Non Governmental Organisation (NGO)

The Non Governmental organization (NGO) is a voluntary group of individuals or organizations

usually not affiliated with any government and is formed to provide services or to advocate a
public policy and welfare. Although some NGOs are for-profit corporations, the vast majority are
nonprofit organizations.
The Non Governmental organization (NGO) is a voluntary group of individuals or organizations
usually not affiliated with any government and is formed to provide services or to advocate a
public policy and welfare. Although some NGOs are for-profit corporations, the vast majority are
nonprofit organizations.

DIFFERENT TYPES OF NON PROFIT ORGANISAITONS

There are three ways to establish a non-profit Organisation or charitable institution in India.
Either it can be registered as Trust, or Society or a Section 8 Company. It is very often argued
that which one is the best mode to operate on Indian soil. There is no distinction in the eyes of
Income Tax Department in terms of Exemption of Income or Grant of 80G Certificates. We have
made a detailed study on the basis of Advantages, Limitations, Benefits and Ease of process.

Modes of Formation and Registration of a Non -Profit organisations in India:

1) Trust

2) Society
3) Section-25 Company
TRUST:A public charitable trust is usually floated when there is a property involved, especially in terms
of immovable property like land and building. If a person wishes to set apart either property or
money for a charitable purpose so that the revenue may be devoted for the accomplishment of
the charitable activity, and wants to limit control over the disposal of that income to persons
whom he knows or approved, then it is best to set up a public charitable trust. But it should be
kept in mind that a private trust whose beneficiaries generally are relatives or friends and not
society at large, does not enjoy tax benefits.

Different states have their separate laws for formation of Trust. In absence of specific state laws,
Indian Trusts Act, 1882 is applicable. For example: A public charitable trust can be set up under
the Bombay Public Charitable Trusts Act 1950 in Maharashtra or Gujarat. Elsewhere in the
country it can be set up under Indian Trusts Act by registration of the trust deed with the
registrar.
Requirements for Trust:
A minimum of only two persons are required to form a trust, but there is no upper limit. Trust
can be set up by executing a trust deed on non-judicial stamp paper worth 4 per cent of the value
of the trust property, with either the charities commissioner (Maharashtra or Gujarat) or with the
registrar of documents (elsewhere in India).
Benefits of Trust:
The trust deed is the heart and soul of any Charitable Trust and it enshrines the aims and objects
and mode of management of the trust. The management rests with the board of trustees who can
remain so for life, and need not stand for election. Changes in the composition of the board are
usually by invitation and not election.
This ensures that the trust is managed by those permitted by the original contributors who cannot
be removed by election. Therefore danger of takeover by persons not approved by the trustees or
settler is less.
Limitations of Trust:
The main disadvantage is that the alteration of the objects laid down in the trust deed is difficult
and only the settler can modify them. The charities commissioner also has more power to
intervene in the affairs of a trust than in a society, and a trust cannot be dissolved easily.
Recommendations:
A public charitable trust should be formed only when one wishes to make an endowment of
property for perpetuity and the trustees desire that this property be used only for specified
charitable purposes with close control by the original settlers/trustees.
Society:
Alternatively, one can set up a registered society under the Societies Registration Act of 1860 or
various state laws equivalent to Federal Societies Registration Act. Societies are generally
established for the promotion of science, literature, or the fine arts, for instruction, the diffusion
of useful knowledge, the diffusion of political education, the foundation or maintenance of
libraries or reading rooms for general use among the members or open to the public, or public

