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Non-Profit Organisations - Regulatory Compliances in India
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by Manish Kumar Sharma and  Gunjan Gupta*

 

INTRODUCTION

 

Non-profit organizations (NPOs) are independent organizations operating outside the realm of government or private business.  NPOs are formed with the objective of serving society and do not strive to achieve profits for its owners, directors, officers or investors.  NPOs structures in India can be set up as:

 

(i)      Companies registered under Section 25 of the Companies Act, 1956;

 

(ii)     Public Charitable Trusts; or

 

(iii)     Societies registered under The Societies Registration Act, 1860.

 

Various aspects such as the minimum registration requirements, post registration statutory compliances, management, functioning etc. need to be considered before opting for the appropriate form of NPO.  In this article, we have discussed the major aspects governing the registration and post registration compliances of the above mentioned three forms of NPOs.

 

OBJECTIVES OF NPOs

 

Profits earned by NPOs must be utilized for augmenting the growth of society and for the benefit of the public.  All the earnings of NPOs should be "reinvested" in furtherance of its objectives.  For setting up a non-profit company under Section 25 of the Companies Act, 1956, the objectives of the said company should be confined to promotion of commerce, art, science, religion, charity or any other useful objectives.  The non-profit company should apply its profits (if any) or any other income, in promoting its objectives and should prohibit payment of any dividends to its members.

 

FORMS OF NPOs AND REQUIREMENTS FOR SETTING UP THE SAME IN INDIA

 

In India, foreign residents can invest in NPOs by setting up a new Trust, Society or Company or collaborating with existing Trusts or Societies or Companies.  The requirements of setting up a new Trust or Society or Company are discussed below:

 

 

  A Company registered under Section 25 of the Companies Act, 1956 (“Section 25 Company”) – Section 25 of the Companies Act, 1956 provides for the registration of a non-profit company with the concerned Registrar of Companies.  As the Companies Act, 1956 is a Central legislation, there are no state specific laws which govern the formation of a Section 25 Company. Some of the basic features of a Section 25 Company provided under the Companies Act, 1956 are:

 

           

•     No minimum paid-up capital requirement.

 

       

•     Minimum 2 shareholders would be required if the Section 25 Company is a private company and 7 shareholders would be required if the Section 25 Company would be a public company. Although there is no specific stipulation in the Companies Act, 1956 to expedite the process of incorporation, generally in Section 25 Companies, at least one of the promoters must be a Resident Indian.

 

   

•     Minimum 2 directors would be required if the Section 25 Company is a private company and 3 directors would be required if the Section 25 Company is a public limited company.  All the Directors on the Board of Section 25 Companies can be foreign residents.

 

   

•      Free transferability of shares of a Section 25 Company is permissible.

 

   

•       A section 25 Company can be wound up in accordance with the procedure laid down under the Companies Act, 1956. However, if any property remains, after the satisfaction of all the debts and liabilities, then the same cannot be distributed amongst the members of the company but has to be given or transferred to such other company having objects similar to the objects of the Section 25 Company. The members of the Section 25 Company can determine the company to which the remaining property of the Section 25 Company can be transferred. In case the same has not been decided by the members of the Section 25 Company, then the concerned Court of Judicature having jurisdiction in the matter can decide the same.

 

   

•       The brief procedure for incorporating a Section 25 Company is as appears  hereunder:

 

     

i)      For ascertaining the availability of the name, an application with the Registrar of Companies has to be made online.

 

 

ii)     After the approval of the name is received, an application along with the specified annexures is filed with the Registrar of Companies online for obtaining a license under Section 25 of the Companies Act, 1956.

 

 

iii)    After the license under Section 25 of the Companies Act, 1956 is obtained, a declaration of compliance is filed online for obtaining the Certificate of Incorporation with particulars of the directors and a notice of the location of the registered office of the Section 25 Company with the Registrar of Companies.

 

 

 iv)    After the Certificate of Incorporation of the Company is issued, it can be downloaded from the web portal of the Ministry of Corporate Affairs.

 

 

  A Public Charitable Trust – There is no specific legislation which governs the establishment of a Public Charitable Trust in India.  The same can be established by drafting a trust deed and getting the same registered with the office of the concerned Sub-Registrar under the provisions of The Registration Act, 1908.  The trust deed should contain the following information: 

 

    

•    The name of the Trust;

 

 

•    The objects of the Trust;

 

 

•    The name of the Settlor of the Trust;

 

 

•    The name of the Trustee(s);

 

 

•    The name(s) of the Beneficiary/ies or whether it shall be the public at large;

 

 

•    The place where the principle office and other offices of the Trust would be situated;

 

 

•    The property that shall devolve upon the Trustee(s) under the Trust for the benefit of the Beneficiary/ies;

 

 

•    The procedure for appointment, removal or replacement of a Trustee, their rights, duties and powers, etc;

 

 

•    The rights and duties of the Beneficiary/ies;

 

 

•    The mode and method of determination of the trust.

