Finance Act, 2020 has made changes with respect to provisions related to Trusts and NGOs claiming exemption u/s 11 or u/s 12 of the Income Tax Act, 1961.
These amendments are related to:-
a) registration procedure of all the existing registered trusts under section 12AB,
b) renewal of registration,
c) approval for deduction u/s 80G and
d) Furnishing statement of donations received to the Income Tax Authorities are some of the noted ones.
Introduction
• Finance Minister in her Budget Speech while presenting the Union Budget 2020 on 01-02-2020 has announced the following measures undertaken under the Income Tax Act for the Charitable Institutions:-
"Acknowledging the important role played by the charitable institutions in the society, the income of these institutions is fully exempt from taxation. Further, a donation made to these institutions is also allowed as a deduction in computing the taxable income of the donor.
Currently, a taxpayer is required to fill in the complete details of the donee in the income tax return for availing deduction.
In order to ease the process of claiming deduction for donation, it is proposed to pre-fill the donee's information in the taxpayer's return on the basis of information of donations furnished by the donee. This would result in a hassle-free claim of deduction for the donation made by the taxpayer.
Further, in order to claim the tax exemption, the charity institutions have to be registered with the Income Tax Department. In the past, the process of the registration was completely manual and scattered all over the country.
In order to simplify the compliance for the new and existing charity institutions, I propose to make the process of registration completely electronic under which a unique registration number (URN) [1] shall be issued to all new and existing charity institutions. Further, to facilitate the registration of the new charity institution which is yet to start their charitable activities, I propose to allow them provisional registration [2] for three years."
• Amended procedure for registration of charitable trusts/NGOs under section 12AB is applicable from 01-06-2020. However, owing to the COVID-19 pandemic, CBDT deferred the implementation of the new procedure for registration under section 12AB and approval from 01-06-2020 to 01-10-2020 vide a Press Release dated 08-05-2020. The legislature's amendments are yet to be made.
• Income Tax Act allows many tax exemptions and reliefs to those who are engaged in genuine charitable activities. When tax exemptions are given many tend to misuse the provisions and carry on charitable activities in a non-genuine manner just to use the exemptions which prompt the legislature to amend the laws frequently in order to prevent the misuse of the law. It is the intention of the legislature to provide the tax benefit only to those who carry on genuine charitable activities.
• In the continuation of achieving the desired result and to extend the benefit only to genuine charitable trusts, the government has amended the provisions related to charitable trusts/NGOs many times. This has added additional compliance burdens who are genuinely carrying on the charitable activities.
• F.A, 2020 has completely revamped the registration procedure of a charitable trust under the Income Tax Act. The uniqueness bought by Finance Act, 2020 is that the registration granted will not be perpetual and will remain valid for a period of 5 years and needs to be renewed.
• The concept of renewal of registration certificate for claiming exemption by a charitable trust is introduced for the first time in the Finance Act, 2020 in order to curb malpractices in abusing the exemptions given to a trust.
The intention of the legislature behind the amendment
• Sec. 11 of the Act provides for the grant of exemption in respect of income derived from property held under trust for charitable or religious purposes to the extent to which such income is applied or accumulated during the previous year for such purposes in accordance with the provisions contained in Sec. 11, 12, 12A, 12AA and 13 of the Act.
• Section 11(7) of the Act, inserted by the Finance (No. 2) Act, 2014 with effect from 1st April 2015, provides that where a trust or an institution has obtained registration under section 12AA [as it stood immediately before its proposed amendment] or under section 12A [as it stood immediately before its amendment by the Finance (No 2) Act, 1996] and said registration is in force for any previous year, then, an exemption under section 10 [except under clauses (1) and (23C)] shall not be allowed.
• Present process of registration of trusts, institutions, funds, university, hospital, etc. under section 12AA or under sub-clause (iv), (v), (vi) or (via) of clause (23C) of section 10, and approval of association, university, college, institution or company, etc. need improvement with the advent of technology and keeping in mind the practical issue of difficulty in obtaining registration/ approval/ notification before actually starting the activities.
• It is also felt that the approval or registration or notification for exemption should also be for a limited period, say for a period not exceeding five years at one time, which would act as a check to ensure that the conditions of approval or registration or notification are adhered to for want of continuance of exemption.
• This would in fact also be a reason for having a non-adversarial regime and not conducting a roving inquiry in the affairs of the exempt entities on a day to day basis, in general, as in any case, they would be revisiting the concerned authorities for new registration before expiry of the period of exemption. This new process needs to be provided for both existing and new exempt entities.
• Above intention is taken from the memorandum to the Finance Bill, 2020. However, on the reading of the whole scheme of the new provisions the followings intentions of the legislature can be drawn:-
• New registration procedure under section 12AB is not a Permanent one but for a limited period of five years. This has been done to periodic review of the conditions on which registration was granted or approval was given for enjoying the exemption. This has been done to keep a check primarily on the followings-
a) Objects of the Trust on which registration was granted are being adhered to or not,
b) Genuineness of the activity of the Trust
c) Compliances with other laws applicable to the Trust • Concept of provisional registration has been introduced to tackle the practical issue of difficulty in granting registration or approval before the start of actual charitable activities by a trust or an institution.
Amendments in section 12A
• Under the existing provisions of the Income-tax Act, exemption from income-tax in respect of the income of a charitable or religious trust or institution is available only if certain conditions are satisfied. One of these conditions is that the person in receipt of the income shall make an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Chief Commissioner or Commissioner of Income-tax within the specified time.
