[Opinion] Finance Bill 2023 – New Amendments in Charitable Trusts & Institutions

Authored by Amit K & Mansi Modi | Chartered Accountant

Table of Contents

1. Aligning the provisions to plug the loopholes

2. Streamlining the provisions for registration

3. Clarifying the time limits for furnishing returns and other forms

4. Others

The Charitable Organisations play a major role in enriching our cultural heritage and cater to the various needs of the people at large be it educational, medical, socio-economical or religious. Because of their tax exemption status, the provisions applicable to the Charitable Organisations are the most misused provisions. Therefore, they are always under the special attention of the Government to necessitate changes in pursuit of clarity and plugging of any loopholes. The government has amended/inserted quite some clauses in Finance Act, 2022. The Finance Bill, 2023 (the “Bill”) is also a step forward in this direction.

The Charitable trusts and institutions can claim exemption in respect of their income under the Income-tax Act, 1961 (“IT Act”) under two regimes –

(i) Institutions approved by the Principal Commissioner or Commissioner of Income tax (“PCIT/CIT”) under Section 10(23C) (hereinafter referred to as the “first regime”); and

(ii) Trusts registered under Section 12AA/12AB (hereinafter referred to as the “second regime”).

The Bill has proposed certain amendments to rationalise the provisions and streamline the governance pertaining to charitable institutions, which are summarised hereunder:

1. Aligning the provisions to plug the loopholes

1.1 Treatment of donation to other trusts

Under existing provisions, the income of trusts/institutions is exempt if they apply at least 85% of their income towards charitable/religious purposes either by themselves or by donating to another trust/institution with similar objectives, other than by way of corpus. Further, trusts/institutions are allowed to accumulate 15 % of its income each year.

It is noticed that multiple trusts/institutions are formed to accumulate 15% at each stage, reducing the effective application of the accumulated income towards charitable/religious purposes.

To curb the above practice, it is proposed to restrict the exemption to 85% of the total amount donated to another trust/institution, under both the regimes.

1.2 Deemed exit in the event of failure to register

The trust/institutions under the existing provisions are required to pay exit tax in the event of conversion into a form which is not eligible for registration or approval.

Instances were noticed, where the trusts/institutions under both the regime exit by not applying for registration after the expiry of provisional/regular registration or re-registration from old provisions to new provisions, resulting in easy route of exit in a way to escape the levy of tax.

To avoid such consequences, it is proposed that, if the trust/institution fails to make application for registration or approval it shall be deemed to have been converted into a form not eligible for registration or approval, on the last date for making such application, thereby, invoking the provisions of exit tax in such event.

2. Streamlining the provisions for registration

2.1 Streamlining the process of registration

To simplify the registration process, the Finance Act, 2021, had introduced a new provision wherein, a trust/institution newly formed or incorporated must apply for provisional registration at least one month prior to the commencement of the previous year (“PY”) for which the exemption is sought.

This has raised concerns from various trusts/institutions which are formed or incorporated during the PY, since the exemption is available only when an application is made one month prior to the commencement of PY, causing practical difficulties for trusts/institutions formed or incorporated during the PY.

To rationalize the provisions and eliminate undue hardships, it is proposed that the application for provisional registration shall be made before the commencement of activities and not one month before the commencement of PY.

Further, the roll back provisions related to exemption for earlier Assessment years (“AY”) in case of pending assessments are rendered ineffective as the trusts/institutions are now required to mandatorily apply for registration prior to the commencement of their activities.

3. Clarifying the time limits for furnishing returns and other forms

3.1 Mandatory filing of return of income within the due date

To avoid unintended consequences, it is clarified that for claiming the exemption, the trust/institution must mandatorily file the return of income (“RoI”) within the due date specified under the Act. Thus, the option of filing an updated RoI upto 2 years from the end of AY shall not be available.

3.2 Time limit for furnishing the form for accumulation/deemed application of income

It is proposed that to claim the benefit of accumulation/setting aside of income or deemed application of income, the requisite statement in the prescribed form shall be furnished at least two months prior to the filing of RoI. This will ensure streamlining of the provisions, as the auditor’s report which is to be furnished one month prior to the filing of RoI inter alia include reporting the details of aforementioned forms.

4. Others

4.1 Depositing back of corpus and repayment of loans or borrowings

The Finance Act, 2021 clarified that under both the regimes, the application of income out of corpus or out of loans/borrowings shall be treated as application not in the year of actual expenditure but in the year of reinvestment/redeposit to such corpus or in the year of repayment of such loan/borrowing respectively.

It is now proposed to further clarify that if trusts/institutions have already claimed the exemption in the year of actual application, the exemption will not be available again in the year of reinvestment/redeposit to the corpus or repayment of loan/borrowing.

It is also proposed that the exemption out of corpus or loan is available only if the reinvestment/redeposit to corpus or repayment of loan/borrowing is made within 5 years of utilizing the funds from the corpus or borrowings and after satisfaction of certain conditions (viz deduction of TDS, expenditure in cash should not exceed INR 10,000, donation should not be by way of corpus etc.)

4.2 Bringing defective applications within the ambit of specified violation

Presently, the provisional registrations/approvals and re-registrations/approvals are automatically approved by Centralized Processing Centre, without any verification or enquiry. This has resulted in granting of registrations/approvals despite the applications being defective (viz false or incorrect or incomplete information).

To avoid disruption, it is proposed to include such instances within the scope of specified violation to vigilant the applicants about the possibility of having their registration or approval cancelled.

The Bill attempted to primarily focus on plugging certain loopholes to curb the misused provisions, which goes to prove that the trusts and institutions utilizing the benefit of exemption are under the constant radar of Revenue. Needless to say, the registration and compliance norms for the Charitable Organisations are consistently being streamlined to foster smooth implementation of their activities.