Exemption to Charities – Tightening the noose
Charitable organisations which are engaged inter alia in education, healthcare, etc. and are not for profit, can seek registration from the income-tax authorities under Section 12AA the Income-tax Act, 1961 (the Act) and could be exempted from paying income-tax on income utilised for such activities under Section 11 and 12 of the Act. Under the existing provisions the registration would remain valid unless withdrawn by income-tax authorities.
There are other provisions of the Act which may apply to such charities under which a registration can be granted by income-tax authorities/central government. They are:
• Section 10(23C) - Applicable to institutions which are solely engaged in running hospitals, educational institutions, etc. and are not for profit
• Section 10(46) - Statutory bodies engaged in administering an activity for benefit of general public and are not for profit
Section 11 of the Act currently allows an entity registered under Section 12AA of the Act to register under Section 10(23C) of the Act if it fulfils the conditions of that Section. However, such option is not available for statutory bodies which could be eligible for registration under Section 10(46) of the Act.
Further, the existing provisions do not provide for any reporting obligations on such entities to report the donations received from the donors and thereby matching the donations given and donations received on one-to-one basis in the income-tax filings made by such donee entities and donors.
Finance Bill, 2020 proposes the following amendments with effect from 1 June 2020:
• Statutory bodies which are registered under section 12AA of the Act would be eligible to be registered under Section 10(46) of the Act provided such bodies satisfy the conditions provided under the said Section. Further, registration of entities under Section 12AA of the Act which are applying for registration under Section 10(23C) and Section 10(46) of the Act would become inoperative from the date on which the entity is registered under Section 10(23C) or Section 10(46) of the Act as the case may be. Further, such an entity has been provided one more window for registering under newly inserted Section 12AB of the Act whereby such entity would have to permanently forgo exemption under Section 10(23C) or Section 10(46) as the case may be.
• Further, to ensure that the conditions of registration are adhered to, existing entities registered under Section 12AA of the Act would be required to apply afresh for registration within three months from 1 June 2020 whereby income tax authorities are required to grant registration for five years. It appears that, in such cases, income-tax authorities are not required to conduct detailed inquiry. However, more clarity would emerge as the provision is implemented. The registration would be for a period of five years and such entity would have to apply for renewal six months prior to the end date.
• Any new entity seeking registration under newly inserted Section 12AB of the Act should apply at least one month prior to the commencement of the financial year for which such entity becomes eligible. To avoid difficulties in obtaining registration prior to commencement of activities, such entities could apply for provisional registration for three years.
• In order to facilitate matching of donations received by the registered entity and tax break claimed by the donor in respect of such donations, the registered entity shall furnish details of such donations to income-tax authorities. Failure to comply would result in penalty.
The existing entities would lose their exempt status on failure to apply for renewal of their registration before the tax authorities within the time range of June to August 2020. Further, the proposal requiring renewal of registration every 5 years would increase compliance burden for registered entities.
The proposal to limit the possibility of switching between alternative regimes granting tax break to not-for-profit entities may result in exemption being denied under one provision with no recourse to the other provision. Further, the requirement of fresh registration at the time of switching the exemption regime could result in compliance burden and uncertainty for entities opting for the same. Lastly, furnishing details of donation would also result in increased compliance for the registered entities. The reporting would provide the tax authorities with significant data relating to such donation, which could be utilised to analyse trends and identify non-genuine transactions.
Charities have been at the centre stage of close scrutiny by income-tax authorities. The claim for exemption of several charities have been questioned for a variety of reasons by income-tax authorities in the past. The amendments to the Act continue the said legacy to carry on close regulatory scrutiny on such entities and make them compliant and transparent albeit at the cost of additional compliance burden.
Information for the editor for reference purposes only
Yogesh Shah is a partner, Chintan Shah is a Senior Manager & Shweta Changlani is a Deputy Manager with Deloitte Haskins & Sells LLP.