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July 15, 2020

Not all services provided by charitable organisations are exempt under GST

by Rubina Dsouza in GST, Income Tax, Legal Court Judgement

Not all services provided by charitable organisations are exempt under GST

Introduction

A charitable organization is basically a non-profit organization whose primary objectives are philanthropy and social well-being (e.g. educational, religious or other activities serving the public interest or common good). GST is applicable on some services which are provided by a charitable trust while some services are exempt. There are certain criteria for a charitable trust to be exempted from the GST. The charitable trust or NGO must be registered under Section 12AA of the Income Tax Act, and the services provided by the charitable trust or the NGO must be for a charitable cause.

“Charitable activities” means activities relating to –

1.public health by way of:-

a. care or counseling 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; or

b. public awareness of preventive health, family planning or prevention of HIV infection

2. advancement of religion , spirituality or yoga

3. advancement of educational programmes or skill development relating to abandoned, orphaned or homeless children, physically or mentally abused and traumatized persons, prisoners or persons over the age of 65 years residing in a rural area

4. preservation of environment including watershed, forests and wildlife

That means not all services provided by charitable organisations are exempt under GST. Only charitable activities provided by charitable trusts registered under Income tax Act are exempt under GST.

Let us refer to the advance rulings provided by West Bengal AAR and Tamil Nadu AAR which gave rulings which highlighted this point.

Tamil Nadu AAR in case of M/s Dream Runners Foundation Limited (22.01.2019)

Facts of the Case:-

  1. M/s. Dream Runners Foundation is registered as a public charitable trust under Section 12AA of the Income Tax Act.
  2. They are engaged in conducting public charitable activities such as Health care, Rural development, Women empowerment, Education facility etc, either directly or through various public charitable institutions for the common good of the general public of India, irrespective of caste, religion, creed, gender and without any motive for profit.

Advance Ruling is Sought on the following questions:-

  1. Whether the conduct of marathon events by the Trust through which donations are raised for charity is an exempted service under GST?
  2. When the Trust is approved under Sec 12AA of the Income Tax Act 1961 which means that the service of the Trust is charitable in nature, does it not automatically become a charitable activity that is exempted under GST?
  3. As the service rendered by the Trust is a charitable activity within the definition of Clause 2(r) of Notification No.12/2017-Central Tax (Rate), is registration under GST required?
  4. Are donations received from participants of the marathon event exempted from GST as it is money paid for conduct of a marathon event for raising funds for charity?

Observations of AAR

Observations based on the documents and books provided by the Applicant

  1. The objective of the Trust is to organize events like Marathon, Blood Donation Camp, Organ Donation Camp, Eye Donation Camp, Health Awareness Camp etc. and utilize the funds raised from such events for Charitable Cause like funding to Non-Governmental Organizations (NGOs), Hospitals, Trusts and other Charitable Organizations, to conducts camps, seminars, meetings, publicity and prevention for terminal illness like cancer, AIDS etc., and to promote, administer, support, maintain and or grant aid to any NGO’s institutions or organizations having similar objectives like the Applicant in India.
  2. The trustees can accept donation, grants, subscriptions, contributions from any person, organization etc.
  3. It was seen from the Income Tax returns that the Applicant are filling nil income.
  4. As per balance sheet it is seen that they are showing income from “Donations received for Marathon and other events”.
  5. It is seen that out of all the amounts shown as operational expenses, a majority of the amounts are under the heads of “Marathon Event Expenses”, “Material purchased for Marathon event”, “event management”, “Misc. expenses”, “prize money for marathon events”
  6. Only a small portion of operational expenses is towards “Donations paid”.
  7. It is seen from the publicity brochure that it is being advertised as an annual fund-raiser event of the Dream runner Foundation to support the cause of providing prosthetic legs for the under – privileged and financial aid to schools in need.

Is money collected from organising a marathon liable to GST or not?

