[Analysis] Union Budget 2024 | Streamlined Tax Framework for Charitable Trusts

As the Union Budget 2024 draws near, the charitable trusts are particularly focused on the anticipated policy changes that could impact their operations. The charitable trusts has been navigating a complex landscape, which have become increasingly convoluted due to numerous amendments over recent years. With the budget presentation scheduled for July 23, 2024, in the Lok Sabha, several critical recommendations are poised for consideration, aiming to simplify these regulations for charitable trusts. Proposals include:
– Creating a unified tax regime to streamline the existing frameworks.
– Introducing a presumptive-like tax scheme to reduce the administrative burden on smaller trusts.
– Defining the 'commencement of activities' to clear ambiguities that often complicate compliance.

Table of Contents

Introduction

1. Unified and Simple Tax Regime
2. Presumptive-like Scheme for Taxation of Charitable Trusts
3. Provide a Definition of ‘Commencement of Activities’
4. Consequential Amendment to Section 13(9)
5. Clarity on Applicability of Tax Audit under Section 44AB

Introduction

As the Union Budget 2024 approaches, anticipation is building across various sectors for significant policy shifts. The charity sector, in particular, is abuzz with hope and apprehension. Over the past few years, a barrage of amendments has not only complicated life for charitable trusts but also posed challenges for tax consultants. Instead of simplifying the taxation process, these changes have often created a labyrinth of rules and regulations.

With the Budget set to be presented in the Lok Sabha on July 23, 2024, there are a few key suggestions for the finance minister to consider in Union Budget 2024 to truly simplify the taxation of charitable trusts. These changes, if implemented, could bring about much-needed simplicity and efficiency, providing a ray of hope, especially for the survival of small charitable entities.

1. Unified and Simple Tax Regime

Presently, charitable trusts and institutions can claim an exemption under any of the following two regimes:

• Institutions approved by the Principal Commissioner or Commissioner of Income-tax (“PCIT/CIT”) under Section 10(23C); and
• Trusts registered under Section 12AA/ 12AB.

In the last couple of years, many amendments have been introduced to the provisions relating to the taxation of charitable and religious trusts. Many differences between both regimes have been diluted with these amendments, and many issues have been addressed. However, the following inconsistencies still remain;

• Explanation 1(2) to Section 11(1) provides an option to treat the subsequent year’s application as the current year’s application. However, Section 10(23C) does not offer a similar option.
• Capital gains arising to a charitable institution are not chargeable to tax if the institution invests the net consideration in acquiring a new capital asset [section 11(1)A]. This concession is not available under section 10(23C).
• Under Section 10(23C), there are two categories of institutions, approval-based and non-approval, whereas, in Section 12A, the exemption is allowed only to the registered institutions.

To simplify the tax provisions, it is recommended that the above gaps should be removed and the approval-based category of exemption under Section 10(23C) be merged with the tax regime under Sections 11 to 13.

2. Presumptive-like Scheme for Taxation of Charitable Trusts

Under the normal taxation scheme, taxpayers have two options for paying tax on business income. The first option is to compute taxable income based on detailed books of account. The second option is the Presumptive Tax Scheme, where income is estimated at a prescribed percentage or amount based on total turnover or gross receipts, without the requirement to maintain books of accounts or undergo audits. Various presumptive taxation schemes are available for both resident and non-resident assessees.

In the realm of charitable trusts, Section 10(23C) already offers similar schemes for specific institutions. For instance, educational institutions with annual receipts not exceeding Rs. 5 crores [Section 10(23C)(iiiad)] and hospitals or other specified institutions with annual receipts not exceeding Rs. 5 crores [Section 10(23C)(iiiae)] benefit from simplified taxation.

The finance minister should consider introducing a similar scheme for small trusts registered under Sections 11 to 13 with receipts up to Rs. 5 crores. This scheme would allow these trusts to claim exemptions without the burden of maintaining extensive books of accounts and fulfilling other stringent conditions, thereby enabling them to focus on fulfilling their charitable purposes.

3. Provide a Definition of ‘Commencement of Activities’

Section 12A(1)(ac)(vi)(A) contains the provision for filing the registration application by the trusts or institutions that have not commenced their activities. Thus, only those trusts and institutions shall file an application for provisional registration that has not commenced its activities. The trust or institution need not apply for provisional registration if it has commenced activities.

Provisional registration shall be granted for 3 years from the assessment year from which the registration is sought. However, the 3 years period is available only if the activities have not been commenced. Therefore, for all practical purposes, the organisation has to convert its provisional registration into regular registration unless it remains inactive without commencing activities. If a trust fails to apply for this conversion, the provisions of accreted tax under Section 115TD will apply.

The requirement to apply for provisional registration applies to those trusts or institutions that have not commenced their activities. The terms “activity” and “commencement” have not been defined in the Income-tax Act. Although several judicial pronouncements explained the commencement of the activity for commercial institutions, the point of commencement for charitable and religious institutions remains uncertain.

