Monday, 14 August 2017

GST Updates & Clarifications

This is further to our Blogpost dated: 2nd July 2017 titled “GST & it’s Impact on Charitable organizations/NGOs”

There are still a number and queries that we continue to receive from within the sector and hence the need to address some of these issues in this blogpost.
The most common question that is still asked is: “We are registered under 12AA of Income tax and therefore tax exempt. Why should GST be applicable to us?”

To reiterate Income tax is a ‘Direct Tax’ and GST is an ‘Indirect Tax’, besides also being a separate legislation. 
Income tax is paid directly by the assesse on income whereas GST is paid indirectly by the consumer and charged to the consumer by the supplier of goods or services. 
In certain cases, the consumer is required to register under GST and pay GST on behalf of the unregistered supplier of goods and services under what is called ‘Reverse Charge Mechanism’ (RCM).

GST is charged only on ‘business activities’. Where the NGO provides goods or services in furtherance to its charitable objects, GST is not applicable. For example, if a company or a corporate foundation enters into a ‘CSR grant agreement’ with an NGO, the latter is merely furthering its charitable objectives and cannot be deemed as carrying out ‘business activities’ as the company or corporate foundation’s commercial vendor of service. 
We reiterate that a ‘grant’ is in the nature of ‘gift’ (albeit with various stipulations) and therefore neither TDS nor GST should be charged on grants.

Taxable person under GST
A ‘taxable person’ under GST, is a person who carries on any business at any place in India and who is registered or required to be registered under the GST Act. Any person who engages in economic activity including trade and commerce is treated as taxable person.

Person’ here includes individuals, HUF, company, firm, LLP, an AOP/BOI, any corporation or Government company, body corporate incorporated under laws of foreign country, co-operative society, local authority, government, trust, artificial juridical person.

While the definition of ‘taxable person under GST’ includes a trust, as long as the trust is not engaged in economic activity including trade and commerce, it cannot be treated as taxable person under GST!

GST registration is mandatory for any business whose turnover in a financial year exceeds Rs.20 lakhs (Rs.10 lakhs for North Eastern and hill states). Further, if turnover is only supply of exempted goods/services which are exempt under GST, registration is not necessary.

Interstate and intrastate turnover of goods and services
Today several NGOs make and sell their products (usually made by their beneficiaries such as the physically or mentally challenged, marginalized women etc.) or charge fees for various services. It is important to understand when and where registration under GST becomes mandatory.
  • If the NGO's total intrastate (i.e. only within the state) turnover from taxable supply of goods and services is below Rs.20 lakh during the fiscal year (Rs.10 lakh in hill states), then GST is not applicable.
  • If the NGO sells goods or provides services to anyone outside it’s state, the NGO must register under GST. In such cases, it is immaterial whether the total turnover of goods or services is below the threshold limit of Rs.10 or Rs.20 lakh.
GST would be applicable on all fee based services including membership fees, training or workshop fees, provided the aggregate fee receipts during the fiscal year are below the threshold limit and confined to the state where the NGO is registered.

GST on Sponsorship by companies
While grants and donations are exempt under GST, sponsorship where the company sponsors an NGO event and the name and or logo of the company is widely and prominently displayed would attract GST.
Sponsorship includes naming an event after the sponsor, displaying the sponsor’s company logo or trading name, giving the sponsor exclusive or priority booking rights, sponsoring prizes or trophies for competition; but, to reiterate, does not include any financial or other support in the form of donations or gifts, given by the donor subject to the condition that the service provider (NGO) is under no obligation to provide anything in return to such donor/s.

No General Exemption to NGOs from GST
There is no general exemption from GST for goods or supplies purchased by NGOs. Hence, if the NGO buys computers for office use or it’s programs or grains or vegetables for its staff or program kitchen, there is no GST exemption. 
Reverse Charge Mechanism (RCM)
If an NGO is registered under GST, it is also required to pay GST under reverse charge on services or goods received from unregistered vendors. This would include contractors, consultants, caterers, shopkeepers, small traders etc., if these vendors are not registered under GST. 
Casual supplies (e.g. stationery, books, refreshments) up to Rs. 5,000 in a day from small vendors are excluded from reverse charge.

