Rohan S Bhandare
Charitable institutions in India get tax relief upon fulfilling certain conditions. In an attempt to penalise certain bad apples taking advantage of the tax exemptions, the Union Budget 2023-24, has tightened the statutes relating to this sector.
The new amendments along with the recent landmark Supreme Court judgements on taxation of charitable institutions have a far-reaching impact which means that charitable institutions irrespective of their sizes would have to review their compliance processes. They therefore need to study the impact of the new proposals and legal interpretations to avail tax exemptions seamlessly.
Charitable activity includes relief of the poor, education, etc., and the advancement of any other object of general public utility (GPU). The Income Tax act further provides that an advancement of any other object of GPU will not be a charitable purpose, if it involves any activity in the nature of trade, commerce. The tax exemptions to the trusts, funds, institutions, universities, educational institutes, hospitals, medical institutions are covered under Section 11, 12 or 10(23C) of the Income Tax Act.
It is well-known that many charitable institutions carry on revenue generating activities to support the main charitable activity. Recently in October 2022, the Supreme Court has passed two important judgements, the ACIT (Exemptions) Vs. Ahmedabad Urban Development Authority and New Noble Educational Society vs. Chief Commissioner of Income Tax and Another, which have a drastic impact on charitable institutions.
Donations to other institutions
One of the conditions for charitable institutions to avail tax exemption is that at least 85 per cent of income should be applied during the year for charitable purposes. Donations to other trusts was treated as application of income as long as the same was not to the corpus. In Union Budget 2023, it has been proposed that only 85 per cent of the eligible donations made by an institution to another institution shall be treated as application. While the provision is welcome to stop organisations abusing the tax provisions, it may impact bigger NGOs who remit funds to smaller grass root NGOs having a wider reach.
Exit tax on accreted income
Recently there was an overhaul in the registration process of charitable Institutions wherein the erstwhile regime was discontinued, and institutions had to re-register under the new digital regime u/s 12AB to continue availing tax benefits. During the interim, many entities did not intend to register under the new regime for various reasons, and may have paid their taxes as an unregistered trust. The Budget 2023 has now proposed that the non-registration would be penalized by taxing accreted incomes of these trusts at the maximum marginal rate ( basic tax 30% + surcharge + Ed & H.Ed Cess] on the fair market value of their net assets retrospectively from AY 2023-24. Similarly, if any institution has not submitted the application for regularising its provisional registration, then it will also be subject to exit tax. This amendment will have significant repercussions on the sector, and could be subject to litigations.
Cancellation of registrations
The scope of cancellation of registration by the authorities has been widened, and submission of an application for registration containing false, inaccurate, or even incomplete information would be considered a specified violation, resulting in the revocation of the registration of institutions. The government should at least provide an opportunity to rectify the procedural lapses so that there is no genuine hardship.
Preponement of time limits
Presently, the audit report has to be submitted one month before the due date while Form 9A and 10 (for accumulation income) can be submitted within the due date of furnishing the return of income. The Budget has proposed that Form 9A and 10 would have to be submitted at least two months prior to the due date of furnishing the return of income. This would mean the accounts would now have to be prepared at least by August 31 to determine the shortfall and remedial measures.
No Benefit for tax years before
registration
Charitable institutions were skeptical for applying for tax exemptions in the fear that past incomes would be assessed by the department. The government had alleviated the fears by providing that all open assessments pending before assessing officer will be made by giving the benefit of exemptions. The proposal to omit these provisions in Budget 2023 may reopen a Pandora’s box of tax demands.
No exemption benefit on filing updated returns
Timely filing of the returns is of utmost importance. The Budget 2023 has announced that the tax exemptions to the institutions shall be available provided the return of income is filed within the time allowed to file the original return or belated return, but not the updated return.
Recent notifications by the Central Board of Direct Taxes (CBDT):
Mandatory records to be maintained: The CBDT has notified a comprehensive list of records to be maintained by all charitable institutions availing income tax exemption. The list of documents to be maintained includes cash book, ledgers, copies of bills, records supporting income used in India and abroad, records of movable and immovable properties, details of contributors and their identification documents etc. The documents and paperwork must be retained for ten years from the end of each assessment year and stored at the registered offices of the entity, failing which tax exemption shall be withdrawn. Smaller charitable institutions who do not employ a large administrative and accounting staff would have to gear up for this compliance.
Comprehensive audit report: A comprehensive audit report would be applicable to charities with total income exceeding Rs 5 crore before applying the exemption provisions, or have received any foreign contribution, or have applied any part of its income outside India during the financial year. The report containing an exhaustive questionnaire will not only increase the work for auditors but will also require institutions to compile mammoth information in a limited time.
The writer is R S Bhandare & Associates, chairman and GCCI, taxation committee president.