NON GOVERNMENT ORGANISATION Practical Aspects relating to Formation, Registration, Accounting & Provisions of Taxation

Assistant Professor of Commerce St.Joseph’s College (Autonomous) Practical Aspects relating to Formation, Registration, Accounting & Provisions of Taxation Dr.V.Bastin Jerome Assistant Professor of Commerce St.Joseph’s College (Autonomous) Tiruchirappalli - 2

ASPECTS COVERED Definition NGO vis – a- vis NPO Formation Registration with different authorities Sources of Funds to NGO Accounting aspects Provisions of Income Tax Act, 1961

What is “NGO” What is “NGO” Defined as “Non Government Organisation” Whose Control & Management does not vest into the Government but with a totally “independent” group of persons. These are being formed for Charitable, Educational, Social or Religious purposes only

NGO vis-à-vis NPO NPO denotes “Non Profit Organization” i.e. Their motto is not to earn profits Their objects may not cover benefits of public at large but are generally restricted to group of persons Generally all “NGO” may also a kind of “NPO”, but all NPO are not necessarily NGO Common example of NPO are Various Trade Organisation/Associations registered under Non Trading Companies Act

Different Forms of NGO Different options available for formation A Trust Registered under Indian Trust Act A Society registered under State Societies Act A Society registered under Indian Societies Act A Company Registered u/s 25 of the Companies Act, 1956 The Most Common form among above are either a trust or Society registered under the State Societies Act.

Formation of Trust/Societies Factors to be considered while selecting the form of NGO Number of persons interested to form the NGO Main objects of the NGO Amount to be settled by settler or no initial fund available Starting of activities ,whether immediately or can be started after registration

Proposed Management Pattern i.e. closely held or widely held Planning for generation of Fund From private sources, public / community Grants & contribution from Government, Funding Agencies (including FCRA) Reputation / Goodwill Annual formalities / compliances Penalties

Formation of Trust Why to Form a Trust For discharge of Charitable and/or Religious sentiments of the settler/author of the trust, in a way that ensures public benefit. For Claiming exemption from income tax u/s 10/11 of the I.T. Act, 1961 as the case may be in respect of incomes applied to Charitable and/ or Religious purposes For the welfare of members of the family and/or other relatives who are dependent on the settler of the trust.

Definition of Trust Section 3 of Indian Trust Act, 1882 defines trust as under: A “trust’ is an obligation annexed to the ownership of the property, and arising out of a confidence reposed by one person in other and enforceable in court of equity. - A person who reposes or declares the confidence is ‘Author of the Trust: - The person(s) who accepts the confidence is called “Trustee(s)” Continue …..

- The person for whose benefit the confidence is accepted is called the “beneficiary” - The Subject matter of the trust is called “trust property” or “trust money” - The instrument if any , by which the trust is declared is called the “instrument of the trust” The word confidence reposed is key word for the formation of trust since the trustee is bound to held the property for the beneficiary and he cannot use the property for his own benefit.

Creation of Trust – Drafting of Deed Information Required: Name of Settler Details of Movable/immovable property he wants to settle towards corpus of the Trust Name of at least three prospective trustees (Settler can also be a trustee ) Name of the trust Address of the Registered Office of the Trust Main Objects of the Trust / other Objects Beneficiary details

Formation of Society – Information Required: Memorandum & Byelaws of the Society Names of seven prospective office bearers (incl. President, Secretary & Treasurer) of the Proposed Society Proposed name of the Society ( Norms apply) Address of the Registered Office Main Objects of the Society

Drafting of Trust Deed in case of Trust & Memorandum & Bye laws in case of a Society Important clauses to be taken care of : Appointment, term of office & removal of Trustees / Office Bearers & their powers & duties Appointment of an additional Trustee(s) / Office Bearer(s) Formation of various Committees etc The manner of making, altering & rescinding regulations

Manner of dissolving of Trust / Society The determination upon the dissolution that the property be utilised by the Government or others in particular manner Removal or termination of any Office bearer or any member on some happening or conditions Clause may be given to allow donation/ contribution to trust/society having similar objectives Clause allowing authority to borrow money and / or mortgage the property

The Trust Deed is required to be executed on Non Judicial Stamp Paper The Memorandum / Byelaws of a Society can be typed on plain paper or a booklet available for this purpose may also be utilised .

Formation of Societies Under Indian Societies Act Minimum 15 persons from 8 different States required 2. Registration papers will have to be filed with the Registrar of Societies, Delhi. Other requirements are generally same as per registration in Rajasthan Societies Act

Registration with Sub Registrar (Required in case of immovable property settled by the setter of the Trust, otherwise it is optional ) Two copies of Trust Deed , one original & one Xerox copy Xerox copy must have original signature Two Photo of each trustee/ Settlor Payment of requisite fee All Trustee & Settler are required to be present in person in the office of sub–registrar. Two Witnesses also required to be present in person

Registration with Registrar of Societies Mandatory in case of Society Three Copies of Memorandum & Bye laws of Proposed Society with original signature of all the subscribers i.e at least Fifteen persons on Memorandum Each page shall be signed by three office bearers It shall be witnessed by two persons & shall be notarised

Address / I.D. Proof of all Executives (self attested ) Recommendation of Parshad / MLA required An affidavit (as prescribed) by office bears Payment of requisite fee Rs.2,516/- (Challan by Dept ) Application can be filed through President / Secretary or any office bearer Management Committee shall have the one person from one family.