Different legal interpretations may arise due to the broad meaning of the word “activity”, which could include preparatory activities leading up to the actual commencement of the activity. Therefore, the Central Board of Direct Taxes (CBDT) should provide clear guidelines on what constitutes the commencement of activities for charitable and religious institutions to remove any ambiguity and ensure consistent application of the law.

4. Consequential Amendment to Section 13(9)

As per Section 11(2), if a trust cannot apply 85 per cent of its income in a particular year, it can accumulate the shortfall to be used for religious or charitable purposes within the next 5 years. This accumulation is allowed if the assessing officer is informed about the purpose of the accumulation and the period for which the income is being accumulated. This information is to be furnished in Form 10.

The Finance Act, 2023 has preponed the due dates by two months with effect from the assessment year 2023-24. Now, the information in Form 10 must be furnished at least two months before the due date specified under Section 139(1) for furnishing the return of income for the previous year.

Section 13 specifies the circumstances under which the exemptions under Section 11 and Section 12 would not be available to trusts. Section 13(9) provides that to claim the benefit of accumulation for five years, Form 10 and ITR need to be submitted before the due date.

Since section 11(2) has been amended to prepone the date to file Form 10 by two months, no consequential amendment has been made in Section 13(9). So, in a way, it implies that there will be no penal consequences if Form 10 is filed up to the due date to file an Income-tax return, i.e., there will be no withdrawal of exemption in respect of the accumulated amount.

The Central Board of Direct Taxes (CBDT) has also issued Circular No. 6/2023, dated 24-05-2023, clarifying that a trust will not be denied the benefit of accumulation even if Form 10 is not filed two months before the due date under Section 139(1). However, Form 10 must still be submitted on or before the due date for filing the ITR to avail of this benefit. Thus, the effect of the Finance Act 2023 amendment is effectively nullified by this circular.

To align with the department’s intent to have Form 10 filed two months before the ITR due date, it is recommended that:

• Circular be withdrawn
• A consequential amendment be made to Section 13(9) to reflect the revised filing schedule for Form 10

The underlying rationale for this amendment is that the due dates for filing Form 10 should precede the due date for filing the ITR and audit report. The current misalignment complicates auditors’ ability to report the details of Form 10 in the audit report, given that the due date to file the audit report in Form 10B/10BB is one month before the due date to file the ITR. Synchronising these dates would simplify compliance and reporting requirements.

5. Clarity on Applicability of Tax Audit under Section 44AB

Section 44AB of the Income-tax Act mandates the audit of books of account for an assessee engaged in business or profession. The audit report under Section 44AB must be furnished in Form No. 3CA/3CB-3CD. A pertinent question arises whether the ‘Tax Audit’ under Section 44AB applies to charitable and religious institutions registered under Section 12AB. These institutions are governed by Sections 11 to 13, which contain special provisions for the taxation of charitable or religious institutions. This issue remains controversial and debatable due to contradictory requirements in the Income-tax Rules.

Rule 17A of the Income-tax Rules, 1962, outlines the documents required for the registration application in Form 10A or 10AB. It necessitates the submission of an audit report under Section 44AB if the applicant holds a business undertaking as per the provisions of Section 11(4) and where the income includes profits and gains from business as per Section 11(4A).

The Form 10B audit report also requires uploading the Balance Sheet, Profit and Loss Account, and Audit Report in Form 3CA or 3CB (as applicable) for the business undertaking or business incidental to the charitable objectives.

However, it is well-settled law that the income of charitable institutions is to be computed in a commercial sense and not under the five heads of income, including profits and gains from business. The requirement for an audit under Section 44AB pertains to income computed under the head ‘Profit & Gain from Business.’ Therefore, this audit is required only when the income is computed under the head ‘Profit & Gain from Business’ or there is a specific requirement for a tax audit under Section 44AB.

To compute income under Section 11(4) or Section 11(4A), there is no requirement to compute income under the head ‘Profits & Gains of Business or Profession.’ Notably, Sections 11 to 13 include specific references where provisions applicable under the head ‘Profits & Gains of Business or Profession’ are also made applicable to the computation of income under Section 11, such as disallowances on non-deduction of TDS and cash payments.

‘Tax Audit’ is a specific requirement for assessees with income under the head ‘Business and Profession.’ Therefore, there is no obligation for charitable institutions to have their accounts audited under Section 44AB. However, these organizations are subject to the specific audit requirement under Section 12A(1)(b) read with Rule 17B, with the audit report to be furnished in Form 10B/10BB.

Hence, the CBDT should clarify the applicability of tax audit under Section 44AB to charitable institutions registered under Section 12AB to eliminate any ambiguity with the requirement being imposed in certain rules.

Dive Deeper:
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