Recent Income Tax Changes For Charity Organisations

CA Ajmal Muhajir
Director, Chartered Accountant

28-Aug-2020

Currently the income derived from the property of the trust is exempt from income-tax under the purview of section 11 of the Act. If the trust or not-for-profit organizations are of charitable nature and the income is applied to the objects of the trust or accumulated. However, for being eligible to claim the exemption, a trust must get itself registered under section 12AA of the Act and also subject to certain other conditions.

Further, if these entities are also registered under Section 80G of the Income Tax Act then persons making donations to such entities are also eligible for deduction against their taxable income. Similarly, educational institutions, universities, hospitals, other medical institutions, funds, and trusts etc. granted approvals under Section 10(23C) of the Act enjoy full exemption of their income.

Earlier provision relating to registration of or not-for-profit organizations was cumbersome with respect to no clear timeline given to Income tax department to approve the application. However, registration once granted is for the life and can be annulled in only certain scenario.

Proposed changes effective from 1st October 2020:

The amendments, as per Finance Act, 2020 were applicable from 1st June 2020. However, due to unprecedented situation caused due to the Covid-19, the applicability of the aforementioned provisions has been deferred to 1st October 2020.

    Existing Registration

• All existing registrations, approvals, etc. granted to exempt entities under Sections 10(23C), 12AA, and 80G, or notifications under Section 35 of the Act would become inoperative from 1st June 2020.
• Exempt entities which were already approved, registered or notified under Section 10(23C), or 12AA or 35 shall have to apply afresh within 3 months (i.e. by 31.12.2020) for approval or registration etc. On doing so, the approvals  shall be made valid for five years from 1st April 2020.
• Entities already approved under Section 80G of the Act shall also have to apply for fresh approvals, whereupon the approval granted to them shall be made valid for five years.

    Pending Applications

• All pending applications under the current provisions of Sections 10(23C), 12AA, 35 and 80G shall be deemed to have been made under the new provisions and shall be processed according to the new procedure.

    New Registrations/Applications

• Henceforth entities making fresh application for registration/ approval under Sections 10 (23C), 12AB, or 80G of the Act shall have to apply within one month prior to the commencement of the year from which such registration/ approval etc. is sought. Such entities will be first granted a provisional approval for three years based on information in their application without detailed enquiry.

• Exempt entities granted provisional approval will then have to make application of regular registration at least six months prior to the expiry of the provisional registration or within six months of start of their activities, whichever is earlier.

• In the case of applications for grant of regular registration/ approvals etc. under Sections 10(23C), 12AB and 80G the Commissioner will have power to call for documents and make necessary inquiries to satisfy himself about –

(a) The genuineness of activities of the applicant trust or institution or university or hospital or institution etc.; and

(b) Compliance by it with such requirements of any other law in force as is relevant for achieving the objectives of the applicant.

On being satisfied about the objects of the applicant entity, the genuineness of its activities, and its compliance with the requirements of the other laws applicable to it the Commissioner may grant approval to it for five years. If the Commissioner is not so satisfied, he may reject the application and cancel its approval after giving a reasonable opportunity of being heard. An appeal will lie to Tribunal against orders rejecting grant of registration or cancelling the registration.

    Compliances

• Applications for renewal of regular registrations/ approvals will have to be filed six months prior to expiry of existing registration/ approval.

• In case subsequent to grant of registrations/ approvals it is found that the activities of the exempt entity are not being carried out in accordance with the provisions of the Act or that it has not complied with requirements of any other applicable law, order, direction or decree, etc. and such non-compliance has attained finality, the Commissioner may cancel the registration after giving a reasonable opportunity of being heard.
• All exempt entities registered under Section 35 or 80G of the Act will have to file periodic 'statement of donations' received by them giving prescribed particulars of the donors, electronically.
• The time limit for submitting the accountant's certificate in prescribe format for exempt institution is now to be done one month prior to filing the return of income, earlier this was required to be done at the time of filing of the tax return. The time limit for filing the return of income in case of a exempt institution required to get its account audited is now 31^st October of each year.

Fine / Penalty

Deductions under Sections 80G and 80GGA of the Act to donors to the exempt entities will be granted only on the basis of such 'statement of donations' filed by them. In case of delays in filing of these statements the exempt entity will be liable to pay a Fee of Rs 250/- per day of delay. The default will be further punishable by penalty varying between Rs 10,000/- to Rs. 100,000/-

Conclusion

Proposed time limit to allot the registration by the Income tax department is a welcome move. Further, aligning the list of donee detail similar to withholding tax compliance will help reduce the tax leakage. Though on down side this will increase the compliance cost for the Exempt entities.

Proposal to ask for all the existing exempt entities to get afresh registration will be cumbersome and even some of the deserving exempt entities may be denied the registration considering the small window for tax department to approve or reject. Further, timeline of new exempt entities to apply one month prior to commencement of the previous year can be avoided and can be amended to apply one month prior to commencement of proposed charitable activity.

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