There should be no Tax Deduction at Source (TDS) nor should there be insistence on compliance under the Goods & Services Tax (GST) on 'GRANTS' (whether CSR grants or regular grants) made by any company or corporate trust/foundation to NGOs.
However, there seems to be a trend among some companies in India to treat NGOs (be they charitable trusts, societies registered under the Act of 1860 or Section 8 Companies) as ‘vendors of professional (commercial) services’ or the company’s ‘contractors/sub-contractors’. This is patently wrong and this practice should be stopped immediately.
Unfortunately, the stakes are so high, that some NGOs, because of their dire need for funds are succumbing under corporate pressure and accepting the dictates of these companies, little realizing the vicious trap that they are falling into – potentially jeopardizing their very tax exempt status. What's worse, because of the mistakes of a few, the entire sector gets tarred with the same brush!
NGOs should understand that when they sign business/commercial/professional contracts with companies and accept their position as vendors of business/commercial/professional services, with TDS deducted for professional or consultancy services (u/s 194J), they are exposing themselves as deemed business/commercial operators of professional/consultancy services. This would not only jeopardize their tax exempt status u/s 12AA, but, also require them to register under GST if the turnover from such professional or consultancy services exceeds Rs. 20 Lakhs during the financial year.
What is a Grant?
It is important for both companies as well as NGOs to understand the nature of a grant.
A grant is in the nature of a ‘gift’ and contractual or an agreement only to the extent of being given for a specific (charitable) purpose with specific terms & conditions regarding use of the gift (E.g. use the grant only to provide education to girls, do not spend more than five per cent of the grant on travel or overheads, spend only as per agreed budget lines, provide quarterly reports etc. etc.)
A ‘Donation’ too is in the nature of a gift, but, it is ‘unrestricted’. A grant on the other hand is a restricted donation or gift, with conditions set by the donor and accepted by the NGO under a grant agreement.
In the case of a ‘grant’ various prerequisites are attached to the grant prior to the NGO receiving the gift, often with specific expenditure requirements / limitations and reporting guidelines. However, this does not make a ‘grant agreement’ into a ‘professional service or consultancy contract’ liable to TDS and compliance under GST.
Even the earlier ‘Technical Guide to Service Tax’ issued by CBEC in 2012 makes it clear: “Conditions in a grant stipulating merely proper usage of funds and furnishing of account also will not result in making it a provision of service.”
NGOs Exist for ‘charitable’ and not ‘commercial’ purpose'
An NGO having registration u/s 12AA is Tax Exempt and is recognized by the tax authorities as an organization established for ‘charitable purpose’.
Under Section 2(15) of Income Tax Act 1961, “charitable purpose” includes:
1) Relief of the poor,
2) Education, Yoga
3) Medical relief,
4) Preservation of Environment (including watersheds, forests and wildlife)
5) Preservation of monuments or places or objects of artistic or historic interest”
6) The advancement of any other object of general public utility.
Thus, how can an organization established for relief of the poor, advancement of education, medical relief etc., be a "vendor of (commercial) service/s" as understood in business or commercial terms?
To repeat, NGOs exists for "charitable purpose" as per objects enshrined in their trust deed or memorandum of association. An NGO generally sustains its work with the aid of grants and donations and not through commercial work contracts!
Therefore, we, at the Centre for Advancement of Philanthropy (CAP) always advise companies to sign 'grant agreements' and treat NGOs as their ‘CSR program partners’ instead of preparing vendor agreements and treating NGOs as their service contractors.
All the companies that we at CAP advise and work with and which includes large finance, banking, pharmaceutical, engineering, textile and trading companies follow the process of sanctioning ‘grants’ without TDS or insisting on GST compliance for the NGO.
No tax should be deducted at source on grants because:
a) A grant is a gift, albeit restricted or conditional
b) NGOs exists for 'charitable purpose' and they are not 'commercial providers of service/s'
c) A 'grant agreement' can have various conditions and stipulations as also specific expected deliverable, but, that does not make it a 'commercial contract'.
d) NGOs under CSR Rules are "Implementing Agencies" or ‘CSR implementing partners’ of companies and not the company’s ‘commercial contractors’ or ‘vendors’
Clearly, therefore, companies should desist from viewing and treating NGOs registered and existing for ‘charitable purpose’ as ‘commercial contractors' or 'vendors of commercial services'.
Benefit to the company
Companies should also realize and understand that as per Finance Act 2014: 'CSR Expenditure' shall not be allowed as 'Business Expenditure' under section 37 of Income Tax Act, 1961. However, any CSR expenditure which is allowed as deduction under other sections (e.g. u/s 80G) would be permissible!
In other words by entering into commercial CSR contracts or vendor agreements with NGOs, companies gain no tax advantage, because, such expenditure would not be deductible as business expenditure or write off. On the other hand, if it is a grant agreement and the funds are given by way of grant (i.e. specific / conditional / restricted contribution) and the NGO has 80G tax deduction certificate, the company can enjoy fifty per cent tax deduction.
Noshir H. Dadrawala