NGO Trust Deed

NGO Registration Methods - 2
1. Trust 2. Society, and 3. Non profit Company

 
I. Summary

A. Types of Organizations:
1. Trusts
The public charitable trust is a possible form of not-for-profit entity in India.  Typically, public charitable trusts can be established for a number of purposes, including the relief of poverty, education, medical relief, provision of facilities for recreation, and any other object of general public utility.  Indian public trusts are generally irrevocable.  No national law governs public charitable trusts in India, although many states (particularly Maharashtra, Gujarat, Rajasthan, and Madhya Pradesh) have Public Trusts Acts. 

2. Societies
Societies are membership organizations that may be registered for charitable purposes.  Societies are usually managed by a governing council or a managing committee.  Societies are governed by the Societies Registration Act 1860, which has been adapted by various states.  Unlike trusts, societies may be dissolved.   

3. Sec. 25 Companies
A section 25 company is a company with limited liability that may be formed for "promoting commerce, art, science, religion, charity or any other useful object," provided that no profits, if any, or other income derived through promoting the company's objects may be distributed in any form to its members.

B. Tax Laws
India ’s tax laws affecting NGOs are similar to the tax laws of other Commonwealth nations.  These laws may have some impact on U.S. grantmakers, and thus are summarized here. 
India provides for exemption from corporate income taxes of the income of certain NGOs carrying out specific types of activities, with unrelated business income being subject to tax under certain circumstances.
India also subjects certain sales of goods and services to VAT, with a fairly broad range of exempt activities. The rates range from 4 percent to 12 percent, with most goods and services taxed at 8 percent.

The income tax law and the corporate tax law provide tax benefits for donors, and these may be relevant to an American corporation doing business in India in deciding whether to engage in direct corporate grantmaking in India. The existence of a double taxation treaty between India and the United States may also affect gift planning decisions of U.S. corporate grantmakers doing business in India.
Finally, not-for-profit organizations involved in relief work and in the distribution of relief supplies to the needy are 100% exempt from Indian customs duty on the import of items such as food, medicine, clothing and blankets.  Other exemptions may also be available.

II. Applicable Laws
Constitution of India Articles 19(1)(c) and 30;
Income Tax Act, 1961;
Public Trusts Acts of various states;
Societies Registration Act, 1860;
Indian Companies Act, 1956, section 25;
Foreign Contribution (Regulation) Act, 1976;
Maharashtra Value Added

III. Relevant Legal Forms
The right of all citizens to form associations or unions is guaranteed by the Constitution of India, Article 19(1)(c). 

There are three pertinent legal forms of not-for-profit entities under Indian law:  trusts, societies, and section 25 companies (as well as cooperatives and trade unions, which, as mutual benefit organizations, are not discussed in this note).  Many state and central government agencies have regulatory authority over these not-for-profit entities.  For example, all not-for-profit organizations are required to file annual tax returns and audited account statements with various agencies.  At the state level, these agencies include the Charity Commissioner (for trusts), the Registrar of Societies (referred to in some states by different titles, including the Registrar of Joint Stock Companies), and the Registrar of Companies (for section 25 companies).  At the national or federal level, the regulatory bodies include the income tax department and Ministry of Home Affairs (only for not-for-profit organizations receiving foreign contributions).

1.   Trusts
Public charitable trusts, as distinguished from private trusts, are designed to benefit members of an uncertain and fluctuating class.  In determining whether a trust is public or private, the key question is whether the class to be benefited constitutes a substantial segment of the public.  There is no central law governing public charitable trusts, although most states have "Public Trusts Acts."  Typically, a public charitable trust must register with the office of the Charity Commissioner having jurisdiction over the trust (generally the Charity Commissioner of the state in which the trustees register the trust) in order to be eligible to apply for tax-exemption. 

In general, trusts may register for one or more of the following purposes:
Relief of Poverty or Distress;
Education;
Medical Relief;
Provision for facilities for recreation or other leisure -time occupation (including assistance for such provision), if the facilities are provided in the interest of social welfare and public benefit; and
The advancement of any other object of general public utility, excluding purposes which relate exclusively to religious teaching or worship.

At least two trustees are required to register a public charitable trust.  In general, Indian citizens serve as trustees, although there is no prohibition against non-natural legal persons or foreigners serving in this capacity. 

Legal title of the property of a public charitable trust vests in the trustees.  Trustees of a public charitable trust may not, however, in any way use trust property or their position for their own interest or private advantage.  Trustees may not enter into agreements in which they may have a personal interest that conflicts or may possibly conflict with the interests of the beneficiaries of the trust (whose interests the trustees are bound to protect).  Trustees may not delegate any of their duties, functions or powers to a co-trustee or any other person, except that trustees may delegate ministerial acts.  In essence, trustees may not delegate authority with respect to duties requiring the exercise of discretion. 