• The Chief Commissioner or Commissioner shall call for documents and information and hold enquiries regarding the genuineness of the trust or institution. After he is satisfied with the charitable or religious nature of the objects and genuineness of the activities of the trust or institution, he passes an order granting registration and if he is not so satisfied, he passes an order refusing registration, after providing an opportunity of being heard to the applicant before an order of refusal to grant registration is passed by the Chief Commissioner or Commissioner and the mentioning the reasons for refusal of registration in the order.
• Further, the order granting or refusing registration has to be passed within six months from the end of the month in which the application for registration is received by the Chief Commissioner or Commissioner, and a copy of such order is sent to the applicant. • Thus section 12A provides that the grant of registration shall be one of the conditions for availing income-tax exemption u/s 11 and u/s 12.
• Prior to 01-04-1997, a trust was granted registration under section 12A of the Act. Effective 01-04-1997, registration is being granted under section 12AA which was inserted by the Finance (No.2) Act, 1996. This section 12AA shall become inoperative from 01-06-2020.
• The provisions related to shifting to the new registration regime u/s 12AB is written in this section 12A. Sec.12A (1)(ac) which is discussed in appropriate places in this article.
• Further, since registration is shifted to section 12AB, hence, wherever section 12AA is written, the new section 12AB is added.
Approval under section 10(23C) vs. Registration under section 12AA
• Section 10(23C) is a self-contained code containing the legislative provisions providing an exemption from income tax to universities and educational institutions and hospitals and medical institutions subject to the fulfillment of stipulated conditions.
• Income of an educational institute is subject to exemption under Sections 10(23C)(iiiab)/ (iiiad)/ (vi).
• Income of a hospital or other institution shall be eligible for an exemption if it satisfies the conditions prescribed under Sections 10(23C)(iiiab)/ (iiiad)/ (vi).
• If these Institutions are also registered under section 12AA or section 12A then exemption can be claimed under any of these two provisions. Thus these institutions have the advantage of claiming exemption either under section 10 or under section 11/12.
• It has been noticed that there is some anomaly by providing exclusion to institutions or fund registered under clause (23C) of section 10, but the same exclusion is not available to entities claiming exemption under clause (46) of section 10 which are established or constituted under a Central or State Act or by a Central or State Government. Such entities are, thus, not able to get notified under clause (46) of section 10 if they are holding registration under section 12A/12AA.
• The anomaly pointed out above, needs to be addressed. However, as the provisions relating to charitable entities constitute a complete code and that once any trust or institution has voluntarily opted for it by obtaining the requisite registration, it flows that the conditions in relation thereto should be complied with and the option of switching at convenience should not be available.
• Accordingly, while a request for exclusion of clause (46) may be acceded to for exemption thereunder even in those cases where registration under section 12AA or 12A remains in force, there should be only one mode of exemption available and also, that the switching may be allowed only once so that such switching is not done routinely and also it remains efficient to be administered.
• We have two sections for claiming exemption - one is under section 11(1) and the other is section 10(23C), though section 10(23C) is for limited institutions. Section 11/12 is for any charitable as well as religious trusts.
• Approval for a new Institution and reapproval process is almost similar to the provisions for a Charitable Trust as prescribed for section 12AB.
For an existing trust registered under section 12A or under section 12AA
• Why the concept of re-registration is introduced when a Trust is already registered is the main question which may come to the mind of many people.
• Actually, there are many trusts in India that are claiming exemption from its income but do not have the registration certificates. These are those trusts which are very old and the department itself could not trace the registration certificate of these old trusts. However, based on earlier assessment records, the exemption is being allowed to such trusts.
• In order to streamline the registration of all the trusts, it is decided to introduce the concept of re-registration so that all of the trusts are given computer-generated URN. Further, there are many trusts which are registered u/s 12A and u/s 12AA. Many trusts have dual exemption privilege-u/s 11 and u/s 10(23C). Therefore it is decided to have only one registration either u/s 12A/12AA or u/s 10(23C). However, u/s 10(23C) only a few institutions like universities, educational institutions, hospitals, and medical institutions can claim exemption whereas section 11 covers any charitable institutions carrying on any charitable activities and even religious trusts.
• The term religious purpose is not defined under the Income-Tax Act. However, Section 2(15)of the Act defines "charitable purpose" to include relief of the poor, education, medical relief, preservation of the environment (including watersheds, forests, and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility.
• In case of an institution approved u/s 10(23C) then the re-approval provisions have been incorporated in the Finance Act, 2020. It may be noted that an institution is approved u/s 10(23C) whereas an institution is registered u/s 12A/12AA (now section 12AB). The approval is taken by filing an application in Form No. 56D (now changed to Form No. 56) where an application for registration is made in Form No. 10A for a charitable trust.
Simple procedure for re-registration
• The procedure to re-registration seems to be very simple. Since trust is already registered, the idea is to provide a new registration number and registration certificate which will be computer-generated.
• Hence, a simple application may be notified for the purpose of re-registration u/s 12AB. Although no form is yet notified for the purpose of re-registration u/s 12AB for the existing trusts. No in-depth scrutiny of documents etc. is expected to happen in the case of re-registration. Further, there will be no lapse in the exemption period and the same will be continued in FY 2020-21.
• After the re-registration, all the trusts will be registered under section 12AB. Further, any new registration of a newly established will also be given u/s 12AB even if their application is pending as on 1-10-2020.