes or skill development relating to -
Orphaned, homeless or abandoned children;
Physically or mentally abused persons;
Prisoners; or
Residents of rural area over the age of 65 years
(V) Activities for preservation of environment including watershed areas, forests and wildlife.
From the above list, it is quite evident that the meaning of ‘charitable activities’ is restricted only to specific activities which are treated as exempt supplies under GST. Consequently, any consideration received by an NGO for providing only the aforementioned services shall be exempt from tax.
Misconception #2 – NGOs are not liable for registration under GST
Another misconception prevailing in the sector is that if the income of the NGO is less than Rs. 20 lakhs in a financial year, it shall not be liable to register under GST. However, it is pertinent to note that the way in which the term ‘income’ is normally understood, should not be used to determine the applicability of GST registration for an NGO. Also, there are various provisions other than the threshold limit of Rs. 20 lakhs to determine the applicability of registration under GST. The relevant provisions are covered below-
A. General rule - Aggregate turnover exceeding Rs. 20 lakhs
Generally, an NGO shall be liable to register under GST in the State from where it makes a taxable supply of goods or services or both, if its aggregate turnover in a financial year exceeds Rs. 20 lakhs.
Here, the important points to remember are –
An NGO shall be making a taxable supply of goods or services or both; and
Aggregate turnover of the NGO in the financial year shall exceed Rs. 20 lakhs*.
*The applicable threshold limit for special category States comprising of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand is Rs. 10 lakhs. However, this article is written from the perspective of applicable threshold limit of Rs. 20 lakhs for all other States.
It is important to note that the term ‘aggregate turnover’ is crucial in determining the applicability of GST registration and is discussed in detail in the later part of this article.
B. Compulsory registration in certain cases
Besides the above general rule, following are some cases wherein an NGO shall be liable to register under GST, even though its aggregate turnover in a financial year does not exceed Rs. 20 lakhs-
NGO making inter-State taxable supply of goods (i.e. taxable supply of goods between 2 different States/Union Territories)
NGO required to pay GST under reverse charge (e.g. an NGO which avails the services of a lawyer shall be required to pay GST on legal fees, under reverse charge)
NGO making occasional taxable supply of goods or services or both, in a State where it does not have a fixed place of business (e.g. an NGO participating in an exhibition outside home-State)
NGO making supply of goods through an E-commerce operator (e.g. Flipkart, Amazon, etc.) who is required to collect tax at source
Note - For complete list of persons requiring compulsory registration, kindly refer Section 24 of Central Goods and Services Tax Act, 2017 along with the relevant notifications.
C. Persons not liable for registration
Any NGO engaged exclusively in the business of supplying goods or services or both that are not liable to tax or wholly exempt from tax under GST law, shall not be liable for registration under GST irrespective of the provisions mentioned in (A) and (B) above.
Considering the above, the applicability of registration under GST for an NGO should be determined in accordance with the aforementioned provisions.
Misconception #3 – Understanding of certain terms in common parlance vis-a-vis GST law
The normal understanding of certain terms used in the sector may not be same as what is defined under GST law. Most of the terms are defined in the law and should be understood accordingly. An effort has been made to explain the relevant terms below-
A. Aggregate turnover - It is important to note that for determining the applicability of registration under GST, the aggregate turnover of Rs. 20 lakhs shall be computed on all India basis in respect of persons having the same PAN and shall include the following –
Taxable supplies (explained in point B below)
Exempt supplies (explained in point C below)
Exports of goods or services
Inter-State supplies
B. Taxable Supply - Taxable supply means a supply of goods or services or both which is leviable to tax under GST law.
C. Exempt Supply - The following are considered as exempt supplies under GST –
Supplies which attract nil rate of tax
Supplies which are specifically notified as exempt under GST law (e.g. interest income from fixed deposit as explained in Misconception #4)
Non-taxable supplies
D. Person – In addition to an Individual, HUF, Firm, etc., the definition of a “Person” includes —
Company (Including Section 8 Company)
Trust
An association of persons or a body of individuals, whether incorporated or not, in India or outside India
Any body corporate incorporated by or under the laws of a country outside India
A co-operative society registered under any law relating to co-operative societies
Society as defined under the Societies Registration Act, 1860
It is imperative to understand the meaning of the term ‘person’ under GST, since most of the NGOs are registered either as a Trust, Society or a Section 8 Company.
Misconception #4 – Interest on fixed deposit is not included while computing the threshold limit of Rs. 20 lakhs
Most of the NGOs keep the donations received from the donors, as fixed deposits with the banks, till the time such donations are appropriately utilized into their welfare programmes. Such deposits earn interest for the NGOs which is usually treated as ‘other income’. However, there is a general misconception that such interest income is outside the scope of GST and shall not be considered while computing the aggregate turnover of Rs. 20 lakhs.