Trustees of religious or charitable trusts are charged with discharging their duties with the degree of care that an ordinarily prudent person would exercise with respect to his personal property.  This is a slight variant on the duty of care applicable in many U.S. jurisdictions, which requires directors and officers to act with the degree of diligence, care and skill that ordinarily prudent persons would exercise under similar circumstances in like positions (as opposed to in the management of their personal affairs).  Public charitable trusts are highly regulated.  For instance, in many states, purchases or sales of property by a trust must be approved in advance by the Charity Commissioner. 

Indian public charitable trusts are generally irrevocable.  If a trust becomes inactive due to the negligence of its trustees, the Charity Commissioner may take steps to revive the trust.  Furthermore, if it becomes too difficult to carry out the objects of a trust, the doctrine of cy pres, meaning "as near as possible," may be applied to change the objects of the trust.  Thus, it appears that grantors can feel fairly secure that the charitable nature of a trust will be honored, even if the original, specific purposes of the trust cannot be carried out.

2.   Societies
Societies are governed by the Societies Registration Act 1860, which is an all-India Act.  Many states, however, have variants on the Act.

Societies are similar in character to trusts, although there a few essential differences.  While only two individuals are required to form a trust, a minimum of seven individuals are required to form a society.  The applicants must register the society with the state Registrar of Societies having jurisdiction in order to be eligible to apply for tax-exempt status.  A registration application includes the society's memorandum of association and rules and regulations.  In general, Indian citizens serve as members of the managing committee or governing council of societies, although there is no prohibition in the Societies Registration Act against non-natural legal persons or foreigners serving in this capacity.  

According to section 20 of the Act, the types of societies that may be registered under the Act include, but are not limited to, the following:
Charitable societies;
Societies established for the promotion of science, literature, or the fine arts,
For education; and
Public art museums and galleries, and certain other types of museums.

The governance of societies also differs from that of trusts; societies are usually managed by a governing council or managing committee, whereas trusts are governed by their trustees. 
Individuals or institutions or both may be members of a society.  The general body of members delegates the management of day-to-day affairs to the managing committee, which is usually elected by the membership.  Members of the general body of the society have voting rights and can demand the submission of accounts and the annual report of the society for inspection.  Members of the managing committee may hold office for such period of time as may be specified under the bylaws of the society.   
Societies, unlike trusts, must file annually, with the Register of Societies, a list of the names, addresses and occupations of their managing committee members.  Furthermore, in a society, all property is held in the name of the society, whereas all of the property of a trust legally vests in the trustees. 

Unlike trusts, societies may be dissolved.  Dissolution must be approved by at least three-fifths of the society's members. Upon dissolution, and after settlement of all debts and liabilities, the funds and property of the society may not be distributed among the members of the society.  Rather, the remaining funds and property must be given or transferred to some other society, preferably one with similar objects as the dissolved entity.

3. Companies
The Indian Companies Act, 1956, which principally governs for-profit entities, permits certain companies to obtain not-for-profit status as "section 25 companies."  A section 25 company may be formed for "promoting commerce, art, science, religion, charity or any other useful object."  A section 25 company must apply its profits, if any, or other income to the promotion of its objects, and may not pay a dividend to its members.  At least three individuals are required to form a section 25 company.  The founders or promoters of a section 25 company must submit application materials to the Regional Director of the Company Law Board.  The application must include copies of the memorandum and articles of association of the proposed company, as well as a number of other documents, including a statement of assets and a brief descripttion of the work proposed to be done upon registration. 

The internal governance of a section 25 company is similar to that of a society.  It generally has members and is governed by directors or a managing committee or a governing council elected by its members. 
Like a society (but unlike a trust), a section 25 company may be dissolved.  Upon dissolution and after settlement of all debts and liabilities, the funds and property of the company may not be distributed among the members of the company.  Rather, the remaining funds and property must be given or transferred to some other section 25 company, preferably one having similar objects as the dissolved entity.

Public Benefit Status
To be eligible for tax-exemption under the Income Tax Act, 1961, a not-for-profit entity must be organized for religious or charitable purposes.  Charitable purposes include "relief of the poor, education, medical relief and the advancement of any other object of general public utility."
Public charitable trusts, by definition, must be created for the benefit of the public.  Societies likewise may be registered for charitable purposes.  Section 25 companies are formed for the limited purposes of "promoting commerce, art, science, religion, charity or any other useful object."

