Charitable organization is an organization which has been established for charitable purpose. Under the existing laws, charitable activities can be carried out by all types of legal entities in India, however structure or management is not the essence of a charitable organisation, rather it is the objective which distinguishes a charitable organization from a commercial organization. In India, the choice of an entity to carry out such charitable activities becomes important because of tax implications. Incomes of charitable entities are exempt under the Income Tax Act (“ITA”), subject to fulfilment of prescribed conditions as laid down under the ITA.
In India, charitable entities can be mostly registered under the following legislations:
- Societies Registration Act, 1860.
- Public Trust Act of various States in India.
- Section 8 of the Companies Act, 2013.
Apart from the above legislations the Income Tax Act 1961 will be applicable to charitable institutions. And in the case of foreign contributions to these charitable institutions, the Foreign Contribution (Regulation) Act, 2010 will be applicable which we have touched upon in brief hereinbelow.
Under the directives of these legislations, an organization engaged in voluntary work can carry out their activities as one of the following entities:
- Registered Society.
- Public Trust.
- Section 8 company.
An organization can choose any of the above forms depending upon the purpose and mandate of the organization.
1. Registered Society:
Seven or more persons are entitled to form a registered society under the Societies Registration Act. The organization so formed must be registered to carry out literary, scientific or charitable activities. In addition to the above Act, several states have also enacted their respective Acts and Rules, and registration is carried out by respective states where such organizations are located. Normally, an organization registers in the concerned district where it operates, but, to have a state-wide scope of its operation, the organization needs to be registered with the registrar of societies.
2. Section 8 Company:
Section 8 of the Companies Act, 2013 permits a company to register itself as a ‘not-for-profit company’ with limited liability to its members. An association formed under Section 8 has the status of a body corporate or a limited company. It is registered under the Companies Act, 2013 and is recognized as an independent entity. As it is a separate legal entity, the property of a Section 8 company vests in the company and law-suits can be filed against the company itself. The members of the management committee enjoy similar powers as that of the board of directors. It is not necessary for a Section 8 company limited by guarantee, to have any share capital.
3. Public Charitable Trust:
Under the local laws in India, a trust can be formed either as a private or a public trust. Formation of a private trust is governed by the Indian Trust Act, 1882 (“ITRA”). However, the ITRA does not govern trusts of public charitable nature. There is no central law governing public charitable trusts, although most states have “Public Trusts Acts.” In the absence of a Trusts Act in any particular state or territory, the general principles of the ITRA are applied.
To form a public charitable trust, it is very important that the objects of the trust must be charitable in nature and to engage in activities for general public utility. Public Trusts can submit an application for registration to the deputy/ assistant Charity Commissioner having jurisdiction over the region/sub-region in which the trust is sought to be registered.
A. REPORTING REQUIREMENTS OF CHARITABLE ORGANISATIONS:
The Societies Registration Act, 1860 provides that each society has to submit an annual report to the Registrar of Societies in the State in which it is registered. Also, in terms of the Societies Registration Act, 1860, an annual list is supposed to be filed with the Registrar containing the names, addresses and occupations of the Governors, Councils, Directors, Committee or other Governing Body entrusted with the management affairs of the Society within the timelines as prescribed. Further, there are few States which also require the societies to file audited or even un-audited accounts within the timelines as prescribed therein.
2. Public Trust:
In case of Public trusts, Annual report and an annual return of income should be filed with the authorities having jurisdiction over the region where trust is registered.
3. Section 8 Company:
These companies are registered under the Companies Act, 2013. It has to comply inter alia, with the requirement of conducting meetings of the Board and the Shareholders as prescribed under the Companies Act, 2013. It will need to file forms with the jurisdictional Registrar of Companies to intimate changes inter alia, pertaining to change in the directorship, change in office address, reporting of audited accounts and other important resolutions are to be filed.
