There’s more than one way of setting up an NGO

There’s more than one way of setting up an NGO
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First Published: Mon, Feb 25 2008. 12 27 AM IST

Updated: Mon, Feb 25 2008. 12 27 AM IST
Typically, educational, charitable, research, training, scientific development institutions and other non-governmental or voluntary organizations in India are set up as companies established under section 25 of the Companies Act, 1956, or a society registered under the Societies Registration Act, 1860, or a charitable trust.
Under section 25, a company can be incorporated for promoting commerce, art, science, religion, charity or any other useful object. It applies profits or other income for promoting these objects. Such a company, while prohibited from declaring dividends and using words “limited” or “private limited” in its name, enjoys a number of exemptions from the operative provisions of the Companies Act. Nevertheless, incorporation of a company under section 25 is a time-consuming process and typically takes anything between three and four months.
Such companies are permitted to receive grants or donations from outside India. The grants and donations so received are viewed as “foreign contribution” and are governed by the provisions of the Foreign Contribution Regulation Act, 1976. This means that, prior to receiving funds from abroad, a section 25 company must register with the ministry of home affairs and designate a branch of a bank through which it will receive the foreign contributions. If the company does not register with the ministry of home affairs, it must obtain prior permission from the ministry for accepting the foreign contribution. In such cases, the company is required to report to the ministry the amount of foreign contribution being received by it, the source and the manner in which such foreign contribution is being received, and the purposes and the manner in which such foreign contribution is to be utilized by the company.
A non-governmental organization can also be established as a society. A society can be established by a minimum of seven persons subscribing to the memorandum of association of the society, with the objective of promoting, among other things, science, fine arts or social welfare. The management of affairs of the society is entrusted to a committee or other governing body appointed by the general body of members. A society has limited liability and its members or executives are not personally liable to settle the society’s dues. Further, a society cannot distribute gains/profits and upon dissolution, no member is entitled to any profits. Like a section 25 company, a society can also receive foreign contributions.
A non-governmental organization may also take the form of a trust, and even these can receive foreign contributions like a section 25 company and society. Trusts may be of two types: public trusts and private trusts. There is no central law governing public charitable trusts. However, certain states such as Madhya Pradesh, Maharashtra and Rajasthan have notified their own public trust legislation. A public charitable trust is one which is established for the benefit of the public as a whole or for the benefit of a portion of it answering to a particular description. The expression “charitable purpose” is broad in import and includes relief of the poor, education, medical relief and the advancement of any other object of general public utility. On the other hand, a private trust is one where the beneficial interest is limited to specified individuals or definite ascertainable individuals such as relatives or friends.
A section 25 company, a society and a trust enjoy certain exemptions under the Income-tax Act, 1961. In terms of section 11(1)(a) of the Act, read with section 12, voluntary donations to an institution created wholly for charitable purposes are not included in the total taxable income of such institution, provided that at least 85% of the income (which includes the donations so made) is “applied” in India, in the year in which it is earned, towards the object of such institution. Even use of donations for the purpose of constructing buildings to be used for carrying out charitable activities has been held to be the “application” of income satisfying the requirements of section 11(1)(a) and therefore eligible to be excluded from the taxable income of the charitable institution (Tiruppani Trust vs The Commissioner of Income-Tax, 1998). From the donor’s perspective, under section 80G of the Income-tax Act, donations to any fund or institution fulfilling certain criteria, among others, if the same has been set up as a charitable trust, a society or a company under section 25 of the Companies Act, will be eligible to be deducted from the donor’s total income, to the extent of 50% of the donation, subject to a maximum deduction of 10% of the gross total income of the donor.
Send your comments to lawfullyyours@livemint.com This column is contributed by Pallavi Puri and Annapoorna Jayaseelan of AZB & Partners, Advocates & Solicitors.
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First Published: Mon, Feb 25 2008. 12 27 AM IST
More Topics: NGO | Education | Charitable | Research | Companies Act |