Implication of Finance (No. 2) Bill 2024 on charitable trusts and institutions
Finance Minister Nirmala Sitharaman introduced Finance (No. 2) Bill 2024 in the Lok Sabha on 23rd July 2024. Overall, the proposed amendments will not affect NPOs/NGOs adversely. Even the proposed phasing out of the tax regime under section 10(23C) (iv), (v), (vi) or (via) is not likely impact the sector significantly since most NPOs/NGOs are registered under Section 12(AB). Also, baring minor benefits under section 10(23C), the requirements and benefits of tax exemption under both are almost the same. Finally, institutions already registered 10(23C) (iv), (v), (vi) or (via) will not lose their existing benefits (concerning modes of investment) upon making the transition.
The ‘Introduction’ to the Bill clarifies: “The provisions of Finance (No. 2) Bill, 2024, relating to direct taxes seek to amend the Income-tax Act, 1961, to continue reforms in direct tax system through tax reliefs, removing difficulties faced by taxpayers and rationalization of various provisions. The Bill also seeks to amend the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, Chapter VII of Finance (No. 2) Act, 2004 (‘Securities Transaction Tax’, STT in short), Chapter VIII of Finance Act, 2016 (‘Equalization Levy’) and Prohibition of Benami Property Transaction Act, 1988 (‘Benami Act’).
Amendments (Rationalization of the provisions of Charitable Trusts and Institutions) relevant to charitable institutions are briefly highlighted and analysed here.
I. Merger of trusts under first regime with second regime
The Income tax Act puts in place two main regimes for trusts or funds or institutions to claim tax exemption. The first is contained in the provisions of sub-clause(s) (iv), (v), (vi) or (via) of clause (23C) of section 10. The second is contained in the provisions of sections 11 to 13 of the Act. The provisions of the respective regimes lay down the procedure for filing application for approval/ registration, the conditions subject to which such approval/ registration shall be granted or can be withdrawn etc.
Since both the regimes intend to grant similar benefit, the procedure, and conditions across the two regimes have been aligned, over the last few years, vide successive Finance Acts.
To take forward the process of simplification of procedures and to reduce administrative burden, it is proposed that the first regime be sunset and trusts, funds or institutions be transited to the second regime in a gradual manner.
It is, therefore, proposed that:
- Applications seeking approval or provisional approval under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10, and filed on or after 1st October, 2024, shall not be considered.
- Applications filed under these sub-clauses before 1st October, 2024, and which are pending would be processed and considered under the extant provisions of the first regime itself.
- Approved trusts, funds or institutions would continue to get the benefit of exemption, as per the provisions of sub-clauses (iv), (v), (vi), (via) of clause (23C) of section 10, till the validity of the said approval.
- They would be eligible to apply for registration, subsequently, under the second regime. Amendments have accordingly been proposed in section 12A.
- Certain eligible modes of investment, under the first regime (viz. those specified in clause (b) of third proviso to clause (23C) of section 10) shall be protected in the second regime, by way of amendment in section 13.
These amendments will take effect from the 1st day of October, 2024.
What the above means?
Section 10(23C) of the Act is a specific exemption available to certain Government and non-government universities, educational institutions, hospitals etc.
The institutions falling under section 10(23C) (iv), (v), (vi) or (via) are:
(iv) any other fund or institution established for charitable purposes which may be approved by the [Principal Commissioner or Commissioner], having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States;
(v) any trust (including any other legal obligation) or institution wholly for public religious purposes or wholly for public religious and charitable purposes, which may be approved by the [Principal Commissioner or Commissioner], having regard to the manner in which the affairs of the trust or institution are administered and supervised for ensuring that the income accruing thereto is properly applied for the objects thereof;
(vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the [Principal Commissioner or Commissioner];
(via) any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiac) or sub-clause (iiiae) and which may be approved by the [Principal Commissioner or Commissioner]:
It is proposed to phase out these special exemptions and allow institutions enjoying tax exemption under Section 10(23C) (iv), (v), (vi) and (via) to make a transition to exemption under Section 11 (i.e. Register under 12AB) on expiry of their current registration. New applications under this provision will not be considered on or after 1st October 2024. However, applications filed under these sub-clauses before 1st October, 2024, and which are pending would be processed and considered under the extant provisions of the first regime itself.
II. Condonation of delay in filing application for registration by trusts or institutions
A trust or institution desirous of seeking registration under section 12AB is inter alia required to apply within timelines specified in clause (ac) of sub-section (1) of section 12A.
It has been noted that at times trusts or institutions are unable to file application within specified timelines. In case a trust or institution is unable to apply within time specified, it may become liable to tax on accreted income as per provisions of Chapter XII-EB of the Act. A situation of permanent exit of trust or institution from the exemption regime may also arise.
It is proposed that the Principal Commissioner/ Commissioner may be enabled to condone the delay in filing application and treat such application as filed within time. The delay may be condoned if he considers that there is a reasonable cause for the same.
These amendments will take effect from the 1st day of October, 2024.
What the above means?
File your application for registration or revalidation of your organisation within the stipulated time or it may become liable to tax on accreted income (this is an additional exit tax) as per provisions of Chapter XII-EB of the Act.
A situation of permanent exit of trust or institution from the exemption regime may also arise. Which means the trust or institution may no longer be eligible for future tax exemption.
Mercifully, the Principal Commissioner/ Commissioner of Income tax may be enabled to condone the delay in filing application and treat such application as filed within time, PROVIDED, he considers that there is a reasonable cause for the same.
III. Rationalisation of timelines for funds or institutions to file applications seeking approval under section 80G
Section 80G of the Act, inter alia, provides for the grant of approval to certain funds or institutions for receiving donation. Deduction is available for donations to approved funds or institutions, in the hands of the assessee making such donations.
The first proviso to sub-section (5) of section 80G provides timelines for filing application for approval, for funds or institutions referred to in sub-clause (iv) of clause (a) of sub-section (2) of section 80G.
The second proviso lays down the procedure for processing the same. It has been noted that at times funds or institutions are unable to file application within specified timelines. A situation of unintended permanent exit of fund or institution from section 80G approval may also arise.
It is proposed to amend the first and second provisos to rationalise the timelines for filing applications for approval.
These amendments will take effect from the 1st day of October, 2024.
File your application for registration or revalidation within the stipulated time or a situation of unintended permanent exit of fund or institution from section 80G approval may also arise. This means the trust or institution may no longer be eligible for 80G and offering tax deduction to donors.
IV. Rationalisation of timelines for disposing applications made by trusts or funds or institutions, seeking registration for exemption under section 12AB or approval under section 80G.
Applications seeking registration under section 12AB, filed by trusts or institutions, are required to be processed by the Principal Commissioner or Commissioner within a period of six months from the end of the month in which the application was received.
Similarly, the applications of funds or institutions referred to in sub-clause (iv) of clause (a) of sub-section (2) of section 80G, seeking approval are required to be processed by the Principal Commissioner or Commissioner within a period of six months from the end of the month in which the application was received.
For better administration and monitoring, it is proposed to rationalise timelines for disposing applications made by trusts or funds or institutions to six months from the end of the quarter in which the application was received.
Thus, where provisionally registered/ approved trusts or funds or institutions apply for registration/ approval or where registered/ approved trusts or funds or institutions apply for further registration/ approval under section 12AB or section 80G (as the case may be) the order granting registration/ rejecting application shall be passed before expiry of the period of six months from the end of the quarter in which the application was received.
These amendments will take effect from the 1st day of October, 2024.
What the above means?
Currently applications seeking registration under section 12AB (tax exemption) and 80G (tax deduction) are required to be processed by the Principal Commissioner or Commissioner within a period of six months from the end of the month in which the application was received. This has been changed to six months from the end of the quarter in which the application was received. This essentially gives Income tax more time to process applications.
V. Merger of trusts under the exemption regime with other trusts
When a trust or institution which is approved / registered under the first or second regime (as the case may be) merges with another approved / registered entity under either regime, it may attract the provisions of Chapter XII-EB, relating to tax on accreted income in certain circumstances.
It is proposed that conditions under which the said merger shall not attract provisions of Chapter XII-EB, may be prescribed, to provide greater clarity and certainty to taxpayers. A new section 12AC is proposed to be inserted for this purpose.
These amendments will take effect from the 1st day of April, 2025.
What the above means?
Section 115TD prescribes circumstances under which accreted or exit tax is leviable. Tax on accreted income is to be paid at Maximum Marginal Rate; this levy is in addition income-tax chargeable in hands of entity. The formula is: Accreted Tax = Accreted Income multiplied by the Maximum Marginal Rate of tax.
There are various conditions under which exit tax would become leviable:
- Trust or institution is converted into any form which is not eligible for grant of registration under section 12AA (now 12AB). Trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA:
- The registration granted to it under section 12AA has been cancelled or
- Trust has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it:
- has not applied for fresh registration under section 12AA in the said previous year.
- has filed application for fresh registration under section 12AA but the said application has been rejected.
- Trust is merged with an entity which is not having similar objectives and not registered u/s 12AA.
- Trust failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or approved u/s 10(23C) within a period of twelve months from the end of the month in which the dissolution takes place.
Thus, if a trust or institution is merged with an entity which is not having similar objectives and not registered u/s 12AB or 10(23C) it could attract an exit tax. It is proposed that conditions under which the said merger shall not attract provisions of Chapter XII-EB, may be prescribed, to provide greater clarity and certainty to taxpayers. A new section 12AC is proposed to be inserted for this purpose.
VI. Inclusion of reference of clause (23EA), clause (23ED) and clause (46B) of section 10 in sub-section (7) of section 11
Sub-section (7) of section 11 of the Act lays down that registration under section 12AB shall become inoperative, if the trust or institution is approved / notified under clause (23C), (23EC), (46) or (46A) of section 10. Such trust or institution has a one-time option to apply to make its registration under section 12AB operative.
Thus, a trust or institution may choose the provisions under which it seeks to claim exemption.
It is proposed to amend sub-section (7) of section 11 of the Act to include reference of clause (23EA), clause (23ED) and clause (46B) of section 10 of the Act, to enable trusts under the second regime to claim exemption under the above-noted specific clauses of section 10.
These amendments will take effect from the 1st day of April, 2025.
What the above means?
This amendment is to protect institutions registered for tax exemption under sections 10(23C) (iv), (v), (vi) or (via) and which will over time transition to registration under section 12AB. Such institutions will be making the transition not out of choice but under the amendment of the law and hence require condonation of option out of the choice made earlier.
Noshir H. Dadrawala