The Goods & Service Tax (GST) Act came into effect from 1st July 2017, and has since affected nonprofits in a manner that neither the nonprofits, nor their donors, have adequately accounted for.
This act has implications on nonprofits in two ways:
1. As providers of goods and services
A ‘taxable person’ under GST, is ‘a person who carries out any business at any place in India and who is registered or required to be registered under the GST Act‘. Any person who engages in economic activity including trade and commerce is treated as a taxable person.
‘Person’ here includes individuals, HUFs, companies, firms, LLPs, an AOP/BOI, any corporation or government company, body corporate incorporated under laws of foreign country, co-operative societies, local authorities, governments, trusts, artificial juridical persons.
While the definition of ‘taxable person under GST’ includes a trust, society, or Section 8 company, as long as these entities are not engaged in economic activity including trade and commerce, they cannot be treated as a taxable person under GST.
However, the Authority of Advanced Ruling (AAR) for GST in Maharashtra has recently ruled that goods and services provided by charitable organisations for a fee classify as supply, making them liable for GST.
Even if a nonprofit is charitable, GST will be applied on their products if their turnover is more than INR 20 lakh.
The ruling further states that all charitable organisations need to register under GST if their annual turnover from this sale of goods and services is above the threshold of INR 20 lakh. Therefore, a nonprofit that sells products—for example, stationery or honey—is liable to register under GST if its income from the sale of these products is more than INR 20 lakhs in any financial year. Similarly, a nonprofit that provides a service—such as digital literacy courses to young women—is liable under GST in the same way.
For the time being, this order has therefore put all doubts and disagreements regarding applicability of GST to charitable organisations to rest.
The order is quite clear and assertive. Even if a nonprofit is charitable, if the income from the supply of goods and/or services is in excess of INR 20 lakhs during any financial year, GST will be applied on their products or services. The burden of paying this GST will be on the consumer. However, it does add to accounting and compliance-related costs for the nonprofit.
Are there any exemptions to this ruling?
Certain ‘charitable activities’ as defined under the GST Act are exempt from this indirect tax, regardless of the size of their fee-based turnover.
Unfortunately, the list ‘charitable activities’ under the GST Act is very narrow and restrictive, and only covers activities relating to:
(i) Public health by way of:
(A) 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;
(B) public awareness of preventive health, family planning or prevention of HIV infection;
(ii) Advancement of religion, spirituality or yoga
(iii) Advancement of educational programmes or skill development relating to:
(A) abandoned, orphaned or homeless children;
(B) physically or mentally abused and traumatised persons;
(C) prisoners; or
(D) persons over the age of 65 years residing in a rural area;
(iv) Preservation of environment including watershed, forests, and wildlife
Therefore, if a nonprofit provides counselling services to terminally ill persons for a fee, and the income generated from these services is over INR 20 lakhs in a given financial year, it is exempt from charging GST on the service it provides. However, it is still liable to register under GST, in order to claim this exemption.
The process of registering and complying (including several returns to be filed with the regulating authorities) under GST is laborious, and requires time, money, and skills that most nonprofits do not possess. The burden of GST compliance therefore is quite steep for nonprofits that fall into the categories listed above.
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2. As buyers of goods and services
Nonprofits registered under Section 12A or 12AA of the Income Tax Act, 1961 may be recognised as ‘tax exempt’ by the Income Tax Department. However, the tax exemption is limited to the income of the nonprofit from direct taxation. It offers no exemption from indirect taxes in the form of GST. For example, if the nonprofit operates from a commercial office space, it cannot flash its 12A or 12AA certificate to the landlord and claim exemption from GST on the rent.
Similarly, while buying products such as computers, laptops, tablets, or a vehicle for the nonprofit’s charitable activities, it’s so-called ‘tax-exempt’ status (from direct tax) does not offer any cover against GST.
To a supplier of goods or a provider of services, a nonprofit is just a regular customer.
GST is applicable to nonprofits for all goods purchased or services received. Thus, to a supplier of goods or a provider of services, a nonprofit is just a regular customer or client.
There is however an added complexity when it comes to the purchase of legal services and in relation to transport of goods, called the Reverse Charge Mechanism (RCM).
Reverse charge means that the liability to pay tax is on the recipient of goods or services, instead of the supplier of such goods or services with respect to notified categories of supply.
A person who is required to pay tax under reverse charge has to compulsorily register under GST, and the threshold limit of INR 20 lakhs is not applicable to such a person.
RCM applies to nonprofits in the following situations:
(i) If a nonprofit wishes to engage the services of a lawyer, and the lawyer charges a fee for his services, the nonprofit must first register itself under GST, and pay GST.
A number of advocacy organisations regularly require legal services. The GST Act not only places a compliance burden on such organisations, but also adds to the cost of delivering their programmes since they have to pay the GST upfront.
(ii) Besides legal services, RCM applies to nonprofits where Goods Transport Agencies (GTA) are concerned. As per Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017, ‘Goods Transport Agency’ or GTA means any person who provides services in relation to transport of goods by road, and issues a consignment note, by whatever name called.
Implications for nonprofits’ budgets and their fundraising targets
Thus, GST impacts nonprofits on two counts:
- It imposes an additional compliance burden and the subsequent costs of meeting such compliance such as the cost of engaging a GST consultant or accounting personnel to handle GST-related compliances.
- There is an additional GST cost factor on goods and services purchased by nonprofits.
Nonprofits and their funders must become cognisant of these implications of the GST Act on their budgets and fundraising targets.
Note: GST is not a ‘straight jacket’ or ‘one type or size fits all’. This article provides a broad overview. However, each organisation is advised to seek professional guidance/assistance to determine applicability on a case to case basis.