Notable Developments under the Income-tax Act, 2025: Revenue-Generating Activities of NGOs

- Aditya Y. Bhatt

(Advocate, Bombay High Court)

The Income-tax Act, 2025 introduces significant and far-reaching changes in the regulatory treatment of revenue-generating activities carried on by non-governmental organisations (NGOs). Two developments, in particular, materially alter the compliance landscape and substantially heighten the risk exposure of charitable organisations.

Summary of developments under the Income-tax Act, 2025

1. Where a charity advancing an object of general public utility (GPU) carries on business in violation of 20% threshold, etc., it can be a ground for cancellation of tax registration certificate.  

2. The artificial definition of business—earlier confined to GPU entities under proviso to section 2(15)— could apply equally to “per se” charitable institutions (education, medical relief, etc.) as well. As a corollary, the “significant mark up test” for business propounded by Supreme Court in AUDA could also apply to “per se” charities.

This is explained in detail below-

I. Violation of Revenue Threshold as an Independent Ground for Cancellation of Registration

Under the Income-tax Act, 1961, where a charity advancing an object of general public utility (GPU) carried on business in violation of the proviso to section 2(15), the consequence was confined to denial of exemption under section 11 for the relevant assessment year. In such cases, income was required to be computed in accordance with section 13(10) / (11), that is, after allowing deductions for revenue expenditure incurred in India.

Crucially, the Central Board of Direct Taxes (CBDT) had expressly clarified that violation of the proviso to section 2(15) could not, by itself, form a ground for cancellation of registration under section 12AB (CBDT Circular No. 21/2016 dated 27 May 2016). The consequence, therefore, was annual and reversible, without threatening the tax registration of the charitable registration.

This position undergoes a fundamental shift under the Income-tax Act, 2025. Section 346—substantially similar to the erstwhile proviso to section 2(15)—governs commercial activities undertaken by entities advancing GPU objects. Significantly, violation of section 346 is now an explicit and independent ground for cancellation of tax registration under section 351(1)(b) of the Income-tax Act, 2025, and consequently, amongst other things, levy of exit tax @ 39% on the market value of assets of the charity.

By way of illustration, where a charity advancing a GPU object undertakes a commercial activity intrinsically linked to its object, but the receipts from such activity exceed 20% of the total receipts (say, 23%), section 346 stands violated. Under the new Act, such breach does not merely result in denial of exemption for that year; it exposes the organisation to cancellation of registration altogether, with cascading consequences for past and future tax positions and possible levy of exit tax on the market value of assets.

This represents a markedly harsher statutory response, transforming what was earlier a computational disallowance into an existential regulatory risk.

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II. Extension of the artificial definition of commercial activity to Per Se Charitable Objects

A second far-reaching development under the Income-tax Act, 2025 is the use of the term “commercial activity” for both “per se” charities (s. 345) and GPU charities (s. 346).

Section 355(e) defines “commercial activity” as:

“any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.”

This definition is materially identical to the artificial definition of “business” contained in the proviso to section 2(15) of the Income-tax Act, 1961.

Under the earlier regime, it was plausibly arguable that this expanded and artificial definition of business applied only to GPU charities, whereas entities engaged in “per se” charitable objects—such as education, medical relief or relief of the poor - were governed by the ordinary judicial meaning of “business”, governed by tests such as profit motive, dominant object, and the doctrine of “business feeding charity”.

The Income-tax Act, 2025 appears to collapse this distinction. The expression “commercial activity” is now employed uniformly in:

• section 345, governing charities engaged in “per se” charitable purposes; and

• section 346, governing charities advancing GPU objects.

As a result, it is arguable that the artificial definition of business - earlier confined to GPU entities - now applies equally to “per se” charitable institutions as well.

As a logical corollary, the tax department could argue that the judicial principles laid down by the Supreme Court in ACIT(E) v. Ahmedabad Urban Development Authority,(2022) 143 taxmann.com 278 (SC) on what constitutes “business”, particularly the “significant mark-up over cost” test in the context of proviso to section 2(15) may now govern revenue-generating activities of “per se” charities as well.

If this interpretation prevails, it would mark a doctrinal shift away from traditional profit-motive analysis and towards a pricing- and surplus-based evaluation even for institutions engaged in education, healthcare and other “per se” charitable purposes.

If the revenue generating activity of a “per se” charity is regarded as “commercial activity”, it will be eligible for exemption only if -

(a)        Such business is incidental to attainment of objects of the charity;

(b)        Separate books of accounts are maintained for such business.

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III. Concluding Observations The Income-tax Act, 2025 significantly elevates the regulatory stakes for NGOs engaging in revenue-generating activities. By converting threshold breaches into grounds for cancellation of registration and by extending the concept of “commercial activity” across the charitable spectrum, the new regime demands a far more conservative and structured approach to pricing, surplus generation and activity design. Charities would be well advised to reassess existing revenue models through the lens of these developments, recalibrate risk management strategies and consider a structure accordingly.