After introduction of Negative List based taxation under service tax from 1.7.2012, the applicability of service tax to voluntary / non-profit organizations (NGOs) has become a contentious issue. This is because of introduction of all encompassing definition of ‘service’ under the law. The definition attempt to cover all kinds of any activity carried out by a person for another for a consideration under its ambit. However, the definition itself excludes certain kind of activities like transfer of title in goods or immovable property, transfer, delivery or supply of goods which is deemed to be ‘sale’ within the meaning of Article 366(29A) of the Constitution, transaction in money or actionable claim or provision of service by an employee to the employer in the course of or in relation to his employment, fees taken by a court or tribunal in accordance with the law etc. Further, the functions of members of Parliament, State Legislature and other local authorities for a consideration or duties performed by any person who holds any post in pursuance of constitution capacity or the duties performed by any person by a Chair person or director of a body established by any government or local authority are also not covered in the definition of service. The negative list provided u/s. 66D list out certain activities which is not covered as ‘service’. Further, exemptions are granted to certain activities under Mega Exemption Notification No. 25/2012 – ST and certain other notifications like exemptions to exporters, SEZ etc.
On the first reading, the definition of ‘service’ seems to cover all activities under its ambit. The exemption to charitable activities provided by an entity registered under Income Tax Act gives the impression that such activities are otherwise covered under the definition.
Voluntary / non-profit organizations is the term commonly used for an organization that is neither a part of a government nor a commercial for -profit business usually set up by ordinary citizens, industrialists, businessmen and may be funded by governments, foundations, businesses or private persons. Some of the examples are Infosys foundation, Gates foundation, Ford Foundation, Aziz Premji Foundation, Sir Ratan Tata Trust, autonomous organizations by government of India like CAPART (Council for Advancement of Peoples Action and Rural Technology), various NGOS founded by State Governments etc.. Funds are contributed by the founders and supplemented by individuals, business houses etc. Such of the NGO have their own objectives but many of them are common too, like charities, social welfare schemes, capacity building from grass root level, women empowerment, health care, family planning, HIV awareness, poverty alleviation etc.
Voluntary / non-profit organizations / NGOs do provide services. Some of the services are specifically exempted and in some cases no specific exclusion or exemption is provided from service tax. Examples of charitable organizations are Rotary Clubs, Lions Clubs, Giants International, charitable hospitals like Bombay hospital, temples, mosques, gurudwaras, public charitable trusts, social service centers like CRY, Rehab centers, institutions of destitute women, orphanage homes etc. Normally, these organizations run by voluntary contributions (donations), though charges are recovered full or in part for specific purposes like hospitalization charges, school or college fees, etc. The other receipts like renting of halls etc. may also be collected for services rendered. Attempt is made in this article to discuss service tax implication on NGOs and such voluntary or non profit motive organizations, for brevity’s sake we will call them “charitable organizations”.
Services by voluntary organizations for which no consideration received would not be covered under service tax in view of specific definition requiring consideration as necessary condition. The voluntary organizations engaged in poverty alleviation, education and health care of poor and needy etc may not receive any consideration from the receiver of service. However, question may arise if a donor donates certain amount to charitable organizations for conducting any activity, whether in such a case can it be said that there is a quid-pro-quo between the donation and such activity and therefore such donation may be regarded as consideration. The argument, though cannot be ruled out, appears to be far-fetched. This is because the charitable trust persue its own objective, for example, feeding the poor or public health care. Any person contributing some amount for the cause of the charitable trust cannot be said to be providing consideration to carry out the activity of feeding the poor by such charitable trust, as the donation is purely voluntary. The same principle would apply to other philanthropic activities by charitable organizations.
The services of voluntary organizations as such are not covered in the list of declared services or in negative list (except in case of funeral, crematorium or mortuary services including transportation of deceased). Some of the activities carried out by a charitable organization are specifically exempt in the law in the following manner:
Education service by educational institutions:
The negative list (Entry _l__ of S.66D) provides for services by way of pre-school education and education upto higher secondary school or equivalent and a degree recognized by the law alongwith approved vocational education. Further, by Entry 9 of the Mega Exemption notification provides exemption to services provided by an educational institution to its student, faculty and staff.
