Tax Exemption under the Income Tax Act, 2023

The tax exemption landscape for NGOs in BD is shaped significantly by the Income Tax Act, 2023, which replaced the earlier Income Tax Ordinance of 1984. While Non-Governmental Organizations (NGOs) are treated as taxable entities under the Act, several provisions allow for tax exemptions, particularly in relation to donations, grants, and income used for charitable or religious purposes.

1. Exemption on Donations and Grants

• Clause 12 of Part 1 of the Sixth Schedule of the Income Tax Act, 2023 provides that any donation or grant received by a religious or charitable institution, if approved by the Tax Commissioner and used for religious or charitable purposes, will be excluded from total income and hence not taxable.
• Similarly, voluntary contributions, grants, or donations received by any person approved by the NGO Affairs Bureau (NGOAB) and used for their intended purpose are also tax-exempt.
• However, the application of Section 76(5) and 76(6) regarding undisclosed income remains valid in all such cases.

2. Approval is Critical

• For tax exemption under Clause 12, an NGO in BD must be approved by the Tax Commissioner or the NGOAB.
• Approval validates the non-profit and charitable status of the organization, which is essential to obtain tax relief on donations and grants.

3. Purpose-Based Utilization of Funds

• Tax exemption is conditional on the funds being spent strictly for charitable or religious purposes. Diversion of funds to non-charitable activities may lead to taxation.

4. NGOs Treated as Companies

• The National Board of Revenue (NBR) now classifies NGOs in BD as “companies” under the Income Tax Act, 2023.
• However, these organizations may not be subject to the standard corporate tax rate, particularly for income used in micro-credit operations or social development.

5. Income from Microcredit Operations

• If an NGO’s microcredit income is retained in a revolving fund and solely used for microcredit purposes, it may be exempt from tax.
• Use of such income for other commercial ventures can void the exemption.

6. Tax on Other Income

• Income from commercial activities, interest from bank deposits, or rent from properties (e.g., conference halls) is generally taxable, even for NGOs.

7. Filing and Compliance

• NGOs approved by NGOAB must file annual income tax returns, fulfilling all reporting obligations under the Act.

Summary: NGOs in BD enjoy tax exemptions on donations and grants, provided they are approved by the appropriate authorities and use their income for charitable or religious purposes. All other income remains taxable. Seeking professional tax advice is highly recommended for full compliance.

Deductibility of Donations by Donors

Under the Income Tax Act, 2023, donations made to certain approved charitable NGOs in BD may be deductible from the donor’s taxable income, provided specific conditions are met.

Eligible Donations Include:

• Contributions to charitable hospitals outside city corporation limits, approved by the NBR.
• Donations to organizations for the welfare of persons with disabilities, approved by both the Department of Social Welfare and the NBR.
• Zakat contributions to the Zakat Fund under the Zakat Fund Management Act, 2023.
• Grants to public welfare or educational institutions approved by the government.

Pre-Approved Institutions Include:

• Liberation War Museum
• Aga Khan Development Network
• Ahsania Cancer Hospital
• Asiatic Society
• ICDDR,B
• Centre for the Rehabilitation of the Paralysed (CRP)

Important Notes for Donors:

• The recipient NGO must be approved by relevant authorities.
• Proper documentation and receipts are essential to claim tax deductions.
• Limits on deductible donations may apply (often as a percentage of the donor’s taxable income).

Conclusion: Donors supporting NGOs in BD may receive income tax deductions, provided the donations are made to duly approved institutions and are supported by valid documentation.

VAT Exemption for NGOs in BD

The Value Added Tax (VAT) regime in Bangladesh, governed by the VAT and Supplementary Duty Act, 2012, generally applies a 15% VAT rate. However, NGOs in BD are not automatically VAT-exempt. Their liability depends on the nature of the goods or services they deal with.

1. No Blanket VAT Exemption

There is no general VAT exemption solely on the basis of NGO status.

2. VAT-Exempt Goods and Services

The First Schedule of the VAT Act lists several exempt items, such as:

• Educational services
• Healthcare services
• Certain agricultural products

If an NGO’s activities fall under these exempt categories, those particular transactions are not subject to VAT.

3. VAT Deduction at Source (VDS)

NGOs approved by NGOAB or the Department of Social Welfare are designated to deduct VAT at source when making payments to VAT-registered vendors, thereby acting as VAT collectors.

4. Import VAT

Unless specifically exempted through Special Regulatory Orders (SROs) by the NBR, imports made by NGOs are subject to the standard 15% VAT.

5. Project-Specific VAT Exemptions

Certain donor-funded or government-prioritized NGO projects may qualify for project-specific VAT exemptions, but only upon formal approval and notification by the NBR.

Conclusion: While NGOs in BD are not broadly exempt from VAT, they may benefit from VAT relief if their services fall under exempt categories or receive specific approval through SROs. It is essential to assess each transaction separately and consult tax professionals for compliance.

Final Thoughts

The fiscal framework governing NGOs in BD is multifaceted, involving income tax exemptions, donor deductibility, and selective VAT reliefs. Ensuring compliance with approval conditions and utilizing funds transparently for charitable purposes are critical. Both NGOs and donors are encouraged to stay informed of tax changes and consult experts for regulatory compliance under the Income Tax Act, 2023 and VAT Act, 2012.