Introduction
Section 8 companies in India, established under Section 8 of the Companies Act, 2013, are designed for non-profit organizations that aim to promote charitable purposes such as education, social welfare, health, and environmental protection. These companies operate with the primary goal of benefiting society, and they enjoy significant tax exemptions and benefits under the Income Tax Act, 1961 and other relevant laws.
In this detailed guide, we will explore the key tax benefits and exemptions available to Section 8 companies in India, including income tax exemptions, GST benefits, and deductions for donors. These provisions not only help non-profit organizations reduce their financial burden but also encourage greater public participation through incentivized donations.
What is a Section 8 Company?
A Section 8 company is a non-profit entity formed under Section 8 of the Companies Act, 2013. It is established to promote charitable purposes such as the advancement of education, healthcare, science, technology, and social welfare. Unlike traditional profit-driven businesses, Section 8 companies cannot distribute profits to their members. Instead, any income generated must be reinvested to further the company’s charitable objectives.
Key features of Section 8 companies include:
- Non-profit motive: The company’s income is applied exclusively to charitable purposes.
- Registration: Section 8 companies must obtain a license from the government to be formed. This condition has now been dispensed with.
- Tax benefits: These companies are eligible for numerous tax exemptions under the Income Tax Act, encouraging them to focus their resources on charity and social work.
Income Tax Benefits for Section 8 Companies in India
Section 8 companies enjoy multiple income tax exemptions under the Income Tax Act, 1961. These exemptions help such companies retain their resources for charitable purposes, instead of paying taxes. Below are the key income tax exemptions and benefits:
1. Exemption under Section 11 – Income from Charitable Activities
Section 8 companies are eligible for an income tax exemption under Section 11 of the Income Tax Act, 1961. This section provides exemptions for income derived from property held for charitable purposes, as long as the income is applied exclusively for the advancement of charitable objectives.
- The company must be registered under Section 12A/ 12AB to avail of this exemption.
- Income from voluntary contributions is also exempt, provided the company applies the funds for its charitable purposes.
- The income must be used within a reasonable timeframe to promote the stated charitable objectives.
By meeting these requirements, Section 8 companies can significantly reduce their tax liabilities.
Section 12A Registration/12AB – Mandatory for Tax Exemption
Section 8 companies must apply for registration under Section 12A/12AB to claim the tax exemptions available under Section 11. This registration is crucial for receiving tax-free donations and ensuring that the company’s income is exempt from income tax.
- Once registered under Section 12A/12AB, the Section 8 company enjoys continued tax exemptions, subject to fulfilling its charitable purpose.
- This registration must be maintained and renewed in every 5 years as per the regulations set by the Income Tax Department.
2. Exemption from Minimum Alternate Tax (MAT)
Section 8 companies are exempt from Minimum Alternate Tax (MAT) under Section 115JB of the Income Tax Act. MAT is levied on companies showing book profits but not paying taxes due to deductions, exemptions, or losses carried forward. Since Section 8 companies are registered under Section 12A/12AB, they are specifically exempt from MAT, ensuring that their income remains tax-free.
3. Accumulation of Income under Section 11(2)
Section 8 companies can accumulate income for future use under Section 11(2) of the Income Tax Act, provided the accumulated income is applied for charitable purposes within a specified time frame (usually within 5 years).
- The company must apply for approval from the Income Tax Department to accumulate the income in Form No. 9A or Form No. 10, as the case may be.
- This provision allows Section 8 companies to plan for long-term projects and use their resources effectively without incurring immediate tax liabilities.
Deductions for Donors to Section 8 Companies
1. Donations Eligible for Deduction under Section 80G
One of the key tax benefits for Section 8 companies is the eligibility for donors to claim tax deductions under Section 80G. This incentivizes donations by reducing the donor’s taxable income.
- 100% Deduction: Donations to Section 8 companies engaged in specific charitable activities (such as education, medical relief, etc.) are eligible for a 100% tax deduction. Generally, Donations to Government promoted funds are eligible for 100% deduction.
- 50% Deduction: Donations to companies working on other charitable activities may qualify for a 50% deduction.
This provision encourages individual and corporate donors to contribute more, knowing that they can reduce their tax liabilities by making charitable contributions.
2. Contributions under Section 35AC
With an intention to promote reinvestment of business profits in socio-economic development, the Government of India has allowed a tax incentive under section 35AC of the Income Tax Act according to which a 100% deduction is allowed to a taxpayer for making contributions towards an approved project or scheme for social and economic welfare. The approval of welfare project or scheme is done by National Committee specially set up for the said purpose.
A Section 8 Company can also take advantage of the said provision by getting its welfare projects approved from the National Committee. In such case, any donor who makes contribution to such Section 8 Company towards approved welfare project shall be eligible for 100% deduction of the donated amount.
