Charitable Trust: New Challenges & Compliances from the financial Year 2020-21 onwards: CA Naresh Jakhotia

Biggest overhaul is there in the Union Budget 2020 with regard to the taxation the NGO, Trust, NPO (Non-profit Organization). The changes in the taxation system of charitable trusts which are enjoying the benefit of exemption from income tax is enormous. Taxation of NGO & Trust has been on the radar of Income Tax Department since last few years. But this year, the changes are chronicle. The objective of the changes is to curb the malpractices that have been noticed in the functioning of some of such trusts.

Around 10 clauses in the Bill i.e., Clauses 7(1), 9 to 12, 29(A) and 29(B)(ii), 33, 34, 54(b) and 61 have been introduced to effect the changes in sections 10(23C), 11, 12A, 12AA, 12AB, 56, 80G, 80GGA, 115BBDA and 115TD of Income-tax Act, 1961 respectively.

Majority of it relates to the grant of registration of such trust. Now, all such registered trust will be required to re-apply for re-registration and thereafter will be subject to renewal after every five years. It means that the registration of the trust will not be for perpetuity but for only 5 years. In case of new charitable trusts, registration will be a provisional registration for a period of three years and full or say final registration shall be granted after completion of some more formalities.

All the more important, now simultaneous registration for tax exemption of charitable institutions u/s 12AA or approval u/s 10(23C) or exemption through notification u/s 10(46) of the Act will not be permissible. Present Section 12AA which as of now deals with the procedure for registration of a charitable trust will cease to be inoperative w.e.f from 01.06.2020. In place of section 12AA, now new section 12AB shall be there which prescribes the procedure for fresh registration. Now, application need not be done to the CIT(Exemption) but application would required to be done to the Principal Commissioner of Income-tax or Commissioner of Income-tax (CIT).

The summary of the key changes are as under:

1. All the trusts which have already been registered are now required to file application for registration again in the prescribed form with the Principal Commissioner or Commissioner within a period of 3 months from the date of coming in to force the new provision i.e., within 3 months of 01.06.2020. In short, all the charitable trust will be required to apply before 01.09.2020. Even a charitable trust, educational or medical institution who were already registered will also have to submit such an application.
2. Earlier provision of section 12AA will be inoperative w.e.f. 01.06.2020 i.e., with the operation of newly inserted section 12AB.
3. The registration once granted shall be valid for a period of 5 years only. Subsequent application for renewal of registration shall be required to be done at least six months prior to the expiry of the period of the earlier registration.
4. If the earlier registration has become in-operative in terms of section 11(7) of the Act by virtue of claiming deduction by the trust u/s 10(23C) or 10(46) of the Act and the trust wish to get the registration operative then application shall be required to be done at least 6 months prior to the commencement of the assessment year for which the said registration is sought to be made operative.
5. In case of trust to whom provisional registration is granted earlier, an application has to be made at least 6 months prior to the expiry of the period of provisional registration or within 6 months from commencement of the activities of the trust, whichever is earlier.
6. In case any modification is carried out in objects clause of the trust which is not in accordance with the conditions for registration, an application is to be made within a period of 30 days from the date of such modifications.
7. In all other cases, application for registration has to be done at least one month prior to the commencement of the previous year relevant to the assessment year from which the registration is sought.
8. It may be noted that now section 12AB provides for the procedure for grant of the registration on receipt of the application by the Principal Commissioner or the Commissioner of Income-tax [i.e., earlier CIT (exemption)]. The main requirements are as follows:-
   a) For existing registered trust: An application has to be filed on coming into force the new procedure. Order by PCIT or CIT for registration shall be passed within a period of 3 months from the end of the month in which the application is received and the registration shall remain valid for a period of 5 years.
   b) For subsequent registration, the PCIT or CIT after getting satisfied as to the genuineness of the activities of the trust shall be required to pass the order within a period of 6 months from the end of the month in which application is received and registration shall be operative for a period of 5 years.
9. c)In case of all new trusts or trust making application for the first time, provisional registration shall be granted within one month and same will continue for a period of 3 years.

9. Section 11(7) now provides that if a charitable trusts were granted registration u/s 12AA of the Act then it has to claim exemption only in terms of sections 11 & 12 of the Act and not under other clauses of section 10 except under section 10(23C) (1) of the Act.
10. In lines with exemption available to a charitable trust u/s 10(23C), option is given to claim exemption u/s 10(46) of the Act in case of trusts established by a Central or State Act or by the Central or State Government as are notified for the purpose of this section.
11. It is also being provided that in case the trust obtained approval u/s 10(23C) or is notified u/s 10(46) of the Act, registration u/s 12A of the Act will become in-operative with the option that subsequently such a trust can get its registration u/s 12A operative by making an application and thereafter, its approval or notification under section 10(23C) or 10(46) will cease to be effective.
12. Amendment has been done in section 56 of the Act to deal with the taxation of income from other sources which is only consequential to refer to the new section as referred above.

13. Another change is with regard to registration for deduction/s 80G. Section 80G enables the donors to get deduction from their income for donation to the approved charitable institution/ prescribed fund. This is also amended so as to stipulate as under:
    a) Such institution or fund which are already approved u/s 80G of the Act shall again apply for approval and have to re-obtain the registration. Such  re-approval or re-registration or re-notification now shall be valid for a period 5 years only  at any one time. It means that 80G registration or approval shall also be not in perpetuity but for a period of 5 years only.
    b) All such application which are pending for approval of registration as of now shall be treated as an application in accordance with the new provisions wherever they are being provided
    c) All such trust will be required to file a statement of donations for with the prescribed Income-tax Authority. Most probably, it will be an e-filing of statement and deductee will get the deduction only after it is reflected in their annual statement (like 26AS).
    d) As earlier, all such trusts are required to furnish to the donor a certificate certifying the amount of donation and other stipulated details.
14. Section 80GGA offers deduction to the donor of scientific research or rural development organization. Now, deduction to the donor u/s  80GGA shall be allowed only if a statement is furnished by the donee recipient & is reflected in the annual statement of the donee

In short, now an onerous duty has been placed on the trust to ensure that they file a statement of donation received by them.

15. Consequential changes have been made in Section 115BBDA (Taxation of dividend received by an assessee from a domestic company exceeding Rs. 10 lakhs) & section 115TD (Taxation of trust which has ceased to be eligible for exemption as a registered charitable institution). It now refers to the new clauses incorporated in the budget 2020 with regard to registration of a charitable trust and the grant of exemption of its income from income tax.

Trust may noted that all the procedure of recognition under the Income Tax Act – 1961 is set to witness drastically change. Income Tax departments & tax professionals, who are working for the trust, will have a mammoth task ahead in the next 6 months.  After the lockdown is over, the trust will have to get ready for the new era of taxation.

On the one side, I don’t deny that the regulator will have better control over the trust. But, the second side of small trust who are working on a small scale for the betterment of the society would be very adversely affected. I would still suggest that the Government must remove smaller trust say having an annual receipt to the tune of Rs. 50 Lakh or Rs. 1 Cr be excluded from the new cumbersome requirements. Ultimately, most of such trust is doing the job of the Government only by way of providing medical facilities, food, and education to the lower class of the society. Putting a threshold of certain amount will not only be in the interest of the trust but also its administrator who can concentrate on select institutions in a minute way.

Let us hope something better for the charitable organization.