For NGOs registered under GST, reverse charge is deductible from GST payable as Input Tax Credit.

List of Exempted Services under GST
The list is quite long and therefore we shall highlight here just a few relevant exempt services.
  • Services by an entity registered under section 12AA of the Income Tax Act, 1961 (43 of 1961) by way of charitable activities;
  • Services by an educational institution to its students, faculty and staff;
  • Services to an educational institution, by way of transportation of students, faculty and staff; catering, including any mid-day meals scheme sponsored by the Government; security or cleaning or house-keeping services performed in such educational institution; services relating to admission to, or conduct of examination by, such institution; up to higher secondary;
  • Services by an artist by way of a performance in folk or classical art forms of music, or dance, or theatre, if the consideration charged for such performance is not more than one lakh and fifty thousand rupees: Provided that the exemption shall not apply to service provided by such artist as a brand ambassador;
  • Service by an unincorporated body or a non- profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution – As a trade union; For the provision of carrying out any activity which is exempt from the levy of GST; or Up to an amount of five thousand rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex;
  • Services of public libraries by way of lending of books, publications or any other knowledge-enhancing content or material;
  • Services by way of training or coaching in recreational activities relating to, Arts or culture. or sports by charitable entities registered under section 12AA of Income Tax Act, 1961;
  • Health care services by a clinical establishment, an authorized medical practitioner or para-medics; services provided by way of transportation of a patient in an ambulance.

Charitable activities” as defined under GST
Services by an entity registered under section 12AA of the Income Tax Act, 1961 (43 of 1961) by way of charitable activities is exempt under GST. However, under GST the scope of “charitable activities” is narrow and restricted.

Charitable activities” means activities relating to:
(i) 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;
(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;
(ii) advancement of religion, spirituality or yoga;
(iii) 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;
(iv) preservation of environment including watershed, forests and wildlife;

Clinical establishment” means a hospital, nursing home, clinic, sanatorium or any other institution by, whatever name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India, or a place established as an independent entity or a part of an establishment to carry out diagnostic or investigative services of diseases.

Noshir H. Dadrawala

CAP with FMSF will be having a workshop on GST in Mumbai on 13th September 2017. Please email for more details

Wednesday, 9 August 2017

Financial Reporting - Whose perspective adds up?

Financial Reporting is important for both donors and NGOs. Donors find it useful to get progress updates and deviations/delays of projects. NGOs are happy to provide data but lack the manpower and expertise. Is Financial Due Diligence important in a sector where the heart rather than the head decides which cause to support? Pradeep Mahtani, financial analyst and our honorary guest editor spoke to 2 NGO representatives and 2 veterans from intermediary organisations to find out. 

