Introduction
In India, the concept of non-profit organizations has a long-standing history, with a legal framework that has evolved over time. Previously governed by Section 25 of the Companies Act of 1956, these organizations were commonly known as Section 25 Companies. However, the Companies Act 2013 introduced provisions related to non-profit organizations under Section 8, along with Rules 19 and 20 of the Companies (Incorporation) Rules, 2014.
Within the Indian legal system, three primary legal forms exist for non-profit organizations, namely trusts, societies, and Section 8 companies. Each of these forms operates under specific legislation and provides distinct advantages and characteristics for those seeking to establish and operate non-profit entities.
Trusts:
Trusts are public charitable institutions registered under the Charity Commissioner’s office, typically within the jurisdiction of the state. The Indian Trusts Act, 1882, governs trusts, and the Bombay Public Trust Act, 1950, has become a model for various other states, notably Maharashtra. Trusts function as charitable organizations and work towards public welfare, adhering to the legal framework established by the respective state.
Societies:
Societies, on the other hand, are governed by the Societies Registration Act (1860), a national statute. However, each state has its version of the model Societies Act, 1860, implemented through the Societies Registration Act, 1860. Societies are considered self-contained entities, often having a larger organizational structure with a governing board elected regularly to manage the society’s affairs. Members of the society hold the governing body accountable for its actions.
Various types of societies can be registered under the Act, including those dedicated to charitable purposes, the promotion of science, literature, fine arts, education, public art museums, galleries, and certain other types of museums.
Section 8 Companies:
Under the Indian Companies Act (2013), primarily governing for-profit corporations, provisions exist for the establishment of Section 8 companies as non-profit entities. A Section 8 company can be formed with or without share capital and aims to promote or advance trade, science, religion, research, art, social welfare, charity, environmental protection, or any other socially beneficial purpose. Unlike for-profit companies, a Section 8 company’s profits or other revenues must be utilized towards furthering its objectives, with no distribution of dividends to shareholders.
To establish a Section 8 company, a minimum of two members is required to form a private business and subsequently apply for a non-profit license under Section 8 of the Indian Companies Act 2013. Founders or promoters of a Section 8 company must submit the necessary application documents to the Registrar of Companies, including the memorandum and articles of organization, along with additional paperwork such as a statement of assets and a brief description of the organization’s intended activities post-registration.
Section 8 Companies: The Reliable and Strong Organizational Structure for Non-Profit Organizations
In India, the legal frameworks for different types of organizations vary. Indian Trusts do not have a centralized law governing them. Indian Societies, on the other hand, have different legal and institutional frameworks from state to state. However, Indian Companies, including Section 8 companies, operate under a uniform law called the Companies Act, 2013, which regulates their formation, management, and accountability. This Act ensures that Section 8 companies are closely regulated and monitored, making them recognized worldwide.
This article aims to discuss the essential provisions and procedures for incorporating a non-profit Section 8 company, as outlined in Section 8 of the Companies Act, along with Rules 19 and 20 of the Companies (Incorporation) Rules, 2014.
A Section 8 company or non-profit organization (NPO) is established to promote various beneficial purposes such as trade, art, research, religion, charity, or any other useful goal. It is required that any earnings or funds generated by the company are exclusively used to promote the objectives of the company, without issuing dividends to its members. To comply with the legal requirements, a Section 8 company must have a Memorandum of Association and Articles of Association.
To form a Section 8 company, one needs to initially establish a private business and subsequently apply for a non-profit license under Section 8 of the Indian Companies Act, 2013. The minimum requirement for forming such a company is at least two members. The founders or promoters of the Section 8 company must submit application paperwork to the Registrar of Companies. This application should include copies of the company’s memorandum and articles of organization, along with additional documents such as a statement of assets and a brief description of the intended activities to be undertaken after registration.
Advantages “of Section 8 Company
Limited Liability: One of the key advantages of a Section 8 company is that its members enjoy limited liability. This means that the personal assets of the members are protected, and they are only liable to the extent of their contributions to the company. In case of any financial obligations or legal disputes, the personal assets of the members are not at risk.
Separate Legal Entity: A Section 8 company is considered a separate legal entity distinct from its members. This means that the company can enter into contracts, own property, and sue or be sued in its own name. The members are not personally liable for the company’s obligations, debts, or legal actions.
Perpetual Succession: Another advantage is perpetual succession, which means that the existence of a Section 8 company is not affected by the death, resignation, or insolvency of its members. The company continues to exist unless it is dissolved or wound up according to the provisions of the Companies Act.