NON GOVERNMENT ORGANISATION Practical Aspects relating to Registration, Accounting & Provisions of Taxation CA. A.K. Goyal

Registration u/s 12A A & Grant of approval 80G of the I.T. Act (A) Documents Required Application to be made before the CIT having jurisdiction of address of Registered Office. All documents to be filed in triplicate, fourth copy be retained for our record Form No. 10A for application u/s 12AA Form No. 10G for application u/s 80G List of Trustees /List of Office bearers

Details of Main activity which has been undertaken or intended to be undertaken. Copy of Trust Deed. h. In Case of Society a. Registered copy of Memorandum & Bye Laws. b. Copy of Registration Certificate. i. Accounts made up to the date of application

Accounting Aspects – various issues Aspects covered Various sources of Funds / receipts Various project related, administrative & Capital Expenditure Accounting issues Are Grants income ? Depreciation on Fixed Assets

Sources of Funds / Receipts to NGO Grants & Contribution from local authorities & Government Grants & Contribution from various Funding Agencies (Indian or Foreign), from another NGO. Donations including donation towards Corpus Fund. Income from Fixed Assets, like rental income, Vehicle hire income, Computer Charges.

Income from any business with the intention to use the profit to attain main object of the institution. f. Bank Interest on S.B. A/c as well as FDR’s. - Interest received - Interest Accrued - TDS deducted by bank ( Submission of form 15G by Trust / Societies )

g. Community contribution in the form of labour, material, service etc g. Community contribution in the form of labour, material, service etc. h. Income from sale of Fixed Asset. i. Income from Agricultural and irrigation activities. j. Annual Membership fee. k. By Providing various services like Fooding arrangement to different Projects l. Bank loans to self help groups m. Savings of the Self help group that is utilized in project

Various project related, administrative & Capital Expenditure 1. Expenditure incurred as per projects 2. Various Expenses charged from the projects 3. Capital Expenditure Out of Project Fund 4. Administrative Expenses 5. TDS, ESI, PF Payment 6. Bank accounts / charges

Various Accounting issues Preparation of Receipt & Payment account is must. Accounting on cash basis is highly recommended. (cash method of accounting ) c. All calculation for receipt & application of income under the I.T. Act should have to be computed from receipt & payment account only. d. Grants , Contribution and/or Donation. e. Donation in kind. f. Unutilised amount of grants in various projects

Are Grants Income ? Some views are that grants are received for specific purposes & represent a liability, hence they should not taken in I & E A/c & should be shown under the head liability in Balance Sheet – not a correct view To show the reality of the activity of the NGO, all grants should have been shown as income against which all expenses ( including capital Expenditure ) should be shown. Provision be made for unspent balance & be carried to Balance Sheet. Grant received for capacity building- treatment

g. Local Contribution in form of material, Labour, Services etc. h g. Local Contribution in form of material, Labour, Services etc. h. Purchase & Sale of Fixed Assets i in some projects as per scheme of Project. ii By head office out of current or accumulated Surplus. iii Fixed Asset acquired by donation _ As per ICAI nominal value should be accounted, but a fair market value be considered i. Charging of various expenses in various projects i. Administrative Expenses. ii. Fooding & Mess Expenses. iii. Vehicle Charges. iv. Computer Charges. v. Telephone & other Expenses.

j. Bank Interest on S. B. A/c & FDR’s. k. Donation towards Corpus Fund j. Bank Interest on S.B. A/c & FDR’s. k. Donation towards Corpus Fund. l. Utilisation of Funds of one project in other project. 1. From Local Project to another Local Project 2. From FCRA Project to another FCRA Project 3. From FCRA to Local Projects or vice versa ? It is advisable to maintain fixed assets register irrespective of the source of receipt / purchases of fixed assets.

Consolidation of Accounts

Separate Receipt & Payment account prepared as per requirements of Funding Agencies Consolidated Receipt & Payment Account, I & E Account & Balance Sheet must be prepared - To know the overall activity of the NGO - Income Tax return can be prepared only from consolidated accounts - Attachment of consolidated statements

What is depreciation When we purchase any fixed asset, it lasts for many years, say for 5-10 years, or 100 years In case of building as per useful life of that asset. Some assets diminishes as per passage of time, like vehicle, furniture etc. Some assets become unusable due to changes in the technology like computer & other technical machinery When we charge depreciation, we write off a proportionate amount each year so as to reduce the book value of such assets. Vehicles etc. can be written off in 10 years, computer may be in 4 years

Who pays for Depreciation Funding Agencies / Donors pays for purchases of new Fixed Assets Neither Funding Agency nor NGO pays for depreciation. It is only an accounting entry to reflect the Written down value of the assets.

