Whether GST Should Apply to Donations Linked  to Services– Controversy Around NGO Training In come

Introduction

The applicability of Goods and Services Tax (GST) to donations received by NGOs, particularly those associated with services like training or educational programs, is a contentious issue that has sparked significant debate in India’s nonprofit sector. The distinction between voluntary donations and payments for services—often referred to as quid pro quo arrangements—is central to determining GST liability, yet it remains mired in ambiguity. This section provides a comprehensive analysis of the legal provisions governing GST on NGO activities, the controversy surrounding training income, the implications for NGOs, relevant case laws, and proposed reforms to achieve clarity and equity in tax treatment.

Legal Provisions

The Central Goods and Services Tax (CGST) Act, 2017, and its associated rules form the backbone of India’s GST framework, with specific provisions relevant to NGOs:

• Section 11 of the CGST Act, 2017: Exempts services provided by entities registered under Section 12AA or 12AB of the Income Tax Act, 1961, for charitable activities, as defined in Notification No. 12/2017 – Central Tax (Rate). Charitable activities include services related to public health, education, skill development, and environmental preservation, provided they are not commercial in nature.

• Section 2(15) of the Income Tax Act, 1961: Defines “charitable purpose” as including education, medical relief, and advancement of any other object of general public utility. However, the proviso restricts activities involving trade, commerce, or business if receipts exceed 20% of receipts, which may trigger GST liability.

• Notification No. 12/2017– Central Tax (Rate): Specifies exemptions for charitable activities, such as training or coaching in arts, culture, or sports, but excludes commercial training programs that generate significant revenue or involve a quid pro quo arrangement.

Case Study: In *In re: Ecosan Services Foundation* (GST Authority for Advance Ruling, Maharashtra, 2020), services provided to an NGO for environmental preservation were deemed exempt if they aligned with charitable objectives. However, training programs with fees were held taxable, illustrating the fine line between charitable and commercial activities.

Controversy: Charitable vs. Commercial Activities

The core controversy revolves around the classification of donations linked to NGO services, particularly training programs, as either voluntary contributions or payments for services:

• Charitable Argument: NGOs contend that training programs, such as vocational skill development or educational workshops, align with their charitable objectives, such as promoting education or employability. Donations received in connection with these programs are argued to be voluntary, not consideration for services, and thus exempt from GST.

• Commercial Argument: Tax authorities assert that fees or donations linked to training programs constitute consideration for services rendered, making them taxable under GST at 18%. This view is based on the presence of a quid pro quo arrangement, where participants receive a tangible benefit (e.g., a certificate or skill) in exchange for payment.

Example: “Skill India Trust,” an NGO registered under Section 12AA, conducts a six-month vocational training program for rural youth, charging 50,000 per participant as a “donation.” The trust argues that the program fulfills its charitable objective of skill development, but tax authorities classify the 50,000 as a service fee, imposing an 18% GST liability, which amounts to 9,000 per participant.

Relevant Case Laws

Judicial and quasi-judicial rulings have provided some clarity but also highlight inconsistencies:

• In re: Ecosan Services Foundation (GST AAR Maharashtra, 2020): The ruling exempted services for environmental preservation as charitable but held that training programs with fees were taxable, emphasizing the need for a clear charitable intent.

• In re: Bangalore International Centre (GST AAR Karnataka, 2021): The authority ruled that training activities, even if educational in nature, are taxable when fees are charged.

• Mixed Rulings: Some advance rulings exempt training programs as charitable if fees are nominal and aligned with the NGO’s mission, while others impose GST if the programs target corporate clients or generate significant revenue. These rulings underscore the lack of uniform criteria for determining GST liability, leading to disputes and uncertainty for NGOs.

   

Implications for NGOs

The application of GST to training income has far-reaching implications for NGOs:

• Financial Burden: An 18% GST liability significantly reduces funds available for charitable activities, as NGOs must either absorb the tax or pass it on to participants, increasing program costs.

• Affordability of Services: Higher fees to cover GST may exclude low-income or marginalized beneficiaries, undermining NGOs’ social mission to serve underserved communities.

• Compliance and Administrative Costs: NGOs with taxable services must register for GST if their turnover exceeds 20 lakhs (10 lakhs in northeastern states)