  1. The applicant is registered under Section 12AA of the Income Tax Act 1961 and the receipts are exempted under Section 80G of the Income Tax Act.
  2. The Applicant collects an amount from participants registered for the marathon, treating them as donations.
  3. It is seen from the balance sheet that from these collected amounts, the expenses of paying the registration partner, event management expenses, prize money and expenses for conducting the marathon are met and some portion of the balance is given as donation for various activities.
  4. The activity in question is the organizing of a Marathon by the applicant. This is advertised as Dream Runners Marathon where a large number of persons participate.
  5. Though the money collected from the participants are donated or used for further charitable activities, organizing marathon itself is a separate supply of service by the Applicant for the various participants, individuals or runner groups etc.
  6. As per Section 2(31) of CGST Act, “consideration” in relation to the supply of goods or services or both includes any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government.
  7. The money collected by the Applicant, from the participant in the Marathon is used for the expenses of organizing the Marathon in terms of paying the registration partner, event management charges, prize money, publicity, other organizing expenses such as T-shirts, banners and other related materials etc. as seen in their balance sheets.
  8. Therefore, the money collected from the participants is a consideration towards the supply of service of organizing and conducting the marathon for the participant’s conduct of marathon event and the same is liable to GST.

Is exemption of Notification No.12/2017-Central Tax (Rate) dated 28th June 2017 applicable?

  1. The Applicant has claimed that their activities are exempted under Sr.No. 1 of Notification No.12/2017-Central Tax (Rate) dated 28th June 2017.
  2. Services by an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) by way of charitable activities is exempted under Notification No.12/2017-Central Tax (Rate).
  3. The Applicant is an entity registered under Section 12AA of Income Tax Act.
  4. However, for the purposes of CGST Notification No. 12/2017, only those activities of such an entity are exempt from GST which qualifies under the definition of “charitable activities” given in the notification.
  5. This activity of conduct of Marathon event by the Applicant does not fall under the definition for Charitable activities mentioned under Notification 12/2017 Central Tax(Rate).
  6. Therefore, though the Applicant is an entity registered under Section 12 AA of the Income Tax Act and conducts the Marathon events for raising funds for charitable activities, the exemption under the said notification does not apply to the activity of organizing the marathon by the Applicant.

Is registration under GST required?

  1. As per Section 22 of CGST Act, every supplier shall be liable to be registered under this Act in the State or Union territory, other than special category States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds Rs 20 lakhs.
  2. In the instant case, the Applicant’s annual turnover is more than Rs 20 lakhs and they are providing the taxable supply of organizing marathon events. Hence, they are liable to register under GST.

West Bengal AAR in the case of M/s Swayam [03/WBAAR/2020-21dated 29/06/2020]

Facts of the Case:-

  1. The applicant is a charitable trust registered under section 12A of the Income Tax Act, 1961.
  2. It extends legal, medical, psychological and financial support to the women and their children surviving violence and abuse and also facilitates training programmes and workshops for the survivors.
  3. The applicant wants to know whether it is liable to pay tax on its activities.

Submissions by the Applicant:-

  1. The applicant submits it provides access of the women survivors to legal aids.
  2. It accompanies the survivor to the police and the courts and co-operates with the lawyers when required.
  3. Depending upon the financial circumstances of the survivor, it often provides support in the form of reimbursement of the court fee, lawyers’ fee or medical expenses, including hospitalization or psychiatric counselling.
  4. Such financial support is also extended to paying the remuneration of the trainers and charges of the facilitators for trainings and workshops.
  5. The applicant further submits that it does not charge anything on the survivors for the services it extends. The payments discussed above are meted out from donations received and interest on deposits.

Observations by AAR:-

  1. The applicant is assisting the women survivors in various ways to get back on their feet.
  2. Such survivors of sexual and other violence need services like legal aid, medical assistance, and vocational training.
  3. The recipient of such services is, therefore, not the applicant but the survivor woman.
  4. The applicant makes payments not to the supplier of the services, but provides financial support in the form of reimbursement to the recipient survivor.
  5. It is, therefore, not liable to pay GST based on reverse charge mechanism on such payments.
  6. The applicant does not charge any consideration for facilitating the legal aid and other assistance.
  7. Such activities of the applicant, therefore, does not result in ‘supply’ of service as defined under section 7(1) of the GST Act.
  8. The applicant is not, therefore, liable to pay tax thereon.

The applicant’s activities do not amount to ‘supply’ of service. The applicant is neither a recipient of the services for which it often provides financial assistance to the women survivors of sexual and other violence. The applicant is, therefore, not liable to pay GST on the activities described in the application.

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