Depreciation Accounting Two ways of accounting Through the Income & Expenditure Account Capital Fund not created Dr. - Depreciation A/c Cr. - Fixed Assets A/c Directly to capital Fund ( Value of assets transferred to capital Fund ) Dr. - Capital Fund A/c Cr. - Fixed Assets A/c

Provisions of Income Tax Act

Taxation aspect of Trust/Societies Provision of section 11 to 13 apply in case registered u/s 12AA of the I.T. Act, 1961. 85% of receipt of the year is to be utilized during that year itself. Donation/contribution towards Corpus Fund not considered as receipts ( Sec.11(1)(d) ) In case 85% of the receipt not utilized: Option u/s 11(1) Explanation 2 may be exercised by filing a letter before A.O. before the due date u/s 139(1) of the I.T. Act.

Amended definition of Charitable Activities

Amendment made w.e.f. 01.04.2008 New Hardship to NGO Charitable purposes includes: a. Relief to poor b. Educational relief c. Medical Relief d. Preservation of Environment e. Preservation of monuments or places or objects of historical interests and f. Advancement of any other object of general public Utility

If any general public utility involves activity in the nature of trade, commerce , Business where fee is charged than this will not be treated as charitable activity. No consideration whether this amount is utilised for Charitable activity. This Provision will not apply if such receipts in a year are Rs.ten lacs or less.

Provisions of TDS Applicable Provisions to NGO’s Section 192 - TDS from salary Total salary income is to be calculated & deduction be given for HRA, Conveyance, LIP, PPF etc & tax to be calculated as per slabs provided in the law. Section 194C – Payment of Contract ( 1% ) TDS @ 1% is to be deducted if individual bill is of Rs.30,000/- or more or if total contract amount in a year is more than Rs.75,000/- TDS @2% if the payee is other than Individual & HUF

Section 194 J – Payment of fee for professional or Technical services Tax @ 10% is to be deducted if payment in a year exceed Rs.30,000/- Section 194I - Payment of Rent 2% on Plant & Machinery 10% on Land & Building ( if exceed Rs.1,80,000/- in a year )

Other important points Quoting of PAN No. Mandatory, if not TDS @ 20% to be deducted, Bill must contain PAN No. Tax to be deposited within 7 days from the end of month in which TDS deducted. Separate Challan for each section Care to be taken while filling section & A.Y. Returned to be filed quarterly Email address is to be given while filing return

Applicable Penalty Provisions - Penalty for non maintenance of books of account - Penalty for non filing of return ( even cancellation of registration u/s 12AA & 80G ) - Penalty for not deducting TDS of late filing of return - Penalty for accepting or paying loan amount of Rs.20,000 or more in cash

Direct Tax Code – harsh for NGO The Union Cabinet has approved the proposed Direct Tax Code and place in Lok Sabha on 30.10.2010 Though many provisions are expected to be modified after report of Standing Committee As per Finance Minister likely to be applicable from 01.04.2012 Presently, there are some harsh clauses in the Direct Tax Code (DTC) about NPOs. If the proposed DTC is enacted, then the NPO sector will be very adversely impacted

key highlights of the proposed DTC (i) No re-registration required (ii) 10% of gross receipts or 15% of income, whichever is higher, will not be taxed provided it is spent in next 3 years. In other words, 85% of income or 90% of gross receipts will be taxed if not spent during the year. (iii) If any income is received in the last month of the financial year, then it will not be treated as surplus and will not be taxed.

(iv) Religious organisations are also included. (v) The term “Charitable Purpose” has been retained, earlier it was coined as “permissible welfare activity”. (vi) basic exemption limit has been provided, surplus in excess of limit shall be taxed. (vii) NPOs have to follow Cash Basis of accounting. However section 25 companies can follow mercantile basis of accounting. (viii)The government can notify some NPO as exempt entity ( Schedule VII ) (ix) All receipts except loan and corpus donation shall be considered as part of income.

(x) Any surplus from receipt and cash expenditure during the year will be taxable @15% (xi) NPOs can not transfer any amount to their corpus without paying taxes. Currently 15% of income can be accumulated indefinitely. (xii) If the NPO is unable to spend the income during the year, then it can only accumulate 15% of income to be spent in the next 3 years. (xiii)The funds or assets shall not be used for the benefit of interested persons, whether directly or indirectly.

(xiv) Anonymous donation will be exempted to the extent of 5% or 1lakh rupees whichever is higher. The remaining amount will be taxed @30%.

Keeping of Old Records

Maintenance of Huge records of earlier year diificult As per provisions contained in I T Act, 1961 records are to maintained for six years after the end of related assessment year , For Example Accounting year ended on 31.03.2003 Relevant A.Y. will end on 31.03.2004 Accounts to be maintained upto 31.03.2010

It is suggested that After the end of limitation period, receipt book, vouchers , bank pay in slips, cheque counter foil books bill books ( if any ) may be destroyed. Following records ( may be year wise )should be kept intact: - Cash Book, Ledgers including sub ledgers - Bank Statements, necessary correspondence - Bills relating to purchase of fixed assets, water, electricity, Telephone & such utility bills

THANKS