One common point heard is that reporting data requested is often a burden? Are details asked for commensurate with the funds provided? Ravistan Anthony is Head of Finance at Mission for Vision, a non-profit that works to restore the gift of vision.  “I don’t think so. Well the Donor will have same reporting format whether they give 1,000 Dollars or one lakh Dollars.”
Anita Limaye, CEO of Ummeed Child Development Center, an NGO that works with developmental disabilities, shares that their experiences differ from donor to donor “This includes frequency of updates as well as details requested for. In all cases, it helps to build a trusting and transparent relationship with the donor so that the donor is confident that the funds assigned to the cause/project are being used for the best possible outcomes and impact. The data requested for by donors pushes NGOs to objectively validate the impact of what they do – we believe this is a good thing.”
Has the entry of the corporate sector helped build the financial expertise of NGOs. Are corporate donors willing to pay overheads for financial reporting? 
Both the NGOs we spoke to agreed that corporate funding had helped NGOs. Ravistan felt – “Yes definitely, the entry of corporate sector has helped NGOs in thinking innovatively, achieving value for money, and very specific target oriented objectives.” Anita agrees – “Yes, the entry of the corporate sector has created an impetus on NGOs to have greater systems and processes, including financial reporting. As the corporate organisation's CSR team gains experience, their expectations become more realistic.”
On the question of overheads, corporates remain less helpful. Anita mentions – “Most corporates look at overhead costs acutely and this can make it challenging for NGOs; these costs often have to be covered through unrestricted funding.” Ravistan concurs – “They prefer to support direct and very specific project costs.”
We asked, are donors willing to help an NGO be sustainable in the long term? Has this situation improved with the entry of CSR money?  
Anita points out – “Experienced corporates are interested in sustainability, both of the NGO and of the change it is trying to create. We have also seen a trend towards multi-year project funding which helps the NGO plan longer-term projects. Given that the social issues that the NGO is trying to address may be new to the corporate entity, it may or may not be able to help the NGO think through how to make the impact sustainable, except by asking the right questions – answers to which may need to come from within the NGO.” Ravistan mentions that “most CSR funds are released for very specific and target oriented projects tentatively for 3-4 years. At the same time, donors would like to see that programmes are self-sustainable.  So the onus is on the NGOs how to utilise the donor’s funds for sustainability in the long run.”

As an NGO what do you feel you do better than other organisations, to present your financials and impact better?
“Donors need to be convinced that the money they will be investing will impact more number of beneficiaries with less cost and in a stipulated time period. Also we don’t ask for any overhead cost. All the funds directly go to the projects.”, explains Ravistan.
Anita adds, “We have diversified our funding sources to ensure financial sustainability. We have robust systems and processes to track organisation-level and project-level finances and we continually strive to better them – through advice from financial experts and learnings from peers. We build trusting relationships with our funders so that there is a common understanding of expected outcomes and impact and how this will be measured.”

Are Corporate Donors doing enough financial due diligence. Has this picked up with the entry of CSR funds?
Anup Vora, who was formerly at CRY & has recently joined Dasra as CFO states, “The scope and importance of financial due diligence has certainly increased among corporates. Unlike in the past, where only known NGOs and charities were supported, today the corporates receive proposals from several NGOs working for various causes. The Corporate Donor today reviews the compliance of NGOs, fund raising costs, administrative overheads, etc before giving a grant. With the entry of CSR funds this activity has become more focused and professionally managed which is a good for the sector as a whole.”
Pushpa Aman Singh, CEO of GuideStar India adds, “While every donor would like effective and efficient utilisation of funds, corporate donors are additionally concerned about financial due diligence as there is high reputation risk if things were to go wrong due to mis-utilisation or non-compliance. Several corporates use GuideStar India certified NGOs as pre-vetted lists to identify credible partners. Portals such as GoodCSR, mention NGO due diligence levels on respective NGO pages to help corporates choose partners.  

Do HNIs and retail donors care enough about financial transparency?  
Pushpa shares that they work with intermediaries who serve retail donors and those who advise HNIs. “Most intermediaries do not necessarily require financial transparency in the public domain but are keen that financial statements have been checked and compliance verified. They require a copy of the financial statements, registration documents, 80G, FCRA, and statutory returns to be made available to them. Crowdfunding portals prefer to indicate the level of certification and leave it to their retail donors to decide what is good enough for them.
Anup’s experience has been, “HNIs and retail donors, unlike corporates are not mandated to donate or spend on CSR, they in a way follow their heart and support a cause. However, today there has been a growing awareness among HNIs and retail donors to seek for financial reports or 80G (50% & 100%) tax deductions, etc.”
We were curious to know, what they felt about the NGOs focus on financial sustainability?   
Anup is positive, “Unlike a few years ago, nowadays NGOs are being run professionally. There is a tendency to recruit the best talent, create a second line leadership and a healthy reserve backed by good Investments. There is a trend among NGOs to have an organizational budget and work as per the budgets thereby helping them monitor their spends. Some NGOs build enough reserves to earn interest which will help them cover the administrative costs for a year.”
Pushpa adds, “Some grant makers invest in mid-size organisations to help them strengthen their strategy and build sustainable models. Many other NGOs want to, but do not know how. NGOs now have access to a variety of channels to mobilise resources (money, talent, goods) and diversify the risk of dependence on traditional grants. They are eager to get coaching for their fundraising strategy and execution.” 

