IRD came up with clarified provisions for Not-for-Profit sector (NGO and INGO) though its Income Tax Directives 2066. INGOs, bilateral agencies and other organizations who make payment to tax exempt organizations (TEO) now have additional responsibility to ensure that the payment relates to intended objective of the TEOs and that they have complied with all relevant Income Tax  regulations.

While making payment to the tax exempt organization, the new tax directives effective February 2010 requires the donor organization to confirm that:

  • The activity of the TEO for which the payment is being made is within the permitted activity as per constitution of the TEO.
  • The fund being disbursed has not been used for any personal use by the TEO.
  • The TEO has expended the fund complying with the provisions of Income Tax Act and Regulations.
  • All other provisions of Income Tax Act and Regulations have been duly complied with.

For e.g. if the donor is making payment to a TEO for a training program it has sponsored, the donor has to ensure that:

  • The  TEO has deducted tax on all payments made during the training like trainer fees, hall rents etc. and
  • The TDS has been duly deposited in IRD.
  • The payment does not relate to an income earned by the TEO by competing with organizations that are not exempt.

The directives have also clarified on how the definition of “Service Fee” (and TDS on such fees) is attracted for payments that are made by donor organizations to TEO or any other organizations. For e.g. the donor may select a private company for a field based research with condition that the company submits the detail of expenditures to the donor. In another case, appointment may be made for a stipulated amount without condition of submission of expenditure details. In both cases, service is calculated differently.

These additional responsibilities means that the concerned program staffs of the donor organization should be well informed about the payments that require TDS as per Income Tax Act and the appropriate TDS rates and provisions of Income Tax Act applicable to TEO.

In several INGOs and bilateral agencies, review of program expenditures and assessment of program effectiveness are looked upon by program staffs who have limited knowledge on taxation matters and the finance departments simply limit itself to accounting of the fund disbursed and its settlement.

Clearly, IRD wants to regulate the Not-for-profit sector by assigning more responsibilities to auditors and the donors, however the control mechanism still lacks in cases where the donor themselves do not have obligation to submit their audit reports and financial statements to IRD because of treaty provisions that override the provisions applicable for tax exempt organizations.

A part of donor’s responsibility is shared if robust audit of NGO/Projects is conducted regularly and timely, because  the auditors are also required to clearly state in their report if the organization has functioned as per its objectives and if Income Tax provisions are complied with.

But the reliance can weaken if the level of reliance in audit report is itself doubtful, as in many cases, the audit of the concerned tax exempt organization is more a formality considered essential for renewal purpose and for submission to donor. It is for donors to ensure that it is not the case.

Summary-NGO/INGO & Not-for-profit sector in Tax Directives
  • Not for Profit companies registered as per Company Act not to get tax exempt status
  • Tax not exempt if income is earned through competitive bidding with taxable organizations
  • Only income covered by Sec.10 Chha exempt for tax purpose
  • Donor and auditors to ensure confirmation of activities with organization’s main objective compliance with  Income tax regulations
  • Service fee clarified for TDS purpose.
  • Donors to obtain TDS deposit vouchers from the recipient organizations