 

 

   A Society registered under The Societies Registration Act, 1860 – A Society set up for promotion of literary, scientific and charitable purposes has to register itself under the Societies Registration Act, 1860.  The registration of a Society entitles it to open a bank account, obtain registration under the Income Tax Act, 1961, purchase properties in its name and obtain recognition before the legal authorities.  Some of the basic features of society are:

 

       

•    Minimum Seven or more persons associated for any literary, scientific or charitable purpose would be required to register a society under The Societies Registration Act, 1860.  “Persons” herein include foreign residents, partnership firms, limited companies and registered societies.

 

 

•     The Society enjoys a legal status separate from its members and can acquire and hold property.

 

 

•     The Society can sue and be sued.

 

EXEMPTION FROM THE PROVISIONS OF INCOME TAX ACT, 1961

 

NPOs can avail itself to the benefit of exemption from payment of tax on their income under the Income Tax Act, 1961.  For this purpose, NPOs are required to register themselves under the relevant provisions of the Income Tax Act, 1961.  It is pertinent to note that various conditions are provided under different Sections of the Income Tax Act, 1961 for claiming exemption from payment of Income Tax which need to be fulfilled.  The application for claiming the exemption has to be filed with the Income Tax Department in whose area the NPO is located.  The concerned Income Tax Officer, while processing the information, can seek further information and documentation. After satisfying itself with the creditability of NPO, the said Officer may grant the exemption which is given on a case to case basis.  Further, it may be noted that there are certain specified legal provisions under the Income Tax Act, 1961 under which registration by NPOs is required if they desire the donors making donations to the NPOs to also get benefited.  For example, if the NPO gets itself registered under Section 80G of the Income Tax Act, 1961, then the donor making a donation to the NPO will get a deduction from her/his/its taxable income to the extent permissible under the Income Tax Act, 1961.

 

REGISTRATION UNDER FOREIGN CONTRIBUTION (REGULATION) ACT

 

NPOs having definite cultural, economic, educational, religious or social programmes shall accept foreign contributions, only after they obtain a certificate of registration from the Central Government.  An NPO which is not registered with the Central Government, can also accept foreign contributions after obtaining the prior permission of the Central Government.  However, such prior permission shall be valid for the specific purpose for which it is obtained.  An application for registration of an NPO for acceptance of foreign contributions has to be made with the Central Government along with specified documents.  The Central Government may refuse the application after citing reasons for refusal.  Every certificate of registration granted to an organization under the Act is valid for a period of five years from the date of its issue, which can be renewed from time to time.

 

APPLICABILITY OF SERVICE TAX

 

Under Service Tax laws of India, various services are subject to the levy of Service Tax.  NPOs being service oriented organizations work for the betterment of the poor and underprivileged sections of society.  NPOs providing taxable services have to charge service tax on such services.  NPOs are under obligation to collect the service tax from the persons to whom they are rendering the services and are also required to deposit it with the Government.  Thus, NPOs providing taxable services would have to obtain a Service Tax Registration under Service Tax laws.

 

CONCLUSION

 

An NPO can be chosen as a preferred vehicle for entry into India for promoting commerce, art, science, religion, charity or other similar objectives.  Besides many other advantages, NPOs in India can claim exemptions from the provisions of the Income Tax Act, 1961.  To choose from the three forms of NPOs, the specific requirements and objectives for setting it up would have to be evaluated. The documentation and compliances required for incorporation of Section 25 Companies are more elaborate as compared to the documentation and compliances required for setting up Societies and Public Charitable Trusts in India.  However, if a foreign resident desires differential voting rights for shareholders, then a Section 25 Company is the only available option.  Share transfer is possible only in a Section 25 Company as this option would not be available in the case of Charitable Trusts or Societies.  The most suitable structure for the NPO can be worked out by the promoters keeping in view the above parameters along with their specific requirements and objectives.

 


* Manish Kumar Sharma is a Partner with Singhania & Partners LLP in India.  He holds dual qualifications as an advocate and also as a Fellow Member of the Institute of Company Secretaries of India. He has wide experience in the areas of mergers and acquisitions, foreign investments in India, acquisitions, capital markets, regulatory and general corporate advisory, import and export laws, and direct and indirect taxes.  He has handled transactions of varied nature in the financial sector including advising clients for project financing and fund raising.  Mr. Sharma may be contacted at manish.sharma@singhania.in.  Gunjan Gupta is a Senior Associate with Singhania & Partners LLP in India and has an overall experience of 6 years.  She assists in advising clients from overseas in their entry strategy in to the Indian market.  Her key areas of practice are corporate & commercial, mergers and acquisitions, joint ventures and acquisitions, foreign investments in India, due diligence and legal audits.  Ms. Gupta may be contacted at gunjan@singhania.in.

Sunday, September 30, 2012
Not-For-Profit Organizations / Tax Exempt Entities

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