We also invited the perspectives of donors of whom only one responded. We asked if he thought there are gaps in Financial Reporting? Sumit Chauhan  CSR Lead Consultant at Macquarie Group Foundation responded, “There are major gaps in reporting standards as such. With CSR rules and corporate involvement, the NGOs are taken by surprise to the level of reporting demanded both at compliance level and in general. NGO sector, need to look at their organisation holistically and bring in some sort of Enterprise Excellence that will bring all aspects like programs, finance, marketing reporting, HR—even IT into the same improvement and management system. They need to invest in this.

As a conclusion we asked if there has been any move by grantmakers to decide on a common format or find ways to help NGOs gain expertise in the financial reporting function?
Anup says, “NGO (Non-Government Organisation) is a broad term. The organisations
operating as NGOs can be registered as: Trusts under Bombay Public Trusts Act, Society & Section 8 Company under the Companies Act, etc. The reporting formats are mandated by the law under which an NGO is registered, hence there is no standardised format. However The Institute of Chartered Accountants of India (ICAI) has issued a technical guide on accounting for Not-for-Profit Organizations which is a step towards standardising reporting formats for NGO sector.”
Pushpa with her vast experience shares, “There have been attempts to standardise grant application forms among intermediaries as NGOs often have to submit similar information to multiple agencies. We worked on two such initiatives in 2009 and 2014 with no success. What seems more practical is the use of common identifiers so that intermediaries can easily exchange NGO information and systems become interoperable using APIs. And, consequently, people will ask for less information from the NGO. It is encouraging that our efforts to evangelise IT PAN as a unique ID and also the use of GSN (GuideStar Number is simpler to remember and less error prone) seems to have helped. FCRA and NITI Aayog have made PAN mandatory. Most intermediaries are collecting PAN, many are also asking for GSN. We are also assigning BRIDGE Numbers to NGOs so that they can quote their unique global id for correct identification while participating on global fundraising platforms and programs. PAN is the Aadhar equivalent for NGOs within the country and BRIDGE Number will play a similar role globally. The burden on NGOs to keep giving the same information is likely to reduce with the use of these IDs, with better exchange of information among intermediaries and with more and more statutory filings becoming mandatory, as users will find online verification becoming simpler. The Charity Commissioner, Maharashtra, has made online filing of annual returns mandatory from FY 2016-17 onwards. Their portal allows NGOs to provide PAN, FCRA Registration Number and NITI Aayog ID. While reporting formats will not get standardised, technology allows display of information or reports to be generated as desired, on the fly, if information is stored systematically and unique IDs are captured correctly. 
As regards standardisation of financial reports, I think first of all we need uniform accounting standards. Currently financial statements are not comparable more because of not following uniform accounting policies, and financial statements of many organisations do not carry Notes to Accounts and Significant Accounting policies.” 
Ravistan says, “NGO-donor relations have changed in the last 10 years. Earlier the donors approach was to support the overall growth of the organization and to build the capacity for sustainability. But with the changing environment donors are only interested in projects and targets. So, often it is the NGOs responsibility to build its own capacity.”
Sumit feels, “If you look at carefully the formats by most of grant-makers, you will find common things though they just read different. This is common with MNCs incorporated in India where the standards are made by their global counterparts. The sector needs to learn grantmakers language and apply it accordingly. Grant-makers in India are also migrating their reporting formats online to bring in better synchronisation with their other requirements.”
We conclude with Anita’s optimistic view, “Grantmakers have started connecting amongst themselves so that experiences, expectations, and trends can be shared and learned from. Some corporates are also willing to deploy skilled resources as volunteers to NGOs. We have seen some commonality in reporting formats but aren't aware of a move towards "a" common format.”

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