Lesser Compliances: Section 8 companies have relatively lesser compliance requirements compared to other entities such as private limited companies or public limited companies. This reduces the administrative burden and costs associated with compliance, making it an attractive option for non-profit organizations.
Easy Share Transfer: Section 8 companies allow for easy transfer of shares or membership interests. This provides flexibility to the members in case they want to transfer their ownership to others, allowing for changes in the composition of the company’s members.
Various Tax Benefits: Section 8 companies may be eligible for various tax benefits and exemptions under the Income Tax Act, such as exemption from income tax on income derived from the promotion of charitable, educational, or scientific activities. These tax benefits can enhance the financial sustainability of the organization and further its non-profit objectives.
Overall, the advantages of a Section 8 company make it an appealing choice for those seeking to establish a non-profit organization in India.
Procedure for Incorporating a Section 8 Company
- Application for Name Availability: File an application in Form No. 1A with the Registrar of Companies, along with a fee of Rs. 500, to seek availability of the proposed company’s name. In case the initial name is rejected, provide a list of three alternative names for the company.
- Submission of Memorandum and Articles: Prepare three printed or typewritten copies of the proposed company’s Memorandum of Association and Articles of Association. Ensure that all promoters have signed the copies, providing their complete name, address, and occupation. Include a declaration by a lawyer or tax accountant stating that the documents comply with the provisions of the Companies Act and its rules.
- List of Promoters and Directors: Submit three copies of a list containing the names, addresses, and occupations of the promoters and, if applicable, the partners in the firm. Include the names, addresses, and occupations of the proposed board of directors and disclose any directorships or responsible positions held in other companies, associations, or institutions.
- Statement of Assets and Liabilities: Provide a detailed description of the association’s assets (with estimated values) and liabilities as of the application date or within seven days thereafter.
- Financial Projections: Include an estimate of the projected annual revenue and expenditure of the proposed company, indicating the sources of income and the purposes of expenditure.
- Application to Regional Director: Once the availability of the company’s name is confirmed, submit a written application to the Regional Director of the Company Law Board. Attach all relevant documents to the application.
- Submission to Registrar of Companies: Provide a copy of the application and all accompanying documents to the Registrar of Companies in the state where the proposed company’s registered office is located.
- Publication of Notice: Publish a notice, as prescribed, at least once in a newspaper in the principal language of the district where the registered office will be situated or is located. Additionally, publish the notice once in an English newspaper circulating in that district, within one week of filing the application with the Regional Director.
- Evaluation and Decision: The Regional Director will review any complaints received within 30 days of the notice’s publication. The Director may also contact relevant authorities, departments, or ministries as deemed necessary. Based on the evaluation, the Regional Director will determine whether to issue the license or not and may impose specific conditions on the company’s memorandum or articles.
PAN Application:
The first legal compliance is to apply for PAN registration of the NGO after its registration with the respective authority. It is essential to mention the PAN number in all banking and financial transactions for income tax purposes, including NGOs, under the current Income Tax Act.
Section 12A Registration under Income Tax Act:
To avail benefits of taxation, registration of NGOs under Section 12A is mandatory. However, obtaining a Section 12A certificate is not obligatory. The primary purpose of obtaining this registration is to claim exemptions from income tax on the NGO’s income/revenue, provided all the rules and regulations stated in this section are fulfilled.
Section 80G Registration under Income Tax Act:
While registration under this section is not compulsory, it is necessary to obtain registration under Section 80G of the Income Tax Act to provide donors with the benefit of ‘50% or 100%’ exemption on their donations. This registration indirectly benefits NGOs in fundraising efforts.
FCRA Registration under Income Tax Act:
After completing the NGO registration process, there will be opportunities to receive foreign funds for the NGO’s missions. FCRA registration with the Ministry of Home Affairs is required to receive foreign donations or funds. The specific requirements for applying for FCRA registration depend on the type of registration and legal compliances.
TAN under Income Tax Act:
If the NGO becomes liable to deduct tax at source during its operations, it must apply for a TAN (Tax Deduction and Collection Account Number) as a legal compliance. No specific documents or proof of identity are needed for TAN registration. Form 49B must be filled and submitted to obtain TAN.
GST Registration:
If the gross revenue from the NGO’s activities exceeds the basic exemption limit of GST, or if the NGO provides services such as research or consultancy work, it must apply for GST registration as a legal compliance.
Professional Tax Registration:
Professional tax is an obligation for NGOs to be paid to the state government and deducted from employees’ salaries. Different states in India have their own rules and regulations for professional tax, making it a state government matter.