museums and galleries of paintings and other works of art, collection of natural history,
mechanical and philosophical inventions, instruments or designs, etc.
Requirements:
A minimum of seven members are required to form a society. They have to file a memorandum
of association on non-judicial stamp paper, setting out the objectives of the society before the
registrar of societies in the state in which the society is set up. The legal requirements are much
simpler than in the case of a trust or Section 25 companies.
Benefits of Society:
Unlike trusts, a society has a more democratic set up with membership and an elected body to
manage the society. The original members of a society can continue to remain in control as long
as they are elected to the managing committee, but at the same time can opt out of the society if
they wish, which trustees cannot. The society can exist as long as the members wish, but there is
always a possibility of complete renewal of members and objects can be modified easily. It is
easier to wind up a society than it is to wind up a trust.
Limitations of Society:
The major disadvantage is that due to democratic procedures, the society can be taken over by
elements opposed to the founding members. Therefore possibility of hijack of original idea is
very much possible.
Section 8 Company:
According to section 8 of the Indian Companies Act, 2013, a section-8 company can be
established for promoting commerce, art, science, religion, charity or any other useful object,
provided the profits, if any, or other income is applied for promoting only the objects of the
company and no dividend is paid to its members.
For an individual or group of individuals who wish to create a non-profit concern for charitable
purposes as an adjunct to main business activities it would be best to create a Section 8 company
under the Indian Companies Act of 2013. Only seven members are required to set up a non-profit
company. The main instrument is the memorandum and articles of association filed on nonstamp paper before the registrar of companies.
Benefits of Sec. 8:
Its advantages are that a wide range of activities can be taken up. Though complex, its objects
can be modified if need arises, and providing services and trading on a no-profit basis is possible.
The management is with the board of directors and prevention of takeovers is easier than in a
society.

Limitations of Section 8:
However, under company law, the formation and regulation procedures are more complex than in
either a trust or society. There are various compliances which need to be fulfilled periodically.
Cost of formation and Taxes would be higher in Section 8 Company.

DIFFERENCE BETWEEN TRUST, SOCIETY & SECTION 8 COMPANY

S. Basis
No. Difference
1

of

Trust

Society

Section 8 Company

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by the Indianby
the
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Trust Act, 1882. Registration Act 1860,Indian
Companies
which is an all-IndiaAct, 2013.
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however, have variants
on the Act.
Jurisdiction
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under
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Document
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Members Required At least twoMinimum:
Minimum 2 for a
trustees
are- Seven members areprivate company and 7
required
torequired for formationfor a public ltd
register a publicof state level society.company.
charitable trust. Eight
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In general, Indianrequired from separate
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there
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Management
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board of trustees. managing committee.
Legal Title
Legal title of theIn a society, allIn section 8 Company,
property of a trustproperties are held inall properties are held
vests in the handsthe name of thein the name of
of trustees.
society.
Company.
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Indian
publicSocieties
may
beA section 8 Company
Irrevocable
charitable trustsdissolved. Dissolution may be dissolved.
are
generallymust be approved by at
irrevocable.
least three-fifths of the
society's members.

After Registration of Trust, Society or Section 8 Company Incorporation, the one can register the
organization under sections 12A & 80G of Income Tax Act, 1961 and under Foreign
Contribution Regulation Act, 1976 in India for claiming various rebates under the said Acts.
The Shares can't be registered in the name of Trust. However, the Trust may invest in the share of
the Company and the same shall only be registered in the name of Trustee. Further, if the Trust is
registered under section 12A/ 12AA of the Income Tax Act, then investment in shares is not
permissible under Section 13 of the Income Tax Act for availing the exemption benefit.
The range of different funding sources that the governing body needs to consider.
The main sources of income are:

Gifts and donations

Grants

Loan financing and equity capital

Contracts

Trading

Each source has specific governance issues relating to it.

Gifts and donations

Donations generally come from individuals (e.g. from a fundraising appeal or given as a legacy),
from companies, or from charitable trusts and foundations. Unless they have been given in
response to a particular appeal you generally have considerable freedom in how to apply them.
Gifts and donations are a particularly important source of income for charities and can attract tax
relief. Raising funds however can be time-consuming and costly and you could even lose
money.
Key issues for members of the charity or non-profit board body to consider.

Is your fundraising effective and economic? Have you set cost/income ratios for your
fundraising (recognising that some types of fundraising are more expensive than others)
and are you achieving them? Are you claiming back tax (eg. through Gift Aid)?

Is your fundraising legal? The rules about fundraising can be detailed and complex and
you may need to seek advice. There are for example rules on data protection, the use of
professional fundraisers, and for house-to-house collections and lotteries.