B.OTHER APPLICABLE LAWS:
1. Income-tax Act, 1961:
From a tax perspective, the not-for-profit entity could be eligible to the benefits of Sections 11, 12, 12A and 12AA of the ITA which discusses the conditions governing the taxation of charitable entities in India. If the not-for-profit entity obtains registration as a charitable entity under Section 12AA of the Income Tax Act, it is not taxable on its income from the property held for charitable or religious purposes, provided that certain conditions are satisfied. Charitable organisations are required to spend 85% of the donations received as charitable expenditure in the same financial year and they can carry forward only 15%. Finance Bill 2020 enacted recently requires all charitable entities who have obtained registration under ITA to apply for revalidation of their status between June to August 2020.
As per Section 2(15) of the Income Tax Act, ‘charitable purpose’ would include relief of the poor, education, medical relief, preservation of the environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility. It is pertinent to note that the two provisos to section 2(15) of the Income Tax Act do allow an organization that seeks to advance public utility to have incidental business activity provided that the total receipt from such activity does not exceed twenty-five lakh rupees per annum.
2. Foreign Contribution Regulation Act, 2010:
Foreign Contribution Regulation Act, 2010 (“FCRA”) is a non-fiscal statute with the object “to consolidate the law relating to the acceptance and utilization of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit acceptance and utilization of foreign hospitality for any activities detrimental to the national interest and for matters concerned therewith or incidental thereto”. FCRA covers for-profit, non-profit entities as well as persons in a sensitive government position, political parties and persons associated with news media.
FCRA regulates the transfer of money or asset from a foreign source to an Indian non-profit entity. No foreign contribution can be received by the recipient entity without the prior permission or registration under the FCRA. Approvals for grant of prior permission or registration are to be made before the Ministry of Home Affairs (“MHA”), Government of India.
C. COMPARATIVE ANALYSIS OF THE THREE CHOICES FOR LEGAL ENTITY:
|Particulars||Society||Trust||Section 8 Company|
|The Governing Act||Societies Registration Act, 1860.||No central authority for administration of public trusts although some state legislations does exist in this regard which requires a formal registration before the Charity Commissioner / Inspector General of Registration. If the trust property includes immovable property, registration of the documents of title is required to be done under the Registration Act, 1908.||Companies Act, 2013.|
|Nature of Entity||Association of seven or more persons for literary, scientific or charitable purposes.||A trust is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him for the benefit of another, or of another and the owner. A trust could be a private trust or a charitable trust. A public trust means an express or constructive trust for either a public, religious or charitable purpose.||Section 8 Company is a legal entity in which the liability of members or subscribers is limited to what they have invested or guaranteed to the company. Such companies are incorporated for the promotion of charitable activities.|
|Ease of formation and time||Takes 7-10 days to get registered.||Relatively simple. A Trust may be set up within a week of the execution of the trust deed.||Relatively complicated.
Takes 1-2 months for incorporation, license and registration from the Registrar of Companies.
|Number of subscribers/trustees||Seven or more members.||Only a trustee and a settlor is required to set up as public charitable trust.||A minimum number of two members are required for setting up of a Section 8 Company.|
|Governing structure||Two tier structure:
(b) Board of Directors
|Single tier structure as the trustees is the ultimate authority.
The trustee has absolute rights to govern and administer the trust and its activities, subject to the provisions of the trust deed.
|Two tier structure:
(b) Board of Directors
The Board of Directors are responsible for administration and management of the company and its operations.
|Income tax registration||Income tax exemption is available only if conditions under Section 11 and 12 of the ITA are fulfilled.||Income tax exemption is available only if conditions under Section 11 and 12 of the ITA are fulfilled.||Income tax exemption is available only if conditions under Section 11 and 12 of the ITA are fulfilled.|
|Remuneration or other benefit to members||Members can draw a “reasonable” compensation from the society fund.||Trustees can draw a
“reasonable” compensation from the trust fund for the services they provide to the trust.
However, being a trustee in itself is not considered a service.
|A Section 8 Company cannot pay remuneration or other benefit to any of its members.