IV. Specific Questions Regarding Local Law
The following discussion addresses the extent to which Indian not-for-profit entities satisfy the requirements for a charitable equivalency determination under section 501(c)(3) of the U.S. Internal Revenue Code of 1986, as amended (hereinafter the "Code").  The discussion is limited to the minimum requirements under Indian law; the governing documents of charitable entities may of course choose to include further provisions, which may satisfy the requirements of an equivalency determination.  U.S. private foundation donors should, therefore, also review a potential grantee's governing documents for provisions relevant to an equivalency determination.  

A. Inurement
Public charitable trusts must benefit a large class of beneficiaries and must be for the public benefit.  Moreover, trustees of public charitable trusts may not engage in self-dealing.  Despite the clear charitable intent of a public charitable trust, absent a provision in the trust deed specifically prohibiting private inurement, it is unclear whether public charitable trusts satisfy the prohibition on private inurement in Code section 501(c)(3).

The Societies Registration Act 1860 does not prohibit the inurement of any earnings of the society to any private shareholder or individual. 

The Indian Companies Act, 1956, section 25 specifically provides that no profits, if any, or other income may be distributed by way of dividends to its members.

B. Proprietary Interest
Whether an individual may have a proprietary interest in a not-for-profit entity relates to the issue of inurement.  Trustees of a public charitable trust hold trust assets on behalf of the trust.  Thus, although trustees have legal title to the trust's assets, they hold these assets for the beneficiaries of the trust, not for themselves.  Members of the managing committee or governing council of a society or section 25 company hold the assets of a society or section 25 company.

C. Dissolution
Indian public charitable trusts are generally irrevocable.  If a trust becomes inactive due to the negligence of its trustees, the Charity Commissioner may take steps to revive the trust.  Furthermore, if it becomes too difficult to carry out the objects of a trust, the doctrine of cy pres, meaning "as near as possible," may be applied to change the objects of the trust.  Thus, it appears donors could feel fairly secure in the event the trust can no longer accomplish its initial purposes; the trust's purposes would be changed to another similar public charitable purpose, or in the unlikely event of a distribution or winding up of a trust due to changed circumstances, the trust assets would be used for similar charitable purposes. 

Unlike trusts, societies and section 25 companies may be dissolved.  Upon dissolution and after settlement of all debts and liabilities, the funds and property of the society or company may not be distributed among the members.  Instead, the remaining funds and property must be given or transferred to some other society or section 25 company, preferably one with similar objects.
 
D. Activities
Economic Activities
There are no restrictions on Indian NPOs’ business/commercial/economic activities. However, the profits must be applied fully towards charitable objects. If this is not done, then the NPO will lose its income tax exemption and its income will be liable to tax at the maximum marginal rate (35.1%). Further the NPO must maintain separate books of account for the business/commercial/economic activities. [Income Tax Act, 1961 (seventh proviso to section 10(23C); section 11, subsection 4 and 4A)].

Investment Activities
State and national laws limit the types of investments Indian not-for-profit organizations may make.  For example, Indian not-for-profit organizations may not invest in shares of public or private limited companies.  Furthermore, not-for-profit organizations registered in India may not invest abroad.   

E. Political Activities
Not-for-profit organizations in India may not engage in political campaign activities or legislative activities.  Indian not-for-profit entities may "lobby" for non-political causes, however, provided that such activity promotes the "general public utility" and is incidental to the attainment of the charity's objects.

F. Discrimination
Article 30 of the Constitution of India gives all "minorities," whether based on religion or language, the right to establish and administer educational institutions of their choice.  "Minority" is defined as those groups that wish to preserve stable ethnic, religious or linguistic traditions or characteristics markedly different from those of the rest of the population.  Accordingly, special inquiry should be made when donors are considering providing grants to educational institutions.
 
G. Control of Organization
With regard to charities in general, trustees are expected to be independent. It is, however, ordinarily possible for another legal person to influence the selection of directors, officers, or trustees – for example, by making a donation contingent on the donor's right to appoint a member of the board.
A for-profit company that creates a public charitable trust can exert more direct control. The for-profit company could, in the process of founding the public charitable trust, reserve the authority to appoint and remove trustees and to influence major policy decisions. This is typical of a form of public charitable trust known as a "corporate foundation," which is essentially controlled by its for-profit founder, or "settlor."

In the case of a Section 25 company or a society, members always have the right to remove directors and thus to influence policy. These members can include for-profit entities.
Therefore, it is possible that an Indian charity may be controlled, perhaps indirectly, by a for-profit entity (which will lead to additional IRS scrutiny) or by an American grantor charity (which requires that the charity specifically so provide in the affidavit).

V. Tax Laws