Applicability of Service Tax to NGOs/NPOs

Several NGOs/NPOs continue to live under the myth that because they are tax exempt under 12AA or 10(23C) they would also be exempt automatically under Service Tax. Some clarifications from our legal head Noshir Dadrawala. 

It is important for all NGOs/NPOs to know and understand that while Income Tax Act is a Direct Tax, Service Tax is an indirect tax.

If an NGO/NPO offers a service that is not listed in the ‘Negative List’, such as, for example, ‘consulting service’, service tax would apply if consideration from such service exceeds ten lakhs of rupees in any financial year. The current service tax rate is 14%.

The term ‘Service’ means:

·       any activity

·       for consideration

·       carried out by a person for another

·       and includes a declared service

Therefore, an activity for consideration carried out by a person for another person can be included as service and it may also include a declared service. In other words, any service provided for a fee or when something is received in return would be considered as a service. All services except those provided in the negative list would be considered as taxable services.

The Service Tax Act has made all services taxable except those services which are specifically exempted. Under current law, almost all services rendered by NGOs on commercial basis or on consultancy contract are taxable under Service Tax.

Only some NGOs (not all) registered under Section 12AA of Income Tax Act, 1961 are totally exempted from Service Tax.

Earlier, NGOs engaged in “advancement of any other object of general public utility” were exempt up to a certain limit of taxable services in addition to the blanket exemption of Rs. 10 Lakhs. However vide Notification No.33/2012-ST dated 20/06/2012 the special exemption given to this category of NGOs has also been withdrawn, meaning thereby there is no special exemption for NGOs engaged in “advancement of any other object of general public utility” though, to repeat, they can avail the basic service tax exemption of Rs. 10 Lakhs.

It is critical to note that the Service Tax law has taken a narrow definition of the term ‘charitable purpose’ which is different from the definition of charitable purpose under section 2(15) of  Income Tax Act 1961.

Service tax exemption has been provided to only those NGOs which are registered under section 12AA of the Income Tax Act, 1961 and carrying on one or more of the following charitable activities:

(1) NGO engaged in public health by way of:

(a) care or counseling of (i) terminally ill persons or persons with severe physical or mental disability, (ii) persons afflicted with HIV or AIDS, or (iii) 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) NGO engaged in advancement of religion:
(3) NGO engaged in advancement of educational programmes or skill development relating to:
(a) abandoned, orphaned or homeless children;
(b) physically or mentally abused and traumatized persons;
(c) prisoners; or
(d) persons over the age of 65 years residing in a rural area;
(4) NGO engaged in preservation of environment including watershed, forests and wildlife.

Therefore, in light of the above definition, Service Tax is applicable to:

a) NGOs which are not registered u/s. 12AA of the Income Tax Act, 1961.

b) NGOs which are engaged in relief to poor, preventive health, informal education programs, etc.

c) NGOs which are engaged in “advancement of any other purpose of public utility”.

Some of the services covered in the Negative list include:

a) Services by way of:

i) Pre-school education and education up to higher secondary school or equivalent;

ii) Education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;

iii) Education as a part of an approved vocational education course

(Hence, non-formal education is not covered under the exempt category of Service Tax and therefore any collection from non formal, program would be subject to service tax.)

b) Services by way of renting of residential dwelling for use as residence;

(I.e. if the NGO is renting out properties for non-residential purpose then this rent income would become service subject to Service Tax.

CAP offers legal and other compliance advisory to nonprofits and the social sector. For further queries, contact - connect@capindia.in