Service to educational institution
Entry 9 of the Mega Exemption notification provides for exemption to services provided to an educational institution by way of transportation of students, faculty and staff; catering including the mid-day meal scheme sponsored by the government; security, cleaning or house-keeping performed in such educational institution; service is relating to admission to, or conduct of examination by such institution is also exempted.
The educational institution has been defined to mean the educational institution providing such services as covered under the negative list (Cl. l of S. 66D) mentioned above.
Health Care Services:
Exemption is provided to health care services by a clinical establishment or an authorized medical practitioner or para-medics. “health care services" means any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India and includes services by way of transportation of the patient to and from a clinical establishment, but does not include hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma” [cl. 2 (t)]. A “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 [cl. 2(j)]. In terms of [cl.2(h)] of Clinical Establishment Act, Allopathy, Yoga, Naturopathy, Ayurveda, Homeopathy, Sidha, Unani or any other system of medicine recognized by central government is covered in this. Services by cord blood banks by way of preservation of stem cells or any other service related to such preservation is exempted from 17.02.2014. Service of safe disposal of medical and clinical waste treatment facility to a chemical establishment is also exempt from 11.7.2014. Further, all services by a veterinary clinic for health care of animals or birds have been exempted.
Services by charitable trusts:
Entities registered u/s. 12AA of the Income Tax Act is exempted from service tax on services by way of charitable activities without any limit. It may be noted that the registration u/s. 12AA of the Income Tax Act is the only condition and the exemption can be availed from the date of registration. The ‘charitable activities’ are defined to mean public health by way of care or counseling of terminally ill persons (including persons with severe physical, mental disability, HIV, AIDS, or person addicted to narcotics drugs or alcohol), public awareness, family planning, prevention of HIV, advancement of religion or spirituality, advancement of educational programs or skill development for homeless children, prisoners, senior citizens and abnormal children and preservation of environment.
It may be noted that upto 31.3.2013 exemption was also available to an entity registered u/s. 12AA of The Income Tax Act in relation to advancement of any other object of general public utility upto Rs.25Lkahs. However, the said exemption is withdrawn from 1.4.2013.
Service by any person by way of renting of precincts of a religious place meant for general public or conduct of any religious ceremony is exempt under Entry 5 of the mega exemption. A ‘religious place’ is defined to be a place which is primarily meant for conduct of prayers or worship to a religion, mediation or spirituality [cl. 2 (zb)]. The term, ‘general public’ means the body of people at large sufficiently defined by some common quality of public or of impersonal nature [cl. 2 (q)].
Conduct of religious ceremonies is also exempted under mega exemption notification. Religious ceremonies are life-cycle rituals including special religious poojas conducted in terms of religious texts by a person so authorized by such religious texts. Occasions like birth, marriage and death involve elaborate religious ceremonies. Thus, services by the priest of temple is also exempted.
Renting of precincts of a religious place is exempt. However the term, precincts is not defined in the Act. The New Oxford English Dictionary defines, ‘precincts’ as follows:
“the area within the boundaries (real or imaginary) of a building or place, the grounds, the interior, esp. an enclosed or clearly defined area around a cathedral, college, etc. Also, the surrounding or environs of a place”.
Thus, renting of any surrounding area belonging to religious place is exempt under service tax.
Service by way of public convenience
Under Entry 38 of Mega Exemption Notification service provided by any person by way of public convenience such as provision of facilities of bathroom, washroom, lavatories, urinal or toilets are specifically exempted. Thus, exempted is granted to entities such as Sulabh Shauchalays is exempt.
General exemption to service to the members:
Entry 28 of the Mega Exemption notification provides for exemption to service by an unincorporated body or 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. This exemption covers clubs or associations, trade unions, co-operative societies etc., who provide service to its members for some consideration. Service to persons other then members not exempted. This being a specific exemption for the members of the organization only, the same is not discussed here.
Taxability of voluntary organizations like Rotary Clubs, Lions Club, Giant International etc:
In these organizations normally the objects are like,
To serve the people to eradicate poverty and thus pave way for upliftment of downtrodden regardless of cast, creed or colour.
To promote peace, harmony and goodwill through fellowship and spirit of co-operation all over the world.
To promote and advance the cause of service to humanity for the welfare, upliftment and betterment of the community.
To encourage the spirit of service to community by inculcating in members high ideals in civic, cultural and ethical values.
To promote the principles of good government and good citizenship.
To provide a forum for the open discussion of all matters of public interest
To define priority areas of service and develop ways and means for groups to undertake action-oriented program.
To lay down the minimum obligations and duties of members and Groups to bring about greater involvement towards attainment of the objects.
To co-ordinate and generally direct and supervise the activities and administration of the organization throughout the world.
To promote harmony and mutual understanding amongst various Groups and Federations.
These organizations normally recover fees from members. However, the fees are for recovering administrative costs and not for pursuing the objectives of the organizations. The members conduct certain activities like fund raising programs and utilize the funds or the objective of the trust. They are also engaged in distribution of aids, health care etc. Generally, no charge is recovered from the beneficiaries. The members also do not derive any direct or specific benefit from the membership of the organizations. Thus, such activities does not appear to be covered under service tax. Even when somebody donate any sum for furtherance of any of the activity of the trust, the same cannot be said to be covered under service tax as it would not fit into the definition of service as discussed earlier. However, in case someone sponsor a program and donate any sum, the same may fit into the reverse charge mechanism if the sponsor is individual or HUF, subject to other conditions like display of logo etc of sponsors being satisfied.
In case of charitable health care institutions like Bombay hospital where some amount is recovered towards costs as to hospitalization, medicines etc. it seems that the conditions specified under the exemption notification needs to be satisfied.
In relation to religious organizations like temple, mosques, gurudwaras, the religious ceremonies are exempt. Similarly, the donations collected for conducting such ceremony would also be exempt as there is direct relationship between the donation and the ceremony. The persons conducting such ceremonies like priests are also exempt. However, when a person stays in Dharamshala, Musaffirkhana etc., by paying certain amount for carrying out rituals, direct relationship between the ritual and provision of accommodation needs to be established. One also needs to look into Entry no. 18 of the Mega Exemption notification wherein exemption for declared tariff upto Rs. 1000/- per day of accommodation is provided.
Social service centers like CRY, re-hab centers, old age homes, orphanage, homes for destitute women where some amount is recovered towards accommodation, the same needs to be examined from exemption Entry no. 18 of Mega exemption notification. However, donations etc received may not be covered under service tax.
It needs to be noted that many of the entities discussed above are registered under S.12AA of Income Tax Act and therefore they are eligible to claim exemption for the specified services.
On the basis of forgoing discussion, it can be said that the voluntary organizations like charitable trusts, NGOs, Rotary Clubs etc., would not be liable to service tax. However, in case some fees / charges are received from the receivers of services, there may be issue of service tax and the exemptions provided in the law should be of some help.
In a country like India in which social security is not guaranteed by the government and large section of people live below the poverty line in slums and on roads bereft of sanitation and health care beyond reach, it is utmost necessary that the social service sector not driven by profit consideration must be exempted from the levy of taxes which may lead to discouragement to such activity. Further, any indirect tax burden may be harsh and ultimately percolate down to the needy and downtrodden.
By CA Rajkamal Shah
 S.65B(44) of the Finance Act, 1994 as amended from 1.7.2012
 Cl. 4 r.w. definition of ‘charitable activities’ as provided in sub-clause (k) of Notification No. 25/2012 – ST
 Notification No. 25/2012- ST
 From 11.7.2014
Tags Service Tax