Service Tax Applicability on actiivities of Charitable Trust
Contrary to popular belief, a charitable trust does not enjoy blanket exemption from service tax. A charitable trust undertakes a host of activities related to social welfare and gets funds/grants from various Government bodies, corporates, individuals, other charitable institutes etc.
No service tax if Receipt is in the nature of grant/donation:
For any activity to be taxable under service tax, it should be carried out by one person for another person. Moreover, such an activity should be for consideration. Hence an act by charitable trust for consideration would be a service and taxable unless otherwise exempted. “The concept ‘activity for a consideration’ involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration. An activity done without such a relationship i.e. without the express or implied contractual reciprocity of a consideration would not be an ‘activity for consideration’ even though such an activity may lead to accrual of gains to the person carrying out the activity.
The funds generated for an activity can either be consideration for an activity, i.e. in the nature of service or in the nature of a grant / donation. If a receipt of fund is a grant/donation then there is no question of applicability of service tax, as it not a service as per the definition of service under Finance Act 1994. Further,
Rule 6(2)(vii) of the Service Tax (Determination of Value) Rules, 2012 excludes “subsidies or grants disbursed by the Government, not directly affecting the value of service”. Hence, receipt of such donation/grant would not be liable to service tax.
When can a receipt be considered to be in the nature of Grant?
For a receipt of funds to be considered a grant, following broad parameters (not exhaustive) may be applied:
- Donations to a charitable organization are not consideration unless charity is obligated to provide something in return e.g. display or advertise the name of the donor in a specified manner or such that it gives a desired advantage to the donor.
- Beneficiary & donor are generally different.
- 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.
- In case of donation/grant, beneficiaries are not nominated by the donor and the charity is at liberty to identify the beneficiaries.
- Sometimes, in case of a grant, detailed financial accountability reporting is required including conditions such as a specified time period, returning of unexpended funds at the end of the period, allowable & unallowable expenses etc. however, these conditions shall not lead to the conclusion that the receipt is consideration for an activity unless and until some specific advantage is being transferred to the donor.
In some case, the donors provide the funds for a program, nominate/identify the beneficiaries themselves and the role of the trust is that of a facilitator for the program. In these cases therefore, the receipt of funds may amount to consideration for an activity. However, if the activity is a charitable activity as per the service tax provisions, then service tax shall not be applicable on it.
If Receipt is in the Nature of Consideration, No Service Tax is Payable if Activity qualifies as “Charitable Activity” under the Definition:
The Central Government, vide notification No. 25/2012-ST dated 20.06.2012, has exempted “Services by an entity registered under section 12AA of the Income tax Act, 1961 by way of charitable activities” from the whole of service tax leviable thereon under section 66B of the Finance Act, 1994. ‘Charitable activities’ has been defined in Clause 2(k) of the aforesaid notification as follows:
“(i)public health by way of –
(a)care or counseling of (i) terminally ill persons or persons with severe physical or mental disability, (ii) persons afflicted with HIV or AIDS, or (iii) persons addicted to a dependence-forming substance such as narcotics drugs or alcohol; or
(b)public awareness of preventive health, family planning or prevention of HIV infection;
(ii)advancement of religion or spirituality;
(iii)advancement of educational programmes or skill development relating to,-
(a)abandoned, orphaned or homeless children;
(b)physically or mentally abused and traumatized persons;
(d)persons over the age of 65 years residing in a rural area;
(iv)preservation of environment including watershed, forests and wildlife;
Therefore, if a registered charity u/s 12AA of Income tax act is doing any activity falling explicitly in any of the charitable activities specified under Clause 2(k) of Notification No. 25/2012-ST dated 20.06.2012; it is exempt from service tax without any value limit. Even if the activity is a service, if it is covered under Negative List or exempted by any exemption notification, service tax shall not be payable on it.
Activity is not Charitable Activity, Still Basic Exemption of Rs. 10 Lacs Available:
Moreover, even for a taxable service, there is a basic exemption limit of turnover of Rs. 10 Lakhs. Service tax shall be chargeable only after the turnover exceeds Rs. 10 Lakhs in a particular year.