Hon’ble Finance Minister, Nirmala Sitharaman, presented the Union Budget 2023 on 1st February 2023 which proposed many amendments. Tax Exceller seeks to briefly discuss some of these key proposals concerning charitable trusts and institutions enjoying income tax exemptions.
I. Application out of corpus or loans or borrowings
Under the existing provisions of the Act, corpus donations received by trusts and institutions are exempt.
1. Application out of corpus or loans or borrowings before 01.04.2021
Finance Act 2021 provided that the Application from loans and borrowings shall not be considered as application for charitable or religious purposes for the purposes. However, such amount shall be allowed as application in the year in which the amount is deposited back to corpus or loan or borrowing is repaid from the income of that year.
While implementing the aforesaid changes, the government noticed that application from corpus or loan or borrowings have already been claimed as application prior to 01.04.2021. Hence, allowing such amount to be application again as reposting back in corpus or repayment of loan or borrowing will amount to double deduction.
Accordingly, Union Budget 2023 has proposed to provide that application out of corpus or loans or borrowings before 01.04.2021 should not be allowed as application for charitable or religious purposes when such amount is deposited back or invested in to corpus or when the loan or borrowing is repaid.
2. Deposit back in corpus or repayment of loan to be within 5 years of application
Under existing provisions there is no time limit prescribed for the depositing back to the corpus or repayment of loan. Union Budget 2023 has proposed to provide that the deposits back in to corpus or repayment of the loan has to be within 5 years of application from the corpus or loan for such deposit/ repayment to be allowed as application for charitable or religious purposes.
3. Conditions to be satisfied while making the application from the corpus or loan or borrowing
Union Budget 2023 has proposed that the following conditions that are required to be satisfied in the case of application for charitable or religious purposes must also be satisfied while making the application from the corpus or loan or borrowing:
Application should not be in the form of corpus donation to another trust
TDS, if applicable, should be deducted on such application
Application whereby payment or aggregate of payments made to a person in a day exceeds Rs 10,000 in other than specified modes (such as cash) is not allowed
Carry forward and set off of excess application is not allowed
Application is allowed in the year in which it is actually paid
Application should not directly or indirectly benefit any person referred to in sub-section (1) of section 13 of the Act
Application should be in India except with the approval of the CBDT
These amendments will take effect from 1st April, 2023.
II. Treatment of donation to other trusts
Under existing provisions, the entire donation (other than corpus donation) made to other trust is allowed as application. Union Budget 2023 has proposed to provide that only 85% of the donations made by a trust or institution to another trust shall be treated as application.
III. Change in approval/ registration process
It is proposed to amend the law with respect to approval / registration process by amending the provision as follows:
The trusts and institutions shall be allowed to make application for the provisional approval, at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought
After commencement of activities, the trust/institution shall make application for a regular approval under 10(23C) or 12A or 80G, as the case may be
Such application shall be examined by the Principal Commissioner or Commissioner as per the provisions of the Act
Where the Principal Commissioner or Commissioner is satisfied about the objects and genuineness of the activities and compliance of other requirements provided in law, registration or approval in such cases shall be granted for 5 years
The Principal Commissioner or the Commissioner shall pass an order granting or rejecting such applications within 6 months calculated from the end of the month in which such application was received.
These amendments will take effect from 1st October, 2023.
IV. Exemption to development authorities etc.
Budget 2023 has proposed to insert new clause 46A in section 10 to exempt any income arising to a body or authority or Board or Trust or Commission, not being a company, which has been established or constituted by or under a Central or State Act with one or more of the following purposes, namely:
dealing with and satisfying the need for housing accommodation;
planning, development or improvement of cities, towns and villages
regulating, or regulating and developing, any activity for the benefit of the general public; or
regulating any matter, for the benefit of the general public, arising out of the object for which it has been created.
Furthermore, such body, authority, etc. will be required to be notified by the Central Government in the Official Gazette for the purposes of this clause.
V. Exit Tax
The trust and institutions are required to obtain regular registration after taking the provisional registration and re-registration/ approval. Budget 2023 has where the trust and institutions fails to make application for regular registration/ re-registration/ approval within the period specified, it shall be deemed to have been converted into a non-charitable organisation and would be liable for a levy in the nature of an exit tax. Exit tax is payable at the maximum marginal rate on the accreted income of such trust.
VI. Denial of exemption where ROI is not furnished within time
Under existing provisions, if the return of income is not furnished by a trust or institution within the time under section 139, exemption under section 10/11/12 of the Act shall not be available to such trust or institution. Section 139 was amended by the Finance Act, 2022 providing for an option to the taxpayers to furnish updated return of income up to 2 years from the end of assessment year.
Budget 2023 clarified that exemption to trusts or institutions is available only if the ROI is furnished within permitted time limit and that such exemption to trusts would not be available where they furnish updated ROI. These amendments will take effect from 1st April, 2023
VII. Time limit for furnishing the form for accumulation of income
Under the existing provisions, the trusts and institutions are required to get their accounts
audited and the audit report is required to be furnished at least one month before the due date for furnishing the return of income. However, where the trust or institution accumulates or sets apart its income or deems certain income to be applied, Form 10/ 9A is required to be furnished on or before the due date of filing of return of income. Thus, in order to align the time limits for furnishing the aforesaid statements visà-vis the time limits for furnishing tax audit reports, Budget 2023 proposed to provide for filing of Form No. 10A/9A at least two months prior to the due date for furnishing the return of income
VIII. Cancellation of Registration – Scope widened
At present the approval/registration and the provisional approval/registration of the trusts can be cancelled by the PCIT/CIT for certain specified violations. Budget 2023 proposed to provide that "specified violation" shall also include the case where the application for registration / approval / registration / re-approval is not complete or it contains false or incorrect information.
Tax Exceller believes that the amendments proposed by the Budget 2023 are well intended and aimed at rationalising the provisions relating Charitable trusts. However, such stringent compliance burden can make the existence on chariable trust challenging.
Navneet Saraf
Team Tax Exceller
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