Keeping the above in mind, it becomes important to draw attention to Notification No. 12/2017 - Central Tax (Rate) dated 28th June, 2017 (as amended from time to time) (hereinafter referred to as ‘Notification’). The Notification lists the supplies under the law which are specifically exempted from GST. Relevant extract of entry no. 27 of the said Notification is reproduced below-
In view of the above, it may be construed that an NGO renders the services of extending deposits to banks and receives consideration in the form of interest. However, the NGOs are not liable to pay GST on such services since these are specifically exempted under the said Notification.
Consequently, the services rendered by an NGO by way of extending deposit to the banks shall be treated as exempt supplies and shall be included while computing the aggregate turnover of Rs. 20 lakhs, for registration under GST.
Misconception #5 – GST is not applicable on sale of scrap
Sale of scrap is a routine activity undertaken by every organization. However, most of the NGOs engaged in charitable activities presume that sale of scrap being their non-core activity, would not attract GST. Here, it becomes important to understand that GST is a transaction based taxation system. Each transaction should be studied independently to determine the applicability of tax, irrespective of the nature of objectives of the NGO.
Sale of scrap is a taxable supply under GST. Consequently, all the NGOs shall consider sale of scrap as their taxable supplies and shall include it while computing the aggregate turnover of Rs. 20 lakhs, for registration under GST.
Now that we have covered the common misconceptions among NGOs, let us look at some practical scenarios:
Scenario 1
X, an NGO, is engaged exclusively in providing exempt supplies amounting to Rs. 15 lakhs in a financial year. Is X liable to register under GST? What if the amount of exempt supplies is Rs. 25 lakhs?
Answer -
No. X is not liable for registration under GST as long as it is engaged exclusively in providing exempt supplies, irrespective of the value of such supplies in the financial year.
Scenario 2
X is engaged in providing exempt supplies amounting to Rs. 15 lakhs and taxable supplies amounting to Rs. 2 lakhs in a financial year. Is X liable to register under GST?
Answer –
No. X is not liable for registration under GST, since the aggregate turnover amounts to Rs. 17 lakhs, which is less than the threshold limit of Rs. 20 lakhs.
Scenario 3
X is engaged in providing exempt supplies amounting to Rs. 25 lakhs and taxable supplies amounting to Rs. 2 lakhs in a financial year. Is X liable to register under GST?
Answer –
Yes. X is liable for registration under GST, since the aggregate turnover amounts to Rs. 27 lakhs, which exceeds the threshold limit of Rs. 20 lakhs.
Scenario 4
X is engaged in providing exempt supplies amounting to Rs. 15 lakhs and taxable supplies amounting to Rs. 2 lakhs in a financial year. X falls under the category of persons liable for compulsory registration, due to the requirement for payment of GST under reverse charge (such as on legal services). Is X liable to register under GST?
Answer –
Yes. X is liable for registration under GST even though the aggregate turnover amounts to Rs. 17 lakhs, which is less than the threshold limit of Rs. 20 lakhs.
Scenario 5
X is engaged exclusively in providing exempt supplies amounting to Rs. 25 lakhs in a financial year. X falls under the category of persons liable for compulsory registration, due to the requirement for payment of GST under reverse charge (such as on legal services). Is X liable to register under GST?
Answer –
No. X is not liable for registration under GST since it is engaged exclusively in providing exempt supplies.
Scenario 6
X is engaged exclusively in providing exempt supplies (e.g. charitable activities) amounting to Rs. 25 lakhs and has not registered under GST. X plans to make fixed deposits with banks and earn interest income of approx. Rs. 1 lakh. Is X liable to register under GST?
Answer –
No. Making fixed deposit with banks and earning interest thereon is an exempt supply under GST. Consequently, X is not liable to register under GST, irrespective of the threshold limit of Rs. 20 lakhs.
Scenario 7
X is engaged exclusively in providing exempt supplies (e.g. charitable activities and interest against fixed deposits with banks) amounting to Rs. 26 lakhs and has not registered under GST. X plans to undertake sale of scrap of approx. Rs. 10,000. Is X liable to register under GST before making such sale of scrap?
Answer –
Yes. Since sale of scrap is a taxable supply under GST, X would no longer be engaged exclusively in providing exempt supplies. Accordingly, the applicability of registration under GST shall be determined based on the threshold limit of Rs. 20 lakhs. In the instant case, the aggregate turnover of X would include the total sum of exempt and taxable supplies which amount to Rs. 26,10,000. Since the aggregate turnover exceeds the threshold limit of Rs. 20 lakhs, X would be liable to register and pay GST on scrap value of Rs. 10,000.
Dohit Muranjan, the author of this article, is a Chartered Accountant and working as a Consultant at Aria CFO Services LLP. Aria provides professional services exclusively to NGOs and Social Enterprises pan India. In case of any queries regarding this article, please feel free to reach out to Dohit on his email ID - dohit [at] ariaadvisory [dot] in
DISCLAIMER: The views and opinions expressed in this article are solely those of the author. The basis of this work is the GST law in India as on the date of publishing this article. The article is for informational purpose only and is solely aimed at providing the reader an insight to the common misconceptions about applicability of GST law to NGOs. No part of this article shall be construed as any kind of legal advice.
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