In this blog post, Haneesha Reddy Kandala, an MBA Graduate currently working in Akamai Technologies in the AMG team and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the structuring of a Non-Profit Organization. 

Non-profit organisations (NPOs) in India: –

1. Exist independently in the state and are self-governed.
2. Beneficial for others, generally outside the membership of the organization.
3. Are not allowed to distribute monetary residual to their own members, although they are allowed to employ people for various positions who can take a salary.

There is no particular pattern that can characterise the non- profit sector in India. The complexity lies is that India as a country; A county defined by more than just landscape; a country that derives its complexity from language, secularism, religion, politics and culture.

Broadly The NGOs and the NPOs are legally structured into three types. They are as follows:

1. A trust registered under the Indian Trusts Act of 1882
2. A society registered under the Societies Registration Act of 1860.
3. A cooperative under the Cooperatives Societies Act of 1904.
4. A company under (Section 25) of the Companies Act of 1956 (now section 8 of the Companies Act of 2013).

Trust

A trust is the most common type of an NPO. The origin of ‘Trusts’ can be traced back to the ancient times when,  human motivation to do charity and dedicate property for charitable and religious purposes found its manifestation in the form of  Dharamshala’s, annachatras, sadavarts, educational and medical institutions, construction of water tanks and wells, bathing ghats, implanting trees, etc. 

A trust usually involves the transfer of property from one person to another, where the transferee manages the property for the benefit of an identified person or a class of persons.

The transferor is known as the settlor, the person to whom legal ownership is transferred to, is called the trustee and the person who benefits by the trustee using the property is called the beneficiary.

As per section 3 of Indian Trust Act 1882 “A Trust is an obligation annexed to the ownership of the property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner”. This definition has never been amended since its inception.

The different types of Trusts are as given below:

• Private trust- private trusts can be of various types depending on their purpose. They can be as simple as an inheritance trust for future generations.

• Public trust- Public trusts are those that are established for the benefit of either the public at large or a section thereof (geographically or demographically segmented). This type of trust is often otherwise known as a charitable trust. Trusts which, for example, promote the advancement of education or human rights, or which aim to relieve or reduce poverty, can all be said to have charitable aims. For example: Smile Charitable Trust; Akshaya Trust. There are significant differences regarding the tax treatment of public and private trusts. Public trusts enjoy favourable tax treatment, particularly with regard to donations. They also receive exemptions and reductions on business rates if they operate from their own premises. The tax treatment of private trusts varies hugely depending on the terms of the individual trust.

• Religious Trust- As the name indicates, these are trusts formed by temples, churches, and other religious places and the funds collected are used for the benefit of the human society and these acts are done in the name of God. Examples: Gurudwara Guru Nanak Darbar, Shankar Maharaj Samadhi Trust, etc.

Societies

Societies are membership organisations that may be registered for charitable purposes.  Societies are usually managed by a governing council or a managing committee.  Societies are governed by the Societies Registration Act 1860, which has been adapted by various states.  Unlike trusts, societies may be dissolved.

Societies are similar to trusts with a few minor differences. While two people are required to form a trust, a minimum of 7 people is required to form a society. State jurisdiction plays an important role in the societies NPOs. Example:  In Bihar, promotion of industry and agriculture has been added to allow organisations that undertake these activities to register under the act. To cite another example, in Uttar Pradesh, organisations that promote Khadi, village industry, and rural development can also register under the act. ^[4]

According to section 20 of the Act, the societies that may be registered are as follows:

1. Charitable societies.
2. Societies for the promotion of science, fine arts, literature.
3. Restoration of historical monuments.
4. Education, public art museums and galleries.
5. Libraries.

The governance of the societies is usually managed by a general body of members called managing committee (analogous to the board of directors in a corporate). These individuals have the authority to demand regular reports and oversee the use of funds. They are responsible for ensuring the funds are used for the purpose with which the society NPO was made.

Two advantages of society are its democratic organisational nature and flexibility in making amendments to rules and regulations. The democratic organisational nature arises from society’s periodical election of a governing body accountable to its general members. The flexibility arises from its capacity to change rules as an internal process.

Companies

A section 8 company (old section 25 company) is a company with limited liability that may be formed for “promoting commerce, art, science, religion, charity or any other useful object,” provided that no profits, if any or other income derived through promoting the company’s objects may be distributed in any form to its members.

A company may obtain nonprofit status if it fulfils the following conditions: the Memorandum of Association of the Company makes it expressly nonprofit; the income of the company is solely applied for a promotion of charitable objectives, and the members do not get any dividends or other profits. Such companies are known as charitable companies and can hold the property for charitable purposes. 

The internal governance of a section 8 company is similar to that of society.  It generally has members and is governed by directors or a managing committee or a governing council elected by its members.

Tax Laws

A. Tax Exemptions: Tax exemptions are undertaken under:

• General Scheme
• Corpus Donations: Corpus donations or donations to the endowment are capital contributions and should not be included to compute the total income of the organisation. 
• Business Income: Under amendments to Section 11(4A) of the Income Tax Act 1961, a not-for-profit organisation is not taxed on income from a business that it operates that is incidental to the attainment of the objects of the not-for-profit organisation, provided the entity maintains separate books and accounts with respect to the business.  Furthermore, certain activities resulting in profit, such as renting out auditoriums, are not treated as income from a business.
• Disqualification from Exemption: The following groups are ineligible for tax exemption: all private religious trusts; and charitable trusts or organisations created after April 1, 1962. The following are examples of governmental charities listed in section 80G, contributions to which entitle the donor to a 100% deduction:  the Prime Minister’s National Relief Fund; the Prime Minister’s Armenia Earthquake Relief Fund; the Africa (Public Contributions – India) Fund; and the National Foundation for Communal Harmony.
  
  

B. Reporting Foreign Contributions: Under the Foreign Contribution (Regulation) Act, (FCRA), all not-for-profit organisations in India (e.g., public charitable trusts, societies and section 8 companies) wishing to accept foreign contributions must –

• Register with the Central Government.
• Agree to accept contributions through designated banks. 

C. Customs Duty: Not-for-profit organisations involved in relief work and in the distribution of relief supplies to the needy are 100% exempt from customs duty on the import of items such as food, medicine, clothing and blankets. 

D. Double Tax Treaty: India and the United States signed a double-tax treaty on September 12, 1989.  The treaty does not address issues related to charitable giving or not-for-profit entities.