Retirement Benefits:
If an NGO grows and the number of employees exceeds the prescribed limit, retirement benefits such as Provident Fund, Gratuity, ESIC, etc., become relevant under legal compliances.
Shops and Establishment License:
If an NGO employs individuals in its office to carry out work related to the NGO, it must obtain a license under the Shops and Establishments Act, as per the NGO laws in India.
In case of non-compliance with the procedures, the Ministry of Corporate Affairs has the authority to impose penalties. Penalties that may be imposed include rejection of the organization’s permit if it is found to be operating falsely or in violation of its stated objectives. The officials and directors of the organization may be subject to fines ranging from a minimum of ten lakh rupees up to a maximum of one crore rupees. Additionally, officials in default may face imprisonment or both, if it is discovered that the organization’s affairs were conducted fraudulently.
The legal framework governing non-profit organizations in India is rapidly evolving, resulting in a complex set of rules related to taxation, fundraising, and governance. The India Philanthropy Law Report 2019 by the International Institute for Not-for-Profit Legal provides an analysis of these laws, highlighting significant regulatory developments and assessing their implications for the operation of non-profit organizations in India.
The Directorship Dynamics of Section 8 Companies
Section 149(1) of the Companies Act 2013 establishes that private limited companies must have a minimum of 3 directors, while public limited companies must have a minimum of 3 directors and a maximum of 15 directors.
However, Section 8 corporations do not have any specific requirements regarding the minimum or maximum number of directors.
In certain class of businesses, the second proviso to section 149(1) mandates the appointment of a female director.
Section 149(3) of the Companies Act 2013 requires every company to have resident directors. However, in the case of Section 8 companies, the director position is not counted towards the overall number of directors on the board, and it does not contribute to the limit of 20 directorships as specified in Section 165 of the Companies Act, 2013.
Section 149(1) of the Companies Act, 2013 also states that Section 8 companies are not required to appoint an independent non-executive director and are exempt from any regulations pertaining to independent directors, as stated in an exemption notification dated June 5, 2016.
According to Section 149(3) of the Companies Act, a Section 8 organization must have at least one Resident Director. A Resident Director is defined as a director who has spent at least 182 days in India during the previous fiscal year.
Quorum and Total Number of Board Meetings
As per the stipulations in clause 173(1) and 174 of the exemption notification (1), businesses governed by Section 8 are required to conduct approximately one meeting every six months. For committee meetings, the quorum should consist of either eight directors or a quarter of the total number of directors, whichever is fewer. Furthermore, the quorum must include a minimum of two employees.
Status Of Public Benefit
Not-for-profit organizations can be established for various purposes, including philanthropic endeavors or religious pursuits, in order to qualify for tax exemption under the Income Tax Act (1961). Examples of charitable purposes encompass providing relief for the impoverished, promoting education, healthcare improvement, fostering social progress, enhancing public mobility, preserving the environment, and conserving historic or artistic landmarks or artifacts.
According to the definition, charitable organizations and trusts should benefit the general public. Such organizations can be established under Section 8 of the Companies Act, with the specific objective of promoting religion, conducting research, advancing social welfare, supporting art and culture, facilitating charitable initiatives, promoting business for social causes, nurturing sports education, safeguarding the environment, advancing scientific pursuits, or pursuing similar objectives.
Conclusion
Compliance with legal requirements is essential for NGOs to ensure their proper functioning. NGOs registered as companies, particularly under Section 8, must adhere to annual compliance obligations. Relevant legislations such as the Income Tax Act are crucial, as they offer deductions to donors.
Registration of foreign contributions is necessary for NGOs receiving donations or income from foreign sources. Additional mandatory registrations include PAN (Permanent Account Number) and TAN (Tax Deduction and Collection Account Number). It is important to note that under the Income Tax Act of 1961, the definition of income specifies that “no income is exempt unless provided,” implying that donations may not always be fully exempted from taxation.
Reference
- Companies Amendment Act Elearning.icsi.edu. 2023. [online] Available at: [Accessed 18 June 2023].
- Ministry of Corporate Affairs. Mca.gov.in.2023. Home. [online] Available at: [Accessed 18 June 2023].
- Pruthi S, and Pruthi S, ‘Legal Compliance Of NGO Laws In India – Enterslice’ (Enterslice, 2022) accessed 18 June 2023
- Not For Profit Organizations: What The Companies Act, 2013 Says (Corporate Law Reporter, 2022) accessed 18 June 2023
- Bhattacharjee A, and Bhattacharjee A, ‘Legal Compliance For Ngos In India – Corpbiz Advisors’ (Corpbiz, 2022) accessed 18 April 2023.
Article by – Abhay Shukla
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