When Charity is Harder than Business: Stricter Tax Rules for Charitable Trusts
Running a charitable trust might seem simpler than managing a business at first glance. However, compliance with the Income Tax Act, 1961, tells a different story. Businesses focus on profits, while charitable trusts navigate a labyrinth of tax laws, stringent compliance requirements, and evolving regulations. This complexity highlights the reality that, under the Income Tax Act, “charity is harder than business.” Let’s explore why charitable trusts face stricter tax rules and compliance challenges.
1.Mandatory Registration for Tax Exemption:
Managing a charitable trust may sound noble and rewarding, but it’s no walk in the park. The trust’s income is tax-exempt only if it is registered under Section 12A or 10(23C). Without this, spending on charitable goals won’t be eligible for exemptions. Even more challenging, registration must be renewed every five years—a task businesses don’t have to contend with. Miss this renewal, and the trust could lose all exemptions and face steep penalties under Section 115TD.
[Exception: Trusts exclusively for education or medical purposes are exempt from registration, provided their total receipts do not exceed ₹5 crore annually].
2. The 15% Free Accumulation Rule:
Charitable trusts are mandated to apply at least 85% of their income for charitable purposes within the same financial year. Remaining 15% can be retained tax-free. Irrespective of the method of accounting followed, expenses which have not been paid are not allowable as deduction. Trusts must carefully plan their income and expenses to fully utilize the 15% accumulation benefit without triggering compliance issues
3. Corpus Donations: A Tax-Free Lifeline:
Voluntary contributions specifically directed to the corpus are exempt under Section 11(1)(d). These funds are not subject to the 85% application rule but must be invested in prescribed modes. Planning for corpus donation & ensuring clear documentation and donor intent is critical for such an exemption. One may note that the charitable trusts are allowed to invest only in specified securities and assets under the Income Tax Act. Non-compliance triggers the penal provision for the trusts.
4. Beware of the taxation as Anonymous Donation:
Anonymous donations exceeding ₹1 lakh or 5% of total donations are taxed at 30% u/s 115BBC. The trust not only has to accept the donation but also ensure that the donor provides their KYC by furnishing required documents.
[Exception: Anonymous donation is not taxable in case the trust is a religious trust and is applicable only in case of trust in charitable activities].
5. Forms 9A and 10: Critical Deadlines for Compliance:
The rule of minimum 85% spending is subject to a rider that the income is received by the trust. In case, the income is not received then the trust shall not be required to expend such an amount. However, it is subject to the condition that Form 9A must be filed at least two months before the ITR due date. Delay in filing will result in denial of the benefit of application of income and may result in hefty tax liability.
Similarly, if the trust is not able to spend a minimum 85% within the year then there is an option to accumulate the amount for spending in the next 5 years by specifying the purpose of accumulation. However, trust has to exercise an option by filing Form No. 10 two months before the due date of filing ITR forms.
6. Mandatory Audits: The Cost of Non-Compliance
Charitable trusts must submit audit reports well before filing their Income Tax Returns (ITR). Non-compliance results in disqualification from exemptions, imposing heavy additional tax costs. The penalty for non-furnishing of the audit report for business is not as harsh as it is for charitable trusts. There are numerous instances wherein penalty for belated filing of audit report by businesses has been at all been initiated.
7. Strict deadline for filing of ITR:
Income Tax Law categorically provides that the benefit of exemption would be allowed only if the return is filed u/s 139(1) or 139(4) i.e., within original due date or belated return. The amendment by the FA-2023 has paved the way to claim exemption by filing a belated return also. However, the benefit would not be available if the return filed is merely an “Updated Return”.
8. Donations to Other Trusts: Limited Deductions:
Even donation to another trust is also eligible for deduction and considered as part of the 85% of application subject to the condition that such donation is not forming the part of the corpus of the recipient trust. It may be noted that in the case of donation to another trust, the entire amount is not considered as application but only 85% of the donation would 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.
9. Restrictions on Related Party Transactions:
The income or property of the trust cannot be used for the benefit of specific individuals associated with the trust. Section 13 of the Income tax Act disallows benefit to specified persons such as founders, trustees and their relatives from deriving benefit. As per the section 271AAE, it is found that founders, trustees or their relatives derive any ‘unreasonable benefit’ then the Assessing Officer may levy a penalty of an equivalent amount if it’s a first time and twice the amount of such income in any subsequent years.
Conclusion: A Growing Challenge for Charitable Trusts
The regulatory framework for charitable trusts is designed to ensure accountability and transparency. However, the increasingly stringent and complex tax provisions make compliance a daunting task.
Unlike businesses that operate within relatively simple tax environments, charitable trusts are witnessing a maze of complex deadlines, restrictions, and conditions. Each passing year introduces new compliance requirements, turning tax planning for charitable trusts into an uphill battle. In essence, while businesses focus on profitability, charitable trusts must devote considerable energy to compliance. Indeed, “charity is harder than business.”
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & responses to queries are available at www.theTAXtalk.com].
