Demystifying Section 8 Compliance: Essential Tips and Strategies

Introduction

Section 8 enterprises are non-governmental organizations that are established to support various interests such as commerce, sports, science, the arts, and charitable activities. These companies are registered with the intention of helping India’s economically disadvantaged population and industries. This blog post will address the yearly compliances for Section 8 enterprises.

What is a Section 8?

A Section 8 business is an organization that wants to utilize its earnings for the promotion of the following areas: science, research, sports, commerce, education, charitable purposes, religion, the arts, and the environment. Section 8 corporations are considered limited firms even if their names do not have the word “Limited” at the end.

Benefits of Section 8 for Companies 

Companies provide several benefits to anybody seeking to establish a charitable organization. They are composed of:

1. Section 8 corporations have greater flexibility and are made to carefully accomplish non-profit objectives.

2. Section 8 The Companies Act simplifies the registration process and eliminates the need for partners or members to be present in person. Businesses are registered under this legislation. 

3. The amount of paid-up capital for Section 8 firms has no upper or lower limit. 

4. Section 8 By utilizing the tax advantages offered by Sections 12AA and 80G of the Income Tax Act, businesses can significantly reduce their tax payments. 

5. Partners or members of any company or firm are eligible to serve as directors of a Section 8 corporation, which is useful for anybody wishing to utilize their work to advance society. 

Read Blog: Compliance Calendar for Section 8 Company

Complying with Tax Laws for Section 8 Businesses

In India, Section 8 companies must make timely tax payments in order to stay in operation. These companies are subject to certain tax-related rules even though they are non-profit organizations.

1. Income Tax: Corporations designated as Section 8 are free from paying taxes under Sections 11 and 12 of the Income Tax Act of 1961. In order to benefit from these exemptions, the company must ensure that all of its profits are put towards charity or religious purposes rather than any one member’s or group of members’ personal gain. Proceeds from the donation shall be used to advance the objectives stated in the company’s Memorandum of Association.
2. 12A Registration: To qualify for income tax exemptions, Section 8 enterprises must obtain a 12A registration from the Income Tax Department. This registration provides tax-exempt status for the organization’s charitable endeavor income.
3. 80G Registration: In order to allow donors to deduct contributions from their taxes, Section 8 enterprises may also apply for 80G registration. It provides rewards for people and organizations who support the company’s humanitarian goals.
4. TDS (Tax Deducted at Source): For example, if a Section 8 company is paying contractors or suppliers, it must deduct TDS at the proper rates and deposit it with the government within the specified time frames.
5. Goods and Services Tax (GST): Section 8 businesses are required to pay GST if their yearly revenue exceeds the (changing) threshold set by the GST Act. They must register under GST, file regular GST returns, and abide with all applicable rules and regulations.
6. Foreign Contribution Regulation Act (FCRA): If the Section 8 business accepts foreign donations, it must abide by the Foreign Contribution Regulation Act (FCRA) requirements. To accept grants and gifts from abroad for charity reasons, one must register with the FCRA.
7. Form 10BB: Files including Form 10BB from Section 8 companies must be sent to the Income Tax Department. This form contains details on the money received and the steps taken to achieve the company’s objectives.
8. Requirements for Audits: Section 8 businesses are often obliged to have their records audited by a competent chartered accountant every fiscal year, regardless of turnover. It is necessary to provide the audit report to the Income Tax Department together with the annual income tax return.

Documents Required to Comply with Section 8 Business

To comply with Section 8 business regulations in India, the ensuing documentation is necessary:

1. Essential Records:

Memorandum of Association (MoA): This document describes the goals, competencies, and scope of the company’s activities.

The articles of association (AoA): AOA provide the internal norms and regulations of the firm. The management and activities of the company are under its control.

The official document attesting to the company’s legal foundation is the Certificate of Incorporation.

Digital Signature Certificate (DSC): A DSC is required in order to send electronic forms and documents to the Ministry of Corporate Affairs (MCA).

2. Financial Documentation:

Financial Statements: The balance sheet, profit and loss account, and cash flow statement are all created and audited annually by a licensed chartered accountant. 

Auditors’ Report: This report presents an unbiased evaluation of the company’s financial accounts.

Income Tax Return (ITR-7): Section 8 corporations must submit an income tax report each year, even if they do not have any taxable income.

3. Compliance Documents:

The Directors, Shareholders, Registered Office, and other relevant facts about the company are all listed in detail in the Annual Return (Form MGT-7).

Form AOC-4: Use this form to provide the financial accounts of the business to the Registrar of Companies.

Form ADT-1: A company auditor is designated using this form.

4. Extra prerequisites, if any:

Section 12AA requires registration for Section 8 enterprises before they may obtain a tax exemption. They have to register in accordance with Section 12A of the Income Tax Act.

Register under Section 80G to get tax benefits for donations made to Section 8 businesses. This registration leads to tax advantages.

5. Additional Documents (as required):

Board resolutions: The decisions made by the company’s board of directors are documented in these resolutions.

Minutes of meetings: These records the proceedings of shareholder and board meetings.

Statutory registers: These registers keep track of the shareholders. In addition, they keep track of directors, meeting minutes, and other important corporate information.

How to Register a Company under Section 8

These procedures need be followed in order to register a Section 8 corporation in India:

1. Get a DSC, or Digital Signature Certificate:

• Request a DSC from a certifying authority that is authorized (CA).
• To electronically file forms and other documents with the Registrar of Companies (ROC), you must utilize DSC.

2. Request a Director Identification Number (DIN):

• Every candidate for directorship in the organization has to have a DIN.
• Utilizing Form DIR-3 available on the MCA webpage, submit an application for DIN.

3. Select a Distinct Company Name:

• Provide the firm with a minimum of two names.
• Use Form INC-1 on the MCA site to check for availability and reserve the preferred name.

4. Submit a Section 8 License Application:

• Provide evidence of the company’s non-profit status by filing Form INC-12 with the ROC, which details the goals and operations of the organization.
• Include any necessary documents, such as the directors’ statement, the AoA, and the memorandum of agreement.
• A license under Section 8 is granted by the Central Government upon approval (Form INC-16).

5. Submit the necessary incorporation forms:

• To submit integration applications and other forms via the MCA site, use the SPICe+ (INC-32) form.
• Provide information on the capital structure, registered office address, members, and directors.
• Add the required e-AoA (INC-34) and e-MoA (INC-33) documents.

6. Obtain the Certificate of Incorporation:

• After verification is completed successfully, the firm is formally established by the ROC issuing the Certificate of Incorporation.

7. Compilations After Incorporation:

• Obtain the company’s bank account, PAN, and TAN.
• Form ADT-1 should be filed to schedule an auditor.
• Send financial statements (AOC-4) and yearly returns (Form MGT-7) to the ROC.
• If applicable, submit an application for a tax exemption under Sections 12AA and 80G.

Annual Compliances with Regard to Section 8 Company 

Under Section 8, businesses are subject to several legal obligations and various annual compliance reports. In this article, we will discuss the several yearly compliance forms that section 8 businesses file. 

1. Appointment of Auditors: Every Section 8 firm is required under Section 139 of the Companies Act of 2013 to appoint an auditor to supervise its yearly financial reporting. Form ADT-1 must be provided to the Ministry of Corporate Affairs (MCA) informing them of the auditor’s appointment as well as other pertinent information. The auditor will be hired for a maximum of five fiscal years, during which they will examine the company’s annual financial statements. The auditor is to be chosen within 15 days of the Annual General Meeting (AGM). If the company fails to turn in the Form ADT-1 by the deadline, it will be fined. 

2. Maintaining Statutory record: Under Section 8 of the Companies Act of 2013, companies are required to maintain a record that contains details on the loans they have taken out, the biographies of their directors, any changes to their directorship, charges they have made, and investments they have made. 

3. Conduct Meetings: In addition to their twice-yearly annual general meetings, Section 8 companies are also required to conduct extra statutory meetings. 

4. Report from the Board of Directors: All company directors are obliged to review the Director’s Report, which contains information on the business’s accounting, compliance, corporate social responsibility, and other appendices. The report must be turned in with the AOC-4 Form. 

5. Preparing Financial Statements: A cash flow statement, balance sheet, and profit and loss statement are among the financial statements that the company is required to provide. These documents have to be filed with the Registrar of Companies (ROC) and submitted to an audit by an auditor. 

6. Financial Statements Submission: Failure to submit the AOC-4 Form within 30 days following the AGM date will result in penalties for the business.

7. Annual Returns: Failing to file the MGT-7 Form within 60 days of the AGM date will result in penalties for the business.

8. Submission of Income Tax Return: By September 30 of each year, Section 8 enterprises must file their income tax returns, which provide an overview of their total revenue.

Penalties for Failure to Comply with Section 8 

Organizations are bound by a set of guidelines, much like any other recognized company. If they disregard these instructions, there will be repercussions. A Section 8 Company may face the following penalties for non-compliance:

1. If the Central Government determines that the company is operating dishonestly or in opposition to its stated goals, it may cancel the license.

2. The fine assessed on the company might reach Rs. 1 crore and should not be less than Rs. 10 lakh. 

3. Violations of the agreement might result in jail time and fines of up to Rs. 25 lakhs for the company’s directors or anybody else. 

4. If it is demonstrated that the company is conducting fraudulent operations, every officer in default will be held responsible for their actions under Section 447 of the Companies Act, 2013. 

Hence, Section 8 Companies are required to comply with all regulations to prevent penalties. By doing this, they can maintain their legal status and fulfill their specific roles.

Read Blog: Section 8 Company Registration