Per Nepalese Income Tax, the income of social, religious, educational, or charitable organization of a public character registered without having a profit motive and similar other organizations as approved by the Inland Revenue Department are exempt. Since NGOs are registered as social organizations and INGOs through a general agreement with the Social Welfare Council, we were generally treating them as tax-exempt organizations and Inland Revenue Department was also issuing the tax exemption certificates for them. But, recently, Inland Revenue Department has stopped renewing tax-exempt certification of the NGOs/INGOs and also, stop issuing the new certificate to new registered NGO/INGOs. In such a context, we are here trying to analyze the potential impact on NGO/INGOs.
We want to start by saying that irrespective of the tax exemption certificate, the following incomes were always taxable:
1) The organization has received the grant or won the bid that falls into the category of consulting income, service fees which is generally taxable in nature. E.g. NGO/INGOs received a consulting fee for carrying out the research although related to a social cause. The portion of the profit made of such consultancy would be taxable.
2) The organization has won the bid from the funder/donor through a competitive process where profit-making entities where competing then, any profit generated from such activity is also taxable.
3) The organization is imparting any programs which are not part of its objective, any income generated from such activity is also taxable.
NGOs/INGOs should definitely pay taxes on the above per the prevailing rates and also, on the unrestricted funds if there is a surplus there. Besides, we are also not covering the responsibility of the NGOs/INGOs to withheld taxes (TDS) on the payment to the different service providers and the employment tax deducted on the monthly payroll on behalf of its employees.
In the recent fiscal years, we have been hearing that NGO/INGOs have been paying taxes on the surplus on the restricted grant revenue received for the funder that is part of their objective and received without a competitive bidding process with a commercial entity. We were wondering how is that possible if we have done the accounting treatment correctly?
The general rule of accrual accounting is such that whenever we receive a grant income that is restricted in nature and not used during the period of the fiscal year then, those should be transferred to "Deferred Revenue".
Deferred revenue is a liability because it reflects revenue that has not been earned and represents products or services that are owed to the funder/donor. As an organization, we will have to return the grant back to a funder if we end up not using it.
Let us look at the accounting treatment:
For instance: When an NGO receives a grant of $100,000 it is first recognized as revenue.
Dr. Bank $100,000
Cr. Revenue from Funder/Donor $100,000
During the fiscal year, if manage to spend $35,000 per the work plan or detailed program implementation plan, then, we record expenses of $35,000 and the remaining balance of $65,000 would be transferred as the deferred revenue through a Journal Entry.
Recording Expenses:
Dr. Expenses $35,000 (we can further classify into Programmatic, Fund Raising, Administrative Expenses as per the need of the organization)
Reclassification of Revenue to a Liability Account
Dr. Revenue from Funder/Donor $65,000
Cr. Deferred Revenue $ 65,000
So, what does that mean.. if you look at the income statement your Income is $35,000 and Expense is also $35,000 which leaves no surplus hence, no taxation.
The question then is how should the tax returns be completed.. please follow the same principle as above. NGOs' tax return should have an equal amount in both Taxable Income and Deductible Expense.
Disclaimer: This is just an opinion and organization should always seek expert advice in such a delicate manner.
We want to start by saying that irrespective of the tax exemption certificate, the following incomes were always taxable:
1) The organization has received the grant or won the bid that falls into the category of consulting income, service fees which is generally taxable in nature. E.g. NGO/INGOs received a consulting fee for carrying out the research although related to a social cause. The portion of the profit made of such consultancy would be taxable.
2) The organization has won the bid from the funder/donor through a competitive process where profit-making entities where competing then, any profit generated from such activity is also taxable.
3) The organization is imparting any programs which are not part of its objective, any income generated from such activity is also taxable.
NGOs/INGOs should definitely pay taxes on the above per the prevailing rates and also, on the unrestricted funds if there is a surplus there. Besides, we are also not covering the responsibility of the NGOs/INGOs to withheld taxes (TDS) on the payment to the different service providers and the employment tax deducted on the monthly payroll on behalf of its employees.
In the recent fiscal years, we have been hearing that NGO/INGOs have been paying taxes on the surplus on the restricted grant revenue received for the funder that is part of their objective and received without a competitive bidding process with a commercial entity. We were wondering how is that possible if we have done the accounting treatment correctly?
The general rule of accrual accounting is such that whenever we receive a grant income that is restricted in nature and not used during the period of the fiscal year then, those should be transferred to "Deferred Revenue".
Deferred revenue is a liability because it reflects revenue that has not been earned and represents products or services that are owed to the funder/donor. As an organization, we will have to return the grant back to a funder if we end up not using it.
Let us look at the accounting treatment:
For instance: When an NGO receives a grant of $100,000 it is first recognized as revenue.
Dr. Bank $100,000
Cr. Revenue from Funder/Donor $100,000
During the fiscal year, if manage to spend $35,000 per the work plan or detailed program implementation plan, then, we record expenses of $35,000 and the remaining balance of $65,000 would be transferred as the deferred revenue through a Journal Entry.
Recording Expenses:
Dr. Expenses $35,000 (we can further classify into Programmatic, Fund Raising, Administrative Expenses as per the need of the organization)
Reclassification of Revenue to a Liability Account
Dr. Revenue from Funder/Donor $65,000
Cr. Deferred Revenue $ 65,000
So, what does that mean.. if you look at the income statement your Income is $35,000 and Expense is also $35,000 which leaves no surplus hence, no taxation.
The question then is how should the tax returns be completed.. please follow the same principle as above. NGOs' tax return should have an equal amount in both Taxable Income and Deductible Expense.
Disclaimer: This is just an opinion and organization should always seek expert advice in such a delicate manner.
Comments
Post a Comment