Is legislative framework against sustainability in NPOs

Dear Members, ‎

I am working on registering a not-for-profit which will involve itself into research activities in ‎technology. The outcomes will be mostly public goods, in terms of papers, open source code, etc. ‎At the same time, it may generate IP, income from licensing IP and ownership (equity) in ‎companies that come out of the work of the center. This will be used for sustaining the center. ‎

As far as I know, there is restrictions by the IT Act that organizations (for Section 8/Trusts which ‎have IT exemption) can’t own equity and also, their total income (from commercial activities) ‎should not be more than 20% of all receipts. ‎

‎- Does this mean that a not-for-profit cannot generate income to pay off for their expenses? If ‎that is the case, then how do not-for-profits become sustainable?‎

‎- Can NFP own patents or equity? ‎

Thanks for the help.‎

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One Response to Is legislative framework against sustainability in NPOs

  1. Subhash Mittal says:

    Dear Varun, You have raised a very interesting question. Tax laws under Income Tax Act are rather warped. An entity will be classified as Non-Profit and be exempt from tax if it can be stated that it is working for ‘charitable purpose’ as defined under S.2(15). Charitable Purpose has majorly 7 limbs. In case Non-Profit’s objectives can be classified to be falling under first six limbs, then there are no restrictions on how much income an NGO earns, as long as these activities are taken without profit motive. Even if some ancillary objects are undertaken with commercial intent if these are emanating from these major objectives, exemption under charitable purpose will not be lost. The first six limbs are relief of the poor, education, yoga, medical relief, preservation of the environment and preservation of monuments, etc. Last limb identified for the purpose is ‘advancement of any other object of general public utility’.

    Most likely research activities in technology is likely to fall under the last limb of general public utility, which has limitation of 20% of total turnover. In case any activity is undertaken which is likely to generate more than 20% of total turnover, then for that FY charitable purpose exemption could be lost. However let me honestly say this is a complex and difficult topic with large number of case laws, which could be relevant, hence I would suggest get some professional advice to examine the issue with specific intent and more closely.

    Not For Profits can own patents & equity.

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