GST Exemptions for Section 8 Companies
Section 8 companies also benefit from various Goods and Services Tax (GST) exemptions, particularly for their charitable activities. The GST exemptions help reduce the cost of providing services and goods for charitable purposes.
1. GST Exemption on Charitable Services
Notification No. 12/2017- Central Tax (Rate) provides that services by an entity registered under Section 12A/12AB of the Income Tax Act by way of charitable activities shall be exempted from GST. The Notification also defines the term “Charitable Activities”. According to the said Notification “Charitable Activities” includes:
· Activities relating to public health by way of care or counselling of ill persons, health awareness, family planning
· Advancement of religion, spirituality, yoga
· Educational programmes or skill development of orphaned children, disabled persons, prisoners, senior citizens in rural area etc.
. Further, Training or coaching in recreational activities in sports or arts & culture shall also be an exempted activity. Thus, training or coaching in arts, culture, sports such as dance, music, painting, literary activities, drama etc. or sports shall not be taxable.
. The basic condition for exemption is that the charitable institution (including Section 8 Company) should be registered under Section 12A/12AB of the Income Tax Act.
2. Exemption from GST on Donations
Donations received by Section 8 companies are not subject to GST because donations are not considered "consideration" for any taxable supply under the GST Act. This ensures that Section 8 companies do not need to charge GST on donations received, which is a significant relief in terms of financial and administrative burden.
3. Input Tax Credit (ITC)
Section 8 companies are eligible to claim Input Tax Credit (ITC) on goods and services purchased for their charitable activities, provided the company engages in activities that are subject to GST. The ITC can be used to offset the GST paid on purchases, reducing the overall cost of goods and services.
Other Tax Benefits for Section 8 Companies
1. FCRA Registration for Foreign Contributions
If a Section 8 company receives foreign contributions for its charitable work, it must obtain Foreign Contribution Regulation Act (FCRA) registration. This allows the company to legally receive foreign donations while ensuring that the funds are used for the intended purposes.
2. Compliance Exemptions under Companies Act
Companies Act, 2013 allows various compliance exemptions to a Section-8 Company. Some of these are as below:
· A Section 8 Company can appoint a person as a company secretary who does not fall in the definition of company secretary in Section 2(1)(c) of the Company Secretaries Act, 1980
. Normally, a general meeting of a company may be called by giving not less than clear 21 days’ notice. However, in case of Section 8 Companies, a general meeting may be called by giving not less than clear 14 days’ notice.
·Section 136(1) provides for circulation of copies of financial statements (and other related documents) to every member of the company, every trustee for the debenture-holder of any debentures issued by the company and all persons other than such member or trustee not less than 21 days before the date of AGM but Section 8 companies may send the financial statements not less than 14 days before the meeting.
. The provisions relating to maximum number of directors that can be appointed in a company is not applicable to Section 8 Company.
. Section 8 companies are not required to appoint independent directors.
. Section 173(1) mandates companies to hold a minimum of 4 board meetings every year with a gap of not more than 120 days between 2 consecutive board meetings but section 8 companies are allowed to hold only 1 meeting within every sixth calendar month.
. Section 174(1) states that the quorum for a board meeting shall be 1/3rd of the total strength or two directors, whichever is higher. However, in case of Section 8 Companies, the quorum for board meetings shall be 8 members or 25% of its total strength, whichever is less.
. Section 8 Companies can constitute audit committee without independent directors.
Conclusion
Section 8 companies in India benefit from numerous tax exemptions and benefits under the Income Tax Act, 1961, Companies Act and GST Act, which help them channel more resources into their charitable activities. From exemptions on income under Section 11 to tax deductions for donors under Section 80G, these tax incentives significantly enhance the financial viability of such companies.
By understanding and leveraging these provisions, Section 8 companies can maximize their impact in the areas of education, health, social welfare, and other charitable causes. Donors, too, are incentivized to contribute more, knowing that their donations not only serve a social purpose but also offer tax-saving opportunities.
If you’re looking to establish or operate a Section 8 company, understanding these tax benefits is essential to optimizing resources and achieving your social mission effectively.
At Taxwink, we specialize in providing expert advisory and compliance services tailored to the unique needs of Section 8 companies in India. Our team of experienced professionals assists with the registration process, ensuring that your company meets all legal and regulatory requirements. We also provide guidance on tax exemptions, filings, and the preparation of annual returns, helping you maintain compliance with the Companies Act, 2013 and other relevant statutes. Whether you're setting up a new Section 8 company or seeking assistance with ongoing compliance and tax planning, Taxwink offers comprehensive support to ensure your organization operates smoothly and efficiently within the framework of Indian laws.