Is your fundraising ethical? Do you comply with the Institute of Fundraisings Codes of
Fundraising Practice? Have you signed up to the self-regulatory scheme for fundraising?

Are your fundraising activities likely to damage your reputation in any way? Do you have
policies for example on corporate donations?

Have you made clear what the appeal is for, and what you will do if you raise more or
less than target? Have you ensured that the money will be spent on the purpose for which
it was given?

Grant funding
Grants are typically made by the public sector or by charitable trusts and foundations. The
money does not have to be repaid and is usually exempt from tax. Many grant funders will only
fund organisations with charitable status. Some grant makers prefer not to fund organisations that
have built up significant reserves or generate cash surpluses. This can disadvantage those with a
business-like approach to running a sustainable social enterprise. Grants almost always come
with conditions, for example:

particular outputs or outcomes

achieving agreed milestones

unspent monies are returned to the funder

reporting requirements on the progress of the project or use of the money.

Before pursuing grant funding the charity or non-profit board should consider the following.

Is this an activity consistent with our aims and strategy or is this grant encouraging us
to drift from our mission?

Can we meet the grant conditions?

Will the cost of seeking grant monies outweigh the benefits?

How will the activity be maintained or wound up after grant funding ends?

Loan financing and equity capital

Debt and equity finance are routinely used in the for-profit sector, but are less common in the
not-for-profit sector.
Debt finance is essentially loans and overdrafts, which have to be repaid.

Equity finance does not have to be repaid. Instead, the investor takes a stake in the organisation,
entitling them to a share in the rewards (and risks) of the organisation.
Both forms of finance are described more fully below.

Loan financing
A loan is simply a sum of money which is borrowed and has to be paid back, usually with
interest. Loan finance is potentially useful for a range of non profits. They are a flexible form of
funding that can be quicker and easier to secure than grant funding. However they have to be
repaid and may require assets to be offered as security.
Loans are often secured against an asset (such as property) but may sometimes be unsecured.
Lenders usually look for a successful track record of operations and income generation.
Consequently a small charity or start up social enterprise may find it difficult to get a loan.
Providers of loan finance to the non-profit sector include: BIGInvest, Charities' Aid Foundation,
Charity Bank and Co-operative & Community Finance and the Community Development
Finance Association.
Members of the charity or non-profit board should consider:

Is loan finance the best option?

Does our governing document give us the power to borrow and,

potentially, to pledge assets as security?

Do we have the appropriate skills and systems to manage the loan and its repayment?

Have we appraised the risks and agreed steps to manage those risks?

Equity capital
Equity capital is provided by external investors in return for a (permanent) stake in the
organisation and if the organisation is successful, the investors share in the rewards. It does not
have to be repaid and does not require security. An equity investor tends to take a long-term view
of the organisation and may also want to contribute expertise. Their money is at risk if the
organisation fails. Equity finance is most likely to be used by social enterprises.
Only organisations with an appropriate legal structure can raise share capital, typically a
company limited by shares, a community interest company (limited by shares), or an industrial
and provident society. Charities and companies limited by guarantee cannot raise equity finance.

Conflicts can arise if investors have different objectives and priorities from those of the social
enterprises founders (for example if they are more interested in financial rather than social
returns). Social enterprises may not be attractive to many traditional equity investors.
Members of the charity or non profit board should consider:

Do you have the power to raise equity finance?

Do potential investors share your objectives?

Do you wish to distribute profit to external investors?

The Social Enterprise Coalition has material focusing on non-grant finance.

This is still a relatively new form of finance for the non-profit sector and there are comparatively
few sources of equity finance. Sources of venture capital for social enterprises include: Triodos;
Venturesome; Bridges Community Ventures Ltd.

Contracts
A contract is a form of trading where there is a formal agreement between two parties. It means
that each party has agreed to do something and that if either of them fails to do it they are
covered both by the terms of the contract and by contract law.
A contract is a commercial agreement and the income from it may be liable for tax and VAT. An
increasing number of non-profits are contracting with the public sector to deliver specific
services. But there are potential pitfalls. Delivering public services may distract the organisation
from its primary aims or undermine its independence.
There is also a danger that contracts are underfunded so that the organisation can only provide a
substandard service or has to use its own resources. Achieving Full Cost Recovery is essential to
long term sustainability. And for charity trustees it is against the law to use charitable resources
to subsidise public services.
Members of the charity or non-profit board should consider the following.

Does the contracted service fit your organisations aims?

Can you fulfill all the terms of the contract, and provide evidence that you have done so?

What would be the consequence of not fulfilling the contract?

Does the contract price cover all your costs?

Have the risks been appraised and steps agreed to manage them?

Trading
Many non-profits earn income by selling goods and services to members, service users, the
general public, or other organisations. Some organisations earn all their income this way. You
have flexibility about how to spend your earned income.
Examples of trading by non-profits include:

selling tickets to events

selling publications or products

hiring out a venue

selling in-house expertise to interested parties e.g. publishing, training, consultancy.

Charities can trade. However, if the trading activity is significant and is not related to your
primary purpose there are charity and tax law implications and you should seek specialist advice.
You may need to set up a separate trading arm.
Trading is likely to pose particular challenges for charities. Questions to be considered include:

does your governing document allow you to create and invest in a trading subsidiary?

will the proposed trading involve significant risk to a charitys assets?

would investment in a trading subsidiary be in line with the charitys current investment
policy?

Frequently Asked Questions

Q1. Are foreigners allowed as members of the trust ?
Ans. There is no apparent bar on the foreigners becoming a trustee of trust.
Q2 Will there be subsequent problems if foreigners are the trustees?
Ans. It is difficult to get FCRA registration if foreigners are there as trustees. Normally,
FCRA registration is not granted to such organisations. The FCRA is silent in this regard but
FCRA authorities confirmed that FCRA registration is not given if foreigners are its
subscribers/members/ trustees. We did come across instances of organisations being given
FCRA registration inspite of having foreigners as board members/trustees. But these are
exceptions and we have to assume that FCRA registration will not be given, unless the

foreigners involved are too distinguished and intervention of higher authorities is availed.
The difficulties involved in getting FCRA permission for NGOs having foreigners as trustees
is a deterrent for foreign NGOs contemplating the option of floating an Indian NGO.
Therefore, foreign NGOs should explore other legal and legitimate way of controlling an
Indian NGO.

Q3. Can foreigners be inducted as ex-officio or nominated trustees?

Ans. There should not be any problem in having foreigners as ex-officio or nominated
trustees. The trust deed can be suitably drafted so as to have Ex-Officio directors or
nominated trustees.
Q4. After registration, how long a trust can exist ?
Ans. The registration as a trust provides perpetual existence. A trust will cease to exist if the
subject mater of the trust is totally liquidated. A trust cannot be revoked once it is legitimately
created.
Q5. Can a Public Charitable Trust Indian have activities outside India?
Ans. The various acts under which an NGO can be registered do not prohibit activities outside
India. The FEMA and FCRA are silent in this regard and under the liberalized regime of RBI,
current account transactions are allowable without any prior permission. Therefore, there
should not be any problem in transfer of foreign exchange, subject to the guidelines of
FEMA.
The most important legislation in this context is the Income Tax Act, which under section
11(1)(c), prohibits the activities of Indian NGO outside India without specific permission of
the CBDT. An Indian NGO spending money on activities outside India will be subject to
income tax on that portion of its income.

Q6. What are the annual returns that a Trust is required to file with the Registrar ?
Ans. A trust is not regulated by any authority therefore, no annual returns are required to be
filed with the registering authority. However, trust has to file annual returns as required under
FCR Act, 1976 and Income Tax Act, 1961.

Q7. Who can form a trust?

Ans. Every person competent to make a contract and competent to deal with property can
create a Trust. Besides individuals, a body of individuals or an artificial person such as an
association of persons, an institution, a limited company, a Hindu Undivided Family through
its Karta can also form a Trust. For all practical purposes, two or more individuals are
required to form a charitable trust.