Impact of Budget 2020 on charitable institutions

The Union Budget and Finance Bill 2020 has proposed major changes for charitable trusts and institutions. Here is a simple snapshot of the key changes and what one needs to do.

Await Notification

Once the Bill is passed and Notified, the Finance Act 2020 will come into force and will apply from the new fiscal year starting 1^st April 2020. For the moment simple be aware, understand the changes, be prepared and above all else stay calm.

Re-validation of existing registrations

All the existing charitable and religious institutions already registered under Section 12A (trusts and institutions registered prior to 1996), Section 12AA (trusts and institutions registered after 1996), Section 10(23C) and Section 80G will be required to re-apply to the income tax authorities to revalidate their existing registrations.

Registration u/s 12AA means the Income Tax authorities recognize the trust or institution as “established for charitable purpose” and therefore exempt from payment of income tax, subject to other compliances under law.

Registration under 80G is of no direct benefit to the charitable trust or institution. Donors contributing to a trust or institution registered under section 80G can enjoy tax deductions. In other words, having registration under section 80G is an incentive for donors.

The process will be online and the new online form will particularly focus on whether the charitable activities of the trust or institution are genuine.

Once the online forms are ready there will be a window of three months within which application must be submitted. Trusts and institutions may do this on their own or through their auditors or practicing chartered accountants. 

After processing your application, your trust or institution’s registration under section 12AA and 80G may be revalidated by income tax for a period of five years.

Application for renewal after five years must be made at least six months prior to the expiry of the five years validity period.

New organisations

Newly established trusts and institutions applying to income tax for registration for the very first time will be given provisional registration for three years. Once granted, the provisional registration shall be valid for three years from the Assessment Year from which the registration is sought.

Thereafter, application for renewal or rather registration (instead of provisional registration) can to be submitted at least six months prior to the expiry of validity period of the provisional registration and registration so granted shall be valid for five years.

National Register & UIN

The Government of India also proposes to create a National Register of all charitable and religious institutions and the Income Tax Department will issue a Unique Identification Number to all charitable and religious institutions.

Either 12AA or 10(23C)

Currently, several hospitals, schools and colleges are registered simultaneously under section 10(23C) and 12AA. Often, if exemption is denied under 10(23C), the institution seeks cover under the backup registration under 12AA.

Charitable trusts and intuitions currently registered under both 10(23C) and 12AA will now be required to decide whether they prefer to apply for revalidation or renewal of either the registration u/s 10(23C) or 12AA, but not both.

Additional new compliance u/s 80G

Every charitable trust or institution registered u/s 80G shall be required to submit a statement of donations received in such form & manner as may be prescribed & the benefit of 80G shall be available to donors on the basis of information relating to donation furnished by the corresponding charitable trust or institution.

Also, tax deduction under section 80G will not be available to donors (individuals or companies) who opt for reduced rate of tax.

Noshir H. Dadrawala