Implications of Finance Bill 2018 on Charities

Finance
Bill 2018 has given no reason to charitable organisations to feel cheerful.
There are neither compliance relaxations nor any tax incentives. The new additional
relaxation under FCRA benefits government more than it does NGOs, but, what’s more
disturbing are the seemingly minor changes to the Income tax Act 1961, whereby provisions
under the head “Business & Profession” may apply with regard to taxation
and assessment of trusts, societies and section 8 companies enjoying tax exemption
u/s 11 or 10(23C) (iv), (v), (vi) & (via). 

Read on …

Amendment to Foreign Contribution
Regulation Act (FCRA)

Clause
217 of the Finance Bill 2018 seeks to amend section 236 of the Finance Act,
2016 which relates to amendment to sub-clause (vi) of clause (j) of sub-section
(1) of section 2 of the Foreign Contribution (Regulation) Act, 2010.

Readers
may recollect that earlier companies registered under the Indian Companies Act
1956 or later under the Indian Companies Act 2013 having shareholding of more
than fifty percent by Foreign Investors were deemed as ‘foreign source’.

Companies
like HDFC Ltd. though registered and operating in India, but having more than
fifty per cent foreign investors/shareholders were deemed as ‘foreign source’ under
FCRA and consequently funds given by such companies whether to the company’s
own foundation or other trusts, societies or section 8 companies was considered
as ‘foreign contribution’.

Thanks to Amendment made to Section 2(1)(j)(vi) under
the Finance Act 2016, Indian
companies such as HDFC Ltd., which have more than fifty per cent FDIs or
FIIs are now not treated as ‘foreign source’ with retrospective effect from 26th September 2010.

Please see our Blog Post of 29th July
2016 for more details: https://new.capindia.in/who-is-foreign-who-is-not-mysteries-of/

The Finance Bill 2018 now proposes to
bring the said amendment with effect from the 5th August, 1976 i.e. the date of
commencement of the original Foreign Contribution (Regulation) Act, 1976, which was repealed and re-enacted as the
Foreign Contribution (Regulation) Act, 2010.

Let’s get a few facts clear:

1)
Whether the amendment of Finance Act 2016 or the proposed Amendment of 2018,
the government has not relaxed the law to oblige the voluntary sector. The law
had been amended in 2016 and proposed to be amended even now to protect
political parties which had violated the provisions of Section 2(1)(j)(vi) of
FCRA even more than forty years ago or from the time the law was originally
enacted during Late Mrs. Indira Gandhi’s Emergency. Any benefit that has come
to NGOs is negligible and purely incidental.

2)
Legally FCRA 1976 stands repealed and is replaced by FCRA 2010. It is a matter
of debate how this amendment could be made applicable to a law that has already
been repealed.

3)
FCRA is not revenue or finance related subject and it is even more debatable
how amendment to this law can be repeatedly placed under the Finance Bill.

It’s
a clear case of ‘might is right’ and ‘government can do no wrong’! It is a
mockery of the current regime’s motto of ‘less government; more governance’

Change in Section 11 & Section
10(23C) of Income Tax Act

The
third proviso to clause (23C) of section 10 of the Income Act 1961 provides for
exemption in respect of income of the entities referred to in sub-clause (iv)
or sub-clause (v) or sub-clause (vi) or sub-clause (via) where
such income is applied or accumulated during the previous year for certain
purposes in accordance with the relevant provisions.

Section
11 of the Act also encompasses provisions relating to income from property held
for charitable or religious purposes.

At
present, there are no restrictions on payments made in cash by charitable or
religious trusts or institutions. There are also no checks on whether such
trusts or institutions follow the provisions of deduction of tax at source (TDS)
under Chapter XVII-B of the Act. This has led to lack of an audit trail for
verification of application of income.

In
order to discourage cash transactions and to reduce the generation and circulation
of black money, it is proposed to insert a new Explanation to section 11 to
provide that for the purposes of determining the application of income under
the provisions of sub-section (1) of the said section, the provisions of
sub-clause (ia) of clause (a) of section 40, and of sub-sections (3) and (3A)
of section 40A, shall apply as they
apply in computing the income chargeable under the head “Profits and gains of
business or profession”.

Section
40(a)(ia) of the Income tax Act disallows as application of income every
category of payment made to a resident on which tax is required to be deducted
at source.

The
existing provision of Section 40A(3) of the Income tax Act, provides that any
expenditure in respect of which payment or aggregate of payments made to a
person in a day, otherwise than by an account payee cheque drawn on a bank or
account payee bank draft or electronic transfer (e.g. RTGS, NEFT), exceeds ten
thousand rupees, shall not be allowed as a deduction.

Further,
section 40A(3A) also provides for deeming a payment as profits and gains of
business of profession if the expenditure is incurred in a particular year but
the payment is made in any subsequent year of a sum exceeding ten thousand
rupees otherwise than by an account payee cheque drawn on a bank or account
payee bank draft oe electronic transfer.

It
is also proposed to insert a similar proviso in clause (23C) of section 10 so
as to provide similar restriction as above on the entities exempt under
sub-clauses (iv), (v), (vi) or (via) of the said clause in respect of
application of income.

The
proposed amendment under Finance Bill 2018 will make the provisions of Sections
40(a)(ia), 40A(3) and 40A(3A) applicable to organisations enjoying exemption
u/s 11 and 10(23C) (iv), (v), (vi) & (via) of Income tax Act 1961.

What does all this mean?

To
put it simply and in just one sentence, provisions
under the head “Business & Profession” will apply with regard to taxation
and assessment of trusts, societies and section 8 companies enjoying tax exemption
u/s 11 or 10(23C) (iv), (v), (vi) & (via).

In
other words, once the Bill becomes Act, the following amount shall not be
considered as application of income for the purpose of tax exemption u/s 11 or 10(23C)
(iv), (v), (vi) & (via):

These
amendments will take effect from 1st April, 2019 and shall, accordingly, apply
in relation to the assessment year 2019-20 and subsequent years.