Presentation on Approach to Setting Up an NPO

02-12-2008

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Agenda

A. B. C. D. E. F.

Features of NPO Choice of Forms of NPO Registration Procedure to form NPO. Tax Exemption & Procedure of Registration Other Benefits & Specific Approvals NPO as a vehicle for CSR

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Features of NPO

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Features of NPO

NPOs in India A. exist independently of the founding entity;

B. are self-governed by a board of trustees or managing committee/ governing council, comprising individuals who serve in a fiduciary capacity;

C. are for the Charitable Purpose, and

D. are non-profit-making, and are prohibited from distributing profits (if any) to their own members.

[Section

2(15) of the Income Tax Act defines charitable purpose to include relief of the poor, education, medical relief and the advancement of any other object of general public utility.]

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Forms of NPO

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Choice of Forms of NPO

Legal Structures for NPO in India

Trust

Society

Section-25 Company

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Choice of Forms of NPO - Trust

Legislation

a) Different states in India have different Trusts Acts in force, for governing the Trusts. b) General principles of the Indian Trusts Act 1882 are applied in their absence.

General Purpose Public charitable trusts can be established for of the following purposes: Establishment relief of poverty education medical relief provision of facilities for recreation, and any other object of general public utility. Main Instrument Trustees Management Main Instrument is Trust Deed; where the objects and mode of management are enshrined. A trust needs a minimum of two trustees; there is no upper limit. The management rests with the Board of Trustees.

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Registration of

Trust deed should be registered.

Choice of Forms of NPO Society

Legislation General Purpose of Establishment

Societies are governed by Andhra Pradesh Societies Registration Act , 2001. Societies are membership organizations that may be registered for the following purposes: Charitable purpose, Promotion of Science, Literature, Fine Arts, Promotion of education and Public Art Museums and Galleries.

Main Instrument Members Management Registration

The main instrument of any society is the MOA and Rules & Regulations. A Society needs a minimum of seven managing committee members; there is no upper limit. Society is managed by a Governing Council or a Managing Committee. MOA and Rules & Regulations should be registered with Registrar of Societies.

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Choice of Forms of NPO - Sec 25 company

Legislation General Purpose of Establishment

Sec 25 (not for profit) Company are governed by Indian Companies Act, 1956. A Section-25 company can be established for promoting:

Main Instrument
Members Management Registration

Commerce, Art, Science, Religion, Charity or any other useful object

The main instrument of a Sec 25 Company is the MOA and AOA.

A Section-25 Company needs a minimum of three members; there is no upper limit. Sec 25 companies are usually managed by Board of Directors/ Managing Committee. License to be obtained from the Regional Director to register a Sec 25 company and MOA & AOA should be registered with Registrar of Companies.

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Forms of NPO A Summary

Particulars Legislation

Trust Indian Trusts Act, 1882

Society AP Societies Registration Act , 2001 .

Sec-25 Company Companies Act, 1956

Main Instrument
To be Registered with Min. No. of Members Management

Trust Deed
Inspector general of Stamps. Two Board of Trustees Audit is compulsory only under the IT Act.

MOA & Rules and MOA & AOA. Regulations

Registrar of Societies. Seven Governing Council/ Mgt. Committee Audit is compulsory under Societies Act and also the IT Act. Registrar of Companies. Three Board of Directors/ Mgt. Committee Audit is compulsory under the Companies Act and also IT Act.

Audit Requirement

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Alternatives to set up an NPO1

Particulars Registration Process Management

Trust

Society

Sec 25 Company

Simple to It is simple, but Complex register not as simple as trust Mgt. by Mgt. may be Mgt. may be Board of distinct from its distinct from its Trustees. members. members. Only from Only from the Author Members its From members and also from Banks and Institutions.

Borrowing

Voting Rights

Not Applicable

Equal Voting Voting rights are Rights to all proportionate to members the share capital
Suits by or against a society should be filed in the name of the president Suits by and against the company can be instigated against the company

Capacity to Suits can be sue/be sued instigated by or against the trustees.

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Alternatives to set up an NPO2

a) Trust is the simplest of the three forms, but is too rigid as a legal structure for management as it places onerous responsibility on the trustee(s) as to governance.
b) Society is more flexible than trust, but does not provide much independence to its governing body in the context of decision making. c) A Sec 25 company offers more independence to its governing body, has more credibility, but is complex.

The following alternatives are available to set up a NPO. i. Set up a trust initially and convert it to sec 25 company later. ii. Incorporate Sec 25 company.

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Registration Procedure
Sec 25 Company Charitable Trust

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Registration of Sec 25 Company..1

a) An association of members can apply for grant of license under Section-25 of the Indian Companies Act 1956.
b) A Sec 25 company can be incorporated as a Private or Public Limited company. c) It is exempted from having the suffix of Limited or Private Limited in its name. d) There is no requirement of minimum paid up capital. e) Any person (including partnership firm in its own capacity) can become a member of Sec 25 Company.

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Registration of Sec 25 Company..2

f) An association desirous of getting the status of Sec 25 Company

i. have to obtain license from the Regional Director ii. after obtaining license, the proposed company has to be incorporated with the ROC. g) For the purpose of getting license, the association need to make an application to the Regional Director (RD) of Ministry of Corporate Affairs in e-form 24A. h) Once license is granted, changes can be made to MoA & AoA, only with the prior approval of the RD. i) The license granted can be revoked by the RD at any time on grounds of non compliance with objectives of company or contravention of the act.

