VAT alert

Non-profit organizations which undertake certain business with a view to use the profits for the furtherance of their objects may be exempted from Income Tax if they fulfil the conditions set out under section 11(4A) of the Income Tax Act. However if the items traded by these organizations are liable to Value Added Tax (VAT), they would have to register and comply with all the formalities under the Value Added Tax Act introduced in 2005, clarifies an article, "Value Added Tax Affecting NGOs” in Philanthropy, (January-February 2006), the newsletter of the Centre for Advancement of Philanthropy. The business conducted by these non-profit organizations may be in the nature of manufacture and trading or dealing in certain goods like foodstuffs and stationery. As specifies the author Freddy Daruwala, "The purpose of this write-up is to make the trustee or office bearer of a non-profit organization aware of VAT, if applicable, and take steps to ensure compliance.”

Under the VAT Act which replaces the Bombay Sales Tax Act, VAT is a system of collection of sales tax at each point of sale of goods, only for the incremental amount of the value added at each stage. The amount paid at the earlier stage is offset against the amount payable at the subsequent stage, notes Daruwala. VAT has reportedly been implemented in over 120 countries, bringing about a positive effect due to its twin benefits of avoiding cascading of taxes, as well as self-policing effect.