Any member working for a Section 25 company has to work in an honorary capacity. What can be paid is reimbursement of expenses, interest on loan, rent for premises lent to the company. However, such payments can be made to a member for services rendered by them which are not of the kind ordinarily expected to be rendered by him as member, with the previous approval of the Central Government.
|Foreign Investment||No foreign investment is permitted in a society.||No foreign investment is permitted in a public trust.||Foreign investment is permitted. However, infusion of foreign capital in a Section 8 company, would be considered as foreign contribution, thereby requiring permission/registration under FCRA prior to such infusion|
|Whether foreigners can be members||There is no restriction under the Societies Registration Act, 1860.
From an FCRA perspective, organizations having
foreign nationals, other than of Indian origin, as members of their executive committees or governing bodies are generally not permitted to receive foreign contribution.
However, it may be possible to seek an exemption in this regard, where there is a justifiable need for such appointment.
|There are no such restrictions in case of a public trust registered under the Registration Act,1908.||Yes. However, a majority of Indian resident directors on the Board is recommended for the practical convenience of attending board meetings.
From an FCRA perspective, organizations having
foreign nationals, other than of Indian origin, as members of their executive committees or governing bodies are generally not permitted to receive foreign contribution. However, it may be possible to seek an exemption in this regard, where there is a justifiable need for such appointment.
Under the Companies Act, 2013, every company should have atleast one resident director.
D. CRITERIA FOR INDUCTION OF MEMBERS IN CERTAIN ORGANISATIONS:
Members: IT-BPM organisations registered in India with annual revenues from IT-BPM operations exceeding one crore rupees are eligible.
a. Associate Member:
- Start-up IT-BPM organizations registered in India with annual revenues from IT-BPM not exceeding one crore rupees.
- Branch Office / Liaison offices of overseas IT-BPM companies registered in India.
- Institutional Members—Firms providing support / affiliated services to IT-BPM organizations (for instance, NGOs, Government departments, Financial Institutions, Venture Capital Firms, Research Institutions, Infrastructure Providers, Real Estate, and Management Consultants).
a. Patron Members:
This category has large companies, MNCs, PSUs, and financial institutions. Maximum Number is restricted to 150. Besides the regular services special privileges are offered to patron members.
b. Corporate Associates:
Firms, sole proprietary concerns, companies, corporate bodies, public sector undertakings, societies or any other body engaged in trade, commerce, agriculture, services or profession are eligible for corporate membership. Direct membership allowed for organizations having turn over of 20 crores or more. There is no restriction to the number of members in this category.
c. Ordinary Members:
Chambers of commerce, trade or industry associations with a minimum annual gross income of Rs. 50, 000 and with at least five years of existence are eligible for Ordinary Membership. No restriction on the number members in this category.
Any Company or Firm in India engaged in manufacturing activity or providing consultancy services (Engineering/Technical/Management) or present in the services sector including Banks, Financial Institutions, Law Firms, Hospitals, Travel/Tourism & Hospitality, Films, Media: Print and Electronic, Digital Entertainment, Advertising, Publishing, Fashion are eligible.
b. Associate Members:
Representative offices of foreign companies operating in India as Liaison Offices under the approval of Reserve Bank of India are eligible. The Associate Membership would be converted into Member category as and when Liaison office status changes to a full-fledged company with the commencement of commercial production/services generating sales turnover.
c. Affiliated Associations:
National or Regional Associations/Councils/ Organizations of industry interests are eligible. Affiliation to CII of such bodies would not affect the autonomy or independence of the affiliated body, which would retain the complete right to decide and to pursue its own line of action. Such National Affiliated Associations shall stand for elections to the National Council but shall not have the right to vote.
d. Institutional Members:
National or Regional Professional Institutes/Organizations/Boards of industry interests dealing with collection and dissemination of information, research & development, technical up gradation processes, exploration of new resources, etc. as distinct from industry Associations/Councils/Organizations are eligible. They shall have no power to occupy a seat on the National/Regional/State Councils and shall not have the right to vote.
Authors: Prashant Jain, Co-Founder & Partner; Anita Dugar, Senior Associates.
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Updated as on April 16, 2020.
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