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Let us discuss the taxation policy in each case of registration of the educational institution.

Registration as a charitable trust

An educational institution may be registered as a trust under the Indian trusts Act 1882. Trusts are formed by a trust deed, prepared on a stamp paper of requisite value (the value varies from state to state) containing trustee information, rights, duties, operation of trust, liabilities and the most important information among all of the above mentioned, the object of the trust i.e whether religious or charitable. Generally an educational institution is formed under the head of the charitable institution. The trust deed must be submitted to the local registrar along with all the prescribed requirements and at the time of such registration, the settler and two witnesses with proof of identity must be present. The registrar shall retain a photocopy of the trust deed and return the original registered one.

After registration, the trust must apply for a PAN card as it is a must for income tax registration with the income tax department, Government of India. Here sec12A of the income tax plays a role. After the trust has received the income tax certificate under section 12A, it can apply for various tax exemptions for donors as well. Such as an application can be submitted under Sec 80G for 100% deduction but there is a condition to it. The institution must be of national eminence. It can be any educational institution registered under 12A of the Act including a university.

Registration of an educational institution as a SOCIETY

An educational institution may be registered under the Societies Registration Act 1860. A society may be formed by an association of 7 or more persons for charitable, literary, scientific purposes as defined in section 20 of the act. The associated 7 persons have to subscribe their name in the memorandum of association and file the same with the registrar of joint stock companies.

As per the provision of sec 12A of the income tax act, income of an organization is exempted if NGO has 12A registration. If the registration under section 12 A is not done, the NGO or organization must pay income tax on the surplus income during the year. This registration under section 12A is a one-time registration.

Registration as a company

If an educational institution is registered under the Companies Act 2013, then we may say that it is registered as a Company. When an educational institute is registered as a Company it does not mean that it is for the purpose of making a profit only. In fact, such steps taken by big companies are a part of their Corporate Social Responsibility and a part of their profit generated from other businesses are utilized in the making of an educational institution for charitable purposes.

Hence as it does not violate the fundamental concept of an educational institution as an institution for imparting education only and not for making the profit, the system of taxation is lenient and much like other clauses mentioned above.

Registration as Sole Proprietorship

As we know, sole proprietorship may be defined as a business enterprise owned by a single person who has entire responsibility and authority with respect to such business. Educational institutes run in the name of a single individual, who has solely invested his capital comes under such category. These types of institutions are normally small-scale like a small coaching institute, a pre-primary or primary school etc. In this case, taxation is done on the name of the individual in whose name the institution is registered.

Educational Institutions exempted from payment of Taxes:

Government institutions - Those educational Institutes which are wholly or substantially financed by the Government (either Union or State) are exempted from payment of taxes under section 10(23C) subclause iii(ab) of the Income Tax  Act. This is because such educational institutes are considered to exist solely for educational purposes and not for the purpose of profit.

The second category of educational institutions which are exempted from payment of taxes is those which exist for the purpose of education only and not for making any profit and whose annual receipts do not exceed Rs. 1 crore.

Any educational institution which does not fall in the above two categories but has been approved by the prescribed authority for exemption may be exempted from payment of taxes.

For claiming exemption the certain statutes need to be followed by educational institutions. These are:

  • The property must be held by a trust or as a legal entity
  • It must be for charitable purposes, i.e. for general public utility and no part of its income can go for the satiation of needs of any particular individual.
  • The accounts of the institute can be audited if the need arises.

Withdrawal of exemption

The privilege of exemption from taxation by any educational institution is not permanent but is subject to change as well. The prescribed authority who had given the exemption reserves the right to withdraw such exemption if any of the following conditions arises:-

  1. In case the prescribed authority has reason to believe that the income generated by these institutions is not being applied for educational purposes solely but are being siphoned off for meeting personal interests, then the prescribed authority reserve s the right to withdraw such exemption.
  2. If the institution violates any of the clauses under which it had been given the exemption or if it is suspected that the activities of the institution are not genuine then the exemption may get cancelled.

However, before withdrawing such approval, they must be given an opportunity of being heard. Thus, this is a quasi-judicial process.

Whatever may be the type of educational institution, all of them have to file returns and get their accounts audited by a Qualified Accountant and must furnish such report in the prescribed form.

The author has vast experience & knowledge in dealing with Direct and Indirect Taxation. He is providing his expertise service as Managing Partner at SRT Consultancy & Service. He can also be reached at sandeeprawatca@gmail.com.


Published by

Sandeep Rawat
(Expert in Taxation and compliance)
Category Income Tax   Report

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