Here are some key implications of Finance Bill 2023 on charitable organisations in India.
Inter charity donations—Potential setback for grant making organisations
Inter charity donations (i.e. one tax exempt charitable trust or institution donating to another tax exempt charitable trust or institution) continues to be allowed but with various restrictions.
Under an earlier amendment one charitable organisation could donate to another charitable organisation but not from its ‘accumulated income’. As we are aware one of the key conditions for tax exemption given to charitable organisations is applying or spending at least eighty five per cent of the total income every financial year. If the organisation is unable to spend this minimum amount it has the option to accumulate the same for up to five years. However, this accumulated amount must be spent by the organisation on its own activities and cannot be donated to another charitable organisation.
Later, the Finance Act disallowed charitable organisations from giving donation to another charitable organisation, whether from its accumulated or current year’s income towards the corpus of another charitable organisation.
Now under Finance Bill 2023 it is proposed that in addition to the above restrictions, if one charitable organisation donates to another charitable organisation only eighty five per cent of such donations given will be considered as application of income for the donor charitable organisation. In other words if Trust A donates a sum of Rs. 100,000/- to Trust B, in the books of account of Trust A while Rs. 100,000 will reflect as given, only Rs. 85,000/- will qualify as ‘application of income for charitable purpose’.
This may prove to be a potential setback for purely grant making organisations unless of course they spend one hundred per cent of their total income every year and not avail benefit of stashing away fifteen per cent towards reserve after applying eighty five per cent of the income.
Application of corpus
Under an earlier amendment, if a charitable organisation decides to use its corpus or borrow by way of a loan, that amount would be considered as application of income only in the year the amount is put back into the corpus fund or the loan is repaid.
Under the Finance Bill 2023 it is proposed that application out of corpus or a loan before April 1, 2021 shall not to be allowed as application for charitable or religious purposes even when such amount is put back into corpus or the loan is repaid. This is in order to avoid double tax deduction.
Further, deduction shall be allowed only if the amount taken from the corpus is put back into corpus or the loan is repaid within five years from application out of the corpus or loan.
Date for filing Form 9A and 10 advanced
To reiterate, in every financial year a tax exempt charitable organisation is required to spend at least eighty five per cent of its total income. In case income is received late in the financial year the trust can exercise option under section 11(1) to use the income in the immediately following financial year by filing Form 9A or accumulate the unspent income u/s 11(2) for up to five years by filing Form 10.
Both Form 9A and Form 10 could earlier by filed by 31st October. However, Finance Bill 2023 has now proposed that Form 9A and Form 10 must be filed two months before the last date for filing the tax return in ITR 7.
As such, the last date for filing Annual Tax Return in ITR-7 is 31st October. Audit Report in Form 10B must be filed by 30th September and now Form 9A or Form 10 must be filed by 31st August.
Timely filing of returns
It is proposed under Finance Bill 2023 that tax exemption under sections 10(23C) and 12AB shall be available only if the return of income is filed by the trust or institution within the time prescribed under section 139(1) [i.e. 31st October] or 139(4) of the Act.
This amendment will be applicable from Assessment year 2023-24 (Financial Year 2022-23) and onward.
Registration for tax exemption
Under Finance Act 2020 organisations enjoying tax exemption u/s 10(23C) or 12A / 12AA were required to re-validate their registration for tax exemption as also for tax deduction u/s 80G. Newly established organisations could apply for provisional tax exemption and tax deduction for a period of three years.
Under Finance Bill 2023 it has been proposed that trust and institutions that have not commenced activities can only apply for provisional registration under 10(23C) or 12AB and section 80G. Trust and institutions that have commenced activities can only apply for regular registration under 10(23C) or 12AB and section 80G.
Such applications shall be examined by the Principal Commissioner or Commissioner as per prescribed procedure and where the Principal Commissioner or Commissioner is satisfied about the objects and genuineness of the activities and compliance of other requirements provided in law, registration or approval in such cases shall be granted for three or five years.
Time frame for disposal
The Principal Commissioner or the Commissioner shall pass an order granting or rejecting such applications within six months calculated from the end of the month in which such application was received.
Powers to cancel registration
Provisional registration or re-registration granted on incomplete or incorrect applications shall be treated as ‘specified violation’ and such provisional registration or re-registration orders can be cancelled by Principal Commissioner or Commissioner after providing opportunity of being heard (applicable from Assessment year 2023-24 onward).
The above amendments will be applicable from 1st October 2023.
Finance Bill 2023 has proposed an ‘Exit Tax’