Skip to main content

Chapter XIII - Applicability of GST

Goods and Services Tax (GST) was rolled out in India on 1st July 2017. It is applicable throughout India and has replaced multiple cascading taxes levied by the Central and State governments. Unlike income tax which is a direct tax levied by the Central Government on income generated by individuals and businesses in a particular financial year, GST is an indirect tax charged by the supplier of goods or services to the consumer and paid to the Government of India. In other words, when one pays income tax on salary or business income, it is a direct tax. However, indirect taxes such as the erstwhile Service Tax and VAT (now both under GST) are taxes that are charged by the vendor of goods or services to the consumer, and paid to the government of India. Thus, under GST, while the onus of charging the tax is on the supplier of services or goods, the burden of payment is indirectly on the consumer.

Reverse charge

The concept of reverse charge mechanism was already present under service tax. In the GST regime, reverse charge has been made applicable for both, services as well as goods. Reverse charge under GST simply means the liability to pay GST (to the central and state government) is by the recipient of goods/services instead of the supplier, i.e., the chargeability gets reversed. Only certain types of entities are subject to the reverse charge mechanism. For example, services provided by an advocate (including senior advocate) or firm of advocates to a business entity located in taxable territory, would fall under reverse charge mechanism and the recipient of such service is liable to pay the GST.

Are NPOs exempt under GST?

NPOs whether registered as trust, society or Section 8 company are exempt under income tax (subject to their complying with provisions laid down under law) but not specifically exempt under GST. Notification No.12/2017-Central Tax (Rate) dated 28th June 2017 exempts services provided by entity registered under Section 12AA of the Income-tax Act, 1961 by way of charitable activities from whole of GST vide entry No. 1 of the notification, which specifies that "services by an entity registered under Section 12AA of Income-tax Act, 1961 by way of charitable activities" are exempt from whole of the GST.

Thus, as per this notification, GST exemption is provided to institutions having 'charitable activities' BUT, only if the following conditions are satisfied.

  1. The entity must be registered under Section 12AA of the Income tax Act; and

  2. Such services or activities by the entity are by way of 'charitable activities'

Unfortunately, the scope of 'charitable activities' under GST is not as broad as it is under Section 2(15) of the Income tax Act 1961. Charitable activities as per GST Notification of 28th June 2017 are limited only to:

'Public health' by way of:

  1. Care or counselling of:

    a. Terminally ill persons or persons with severe physical or mental disability;

    b. Persons afflicted with HIV or AIDS;

    c. Persons addicted to a dependence-forming substance such as narcotics drugs or alcohol; or

  2. Public awareness of:

    a. Preventive health, family planning or prevention of HIV infection;

    b. Advancement of religion, spirituality, or yoga;

    c. Advancement of educational programmes or skill development relating to:

    i. Abandoned, orphaned or homeless children;

    ii. Physically or mentally abused and traumatised persons;

    iii. Prisoners; or

    iv. Persons over the age of 65 years residing in a rural area;

d. Preservation of environment including watershed, forests, and wildlife.

Thus, GST is applicable to all NGOs/NPOs, whether registered as trust, society, or Section 8 company. Only organisations which are registered with Income Tax under section 12AA (now 12AB) and having charitable activities specified above are exempt from registration under GST, regardless the quantum of supply of goods or services. In all other cases, the organisation is required to register itself under GST if its supply of services exceeds Rs 25,00,000 or supply of goods exceeds Rs 40,00,000 during a financial year. Being an indirect tax, the organisation registered under GST must charge GST to the client or buyer of the organisation's goods and services.

Also, all organisations including those having charitable activities as specified under GST, must pay GST on goods or services to which GST applies. For example, if the organisation buys computers or office equipment, it cannot claim exemption from paying GST on the goods or services which it purchases. Thus, goods or services provided to charitable organisations are not out of ambit of GST. All services other than those specifically exempted provided to charitable trusts are subject to GST. Also, the GST Notification makes the GST exemption available to institutions having the specified charitable activities very specific. Accordingly, while the income from the specified (under GST Notification) charitable activities are exempt from GST, income from the activities other than those mentioned in the notification is taxable. There could be many services provided by a charitable and religious trust which are not considered as charitable activities and hence, such services come under the GST net. The indicative list of such services could be renting of premises by such entities, grant of sponsorship and advertising rights during conduct of events/ functions, etc.

Export of services

Many tend to think that GST is not applicable on export of services. As per Sec 2(6) of IGST Act: 'Export of Services' means the supply of any service when:

  1. The supplier of service is located in India

  2. The recipient of service is located outside India

  3. The place of supply of service is outside India

  4. The payment for such service has been received by the supplier of service in convertible foreign exchange; and

  5. The supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8 of the IGST Act, 2017.

The supply of any service is considered an export of service, only where all the above conditions are met. Unless all the above conditions are satisfied, a supply of service cannot be regarded as exports and would be taxable under GST. Thus, if an agency situated outside India contracts an NPO in India to offer certain services to another NPO based in India, it would not qualify as export of service since the recipient of the service would be located in India.

Are grants liable to GST?

Voluntary donation attracts no GST. When it comes to grants, opinions among professionals are divided. It is important to understand the nature of a grant. Both donations and grants are a 'gift'. However, a donation is voluntary and unrestricted. A grant on the other hand is restricted by terms and conditions (e.g., specific timelines, specific output, and outcomes) set by the donor. Merely having such terms and conditions does not make a grant a 'Service' or a 'Work Contract.' Thus, a grant is a 'gift' and contractual only to the extent of being given for a specific purpose with specific terms and conditions. In the case of a grant certain prerequisites are attached to the grant prior to the NPO receiving the gift, often with specific expenditure requirements/ limitations. However, this does not make a grant into a 'service contract' liable to TDS and GST. In short, a Grant is not a fee for service. Even the 'Technical Guide to Service Tax' issued by CBEC in 2012 makes it clear: "Conditions in a grant stipulating merely proper usage of funds and furnishing of account also will not result in making it a provision of service."

An NPO having registration u/s 12AA (now 12AB) is tax exempt and is not a 'vendor of service' as understood in business or commercial terms. It exists for charitable purpose carrying out charitable activities as per objects enshrined in the Trust Deed or Memorandum of Association. A NPO generally sustains its work with the aid of grants and donations and not through commercial work contracts.

Sponsorship

Sponsorship services involve a contractual relationship where one party (the sponsor) provides financial or other forms of support to another party (the sponsored) in exchange for various promotional benefits. This support could be in the form of funds, goods, or services, and the sponsored party, often an event organiser or individual, reciprocates by promoting the sponsor's products or services.

Sponsorship services are typically subject to GST under the reverse charge mechanism. This means that the recipient of the sponsorship service (the sponsored entity) is liable to pay GST, rather than the sponsor. The GST rate on sponsorship services for events in India could vary based on the specific circumstances. Central Board of Indirect Taxes and Customs (CBIC) vide Circular No. 116/35/2019-GST dated: 11th October, 2019 has clarified that there shall be no levy of GST on the service of display of name or placing of name plates of the donor in the premises of charitable organisations receiving donation or gifts from individual donors. Though the circular refers only to individual donors, one could assume that the same principle could perhaps also be applied in the case of a corporate or institutional donor. Thus, sponsorship aimed at advertising the company or its product/s would attract GST under Reverse Charge Mechanism. However, simply acknowledging the donor e.g. "Project/Programme supported by XYZ" would not be advertising or sponsorship.