Taxation of Charitable Trusts & NGO- Recent Amendments
Every passing budget is making the tax provision more stringent & complicated for the Charitable Trusts & institutions. Budget – 2023 is no exception. There are a lot of changes and amendments with regard to the taxation of the charitable Trusts & NGO. Let us have a look at some of the key changes.
No Need for Provisional Registration (U/s 12AB, 10(23C) or 80G):
According to existing provisions, an unregistered trust can make an application for registration u/s 12AB one month prior to the start of the previous year. As a result of this condition, trusts which had already commenced their activities were unable to get registered during the year and could get benefit of exemption from subsequent years only. Such trusts were also required to apply for registration twice i.e., first for Provisional and thereafter for regular registration.
To overcome this situation, FA-2023 has provided that if the activities of trust have already been commenced then application will not be for provisional registration but for regular registration. Accordingly,the PCIT or CIT will be examining the application in detail the way it is done for regular registration.
Due date of filing form 9A and 10 proponed:
- Charitable trust has to compulsorily apply at least 85% of its income during the year for its objects failing which the difference is taxable in the hands of the trust. There is an exception to the 85% application rule whereby trust can accumulate the amount for application within subsequent 5 years. However, for this trust are required to file declaration in Form No. 9Aand 10. This declaration form was allowed to be filed till the date of the ITR.
- Audit report of the trust is required to be filed in Form No. 10B one month before the due date offurnishing ITR & it contains the information related to accumulation of the amount as discussed above.
- Now, this date of filing the Form No. 9Aand 10 has been fixed as 2 months prior to the due date of filing ITR. Effectively, the declaration would be required to be filed by August every year so that the audit report can provide the details of accumulation properly.
Exemption to be allowed if ITR is filed within due Date:
- The trust is eligible to claim deduction towards application of money [i.e., exemption u/s 11] only if the ITR is filed within the due date [specified u/s139(1) or 139(4)].
- FinanceAct- 2022 brought new kind of return called as Updated Return, which can also be used by the trust to file the income tax return if not filed earlier
- Finance Act-2023 has provided specifically that the benefit of exemption would beallowed only if the return is filed u/s 139(1) or 139(4) i.e., within original due date or belated return and will not be available if the return filed is merely an “Updated Return”.
- The amendment by the FA-2023 has pavedthe way to claim exemption by filing a belated return also.
Restriction on use of Corpus Fund/ Loan fund for application towards objects:
- Voluntary contributions (donations) received with specificdirection that it shall form part of corpus are exempt u/s 11(1)(d) & even such amount is not required to be applied to the extent of 85%. Further, the amount spent out for charitable purposes of the corpus fund or loan is not eligible for deduction as “Application of Income”. However, if the amount of corpus fund or Loan fund is applied for charitable purposes & afterwards regular receipts of the trust is used to replenish the corpus fund or for repayment of the loan amount then the benefit of application of income is available in such a case. There was no time limit for replenishing the corpus fund or repayment of the loan amount so far.
- The Finance Act – 2023 has imposed the restrictions now. The benefit will be available only if the amount is invested/deposited/repaid within a period of 5years from the end of the year in which the said corpus or loan fund was utilized towards objects of the trust.
- It is also provided that such re-investment or repayment related to any corpus orloan pertaining to period prior to 01.04.2021 won’t be considered as application of income
- Further, it is also provided that for claiming such reinvestment orrepayment as application, certain conditions be fulfilled, such as:
- a) The application should not be a corpus donation to another trust.
- b) Provisions related to TDS and cash payment restriction of Rs.10,000/- is followed.
- c) The application of income is not determined considering thecarry forward or set off of excess application of any preceding previous year.
- d) Application of income is considered only in the year in whichactual paymentis made.
- e) The Income or the Application of income should not directlyor indirectly benefit the related parties i.e., e persons mentioned in section 13(1).
- f) Application of income is within India except with the priorapproval of CBDT
Restriction on application of income if donated to another trust:
- As discussed above, theincome of a trust is exempt if it applies 85% of its income towards charitable or religious purposes either itself or by donating to another trust. However, such donation should not be towards the corpus of the recipient trust, so as to ensure that 85% of income is actually applied towards charitable or religious purposes. In short, trust is allowed to accumulate 15% of the income freely after applying 85% of the income.
- It was observed by the income tax department thatcertain trusts are trying to defeat this purpose of application to the extent of 85% of the income by forming multiple trusts by donating funds to each other and accumulating 15% at every stage. Thus, the effective application of income is reduced much lesser than 85%.
- To overcome this, FA – 2023 has provided that whenever any trust donates to another trust then only 85% of such donationwould be considered as application of income. It means that if Rs. 100 is donated by Trust A to Trust B then only Rs. 85/- will be considered as application in the hands of Trust A.
Power of PCIT or CIT to cancel registration where the registration or re-registration are defective:
Presently, provisional registration or renewal (re-registration) is automatic whereupon the CPC grants registration without any verification. There have been cases where registration applications and approval are defective. Accordingly, it is proposed to cover such defects in the ‘specified violations’ owing to which PCIT/CIT will have the power to cancel the registration.
Consequence of not renewing the registration or not applying for Regular registration:
FA-2023 has provided that if a trust does not renew (re-register) or does not apply for regular registration then such trust would be required to pay tax on the accreted income at Maximum Marginal Rate as per section 115TD. This Amendment will very adversely affect all such trusts who fail to renew their registrations in the new regime of taxation of charitable trust after 5 years.
Though the changes in the taxation provision of charitable trust & NGO are aimed at ensuring better accountability & transparency, its implementation may be difficult for the smaller trusts. However, trusts have to comply with the law to avoid the penal consequences.