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Registration of Sec 25 Company..3

Generally, the following documents are annexed to the application :

3 copies of Memorandum of Association 3 copies of Articles of Association Declaration as per annexure V of the Companies Regulation Act, 1956. Declaration by prescribed person, that MOA and AOA confirms to the provisions of the Companies Act. 3 copies of details of the promoters and proposed directors of the company. A list of names, addresses, descriptions and occupations of its directors, managers or secretary. Also a list of other associations or companies in which they hold above positions.

Statements of grounds on which the application is made.

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Registration of Charitable Trust..1

a) The application for registration should be made to the official having jurisdiction over the region in which the trust is sought to be registered.
b) The applicant has to affix a court fee stamp to the form and pay a very nominal registration fee which may range depending on the value of the trust property. c) Form should be signed by the applicant before the regional officer or superintendent of the regional office of the charity commissioner or a notary.

d) Form should be submitted, together with a copy of the trust deed.

e) Affidavit and consent letter should also be submitted

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Tax Exemption & Tax Registration Procedure

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Tax Impact on participants of NPO

Tax Impact

NPO
Donations are classified into: General Donations Specific Donations General Donations are in the nature of income and are exempt subject to conditions of Sec 11. Specific Donations are exempt. Income of the NPO is exempt subject to conditions U/s 11.

Donor

Donations are eligible for exemption under 80G & Sec 35(1)(ii)

The legal structure of NPO is immaterial for availing the benefits under Income Tax Act, 1961.

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Eligibility for Tax Exemption

Conditions to claim exemption u/s 11: Registration Activities Application of Income The trust must be registered Commissioner of Income-Tax. with the

The activities of the charitable trust should be confined within India. Not less than 85% of such income shall be applied for charitable purposes within the same financial year. It can be accumulated for a period of 5 years. If the total income before claiming exemption exceeds Rs.1,10,000, the accounts should be audited.

Audit

Investments

Unapplied income should be invested in specified deposits. Corpus donations are not considered as income but as capital receipt.
Will not form part of the Total Income for the purpose of computing the application of 85% as laid down u/s 11.

Agricultural Income

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Registration of NPO Under IT Act

Conditions for registration of a Charitable Trust U/s 12 A: Application Time Limit Prerequisite condition Audit Application should be made in the prescribed Form 10A. Application to be submitted within one year from the date of creation of trust. Such trust must be registered with IT commissioner as per the procedure U/s 12 AA. If the total income before claiming exemption exceeds Rs.1,10,000, Audit Report should be filed in the prescribed Form 10B. Income of the Trust shall be exempt from the assessment year immediately following the financial year in which such application is made.

Effective date of exemption

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Donor Benefits

The following are the benefits available to Donor: General deduction The contribution made by the donors shall be allowed as deduction under 80G while computing income under IT Act.

Limit of deduction

Deduction available under 80G is to the extent of 100% / 50% of donation, subject to a maximum of 10% of Adjusted Total Income of the donor.

Contribution to 100% of Donations made to any institute carrying trust for R&D R&D activity shall be exempt U/s 35 (1)(ii). activity

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Other Benefits & Specific Approvals

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Other Benefits

The following benefits are available to the NPO irrespective of its legal structure: a) Imports for relief work and in the distribution of relief supplies to the needy are 100% exempt from customs duty. b) Exemption from customs duty for scientific/technical equipment and components intended for research institutes. c) Recognition by apex research. bodies in education and scientific

d) Recognition by Income Tax Department for granting exemption U/s 12A.

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Specific Approvals.

In addition to registration, a non-profit organisation engaged in certain activities might also require special license/permission. Some of these include (but are not limited to): Special License/Permission A place of work in a restricted area To open an office and employ people To employ foreign staff Ministry of Home Affairs or by the relevant local authority The Shop and Establishment Act FCRA registration and also obtain a No objection Certificate. The intended employee also needs a work visa. The RBI are governed by FC(R)A regulations and the Home Ministry.

A foreign NPO to set up office in India Foreign contributions to NPOs

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NPO as a vehicle for CSR

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NPO as CSR Tool

a) Corporate Social Responsibility (CSR) agenda of a corporation is reflective of its social conscience and commitments to the community and society at large within which it operates.

b) More and more Companies have increasingly realized that it is an investment with multiple benefits for the corporate sector.
c) A NPO can be used as a tool to fulfill CSR of a corporate as the objectives of NPO are similar to CSR.

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Examples of CSR Arms of Corporate

Name of the CSR arm Dr. Reddys Foundation

Founding Corporate/(s)

Activity Focus

Dr. Reddys Upliftment of economically Laboratories Ltd. backward youth. School Community Partnership for focusing on quality education.

Satyam Foundation

Satyam Computer Health care Services Ltd. Supporting education through adopting schools. Environment protection Empowering Persons with Disability

Infosys Foundation

Infosys Technologies Ltd.

Health care Rural Upliftment & Social Rehabilitation. Learning & education Upliftment of underprivileged artists.

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Examples of CSR Arms of Corporate

Name of the CSR arm Aditya Birla Group

Founding Corporate/(s)

Activity Focus

Aditya Birla Centre Sustainable development for Community and livelihood and Initiatives and agriculture and watershed Rural development Development Health and family welfare Infrastructure development

Biocon Foundation Bharti Foundation

Biocon Ltd.

Providing Healthcare education.

Quality and Health

Bharti Airtel Ltd.

Helping underprivileged children and young people of our country realize their potential Collaborates with the Govt. in promoting quality of pre-school and school education.

GMR Varalakshmi Foundation

GMR Industries Ltd

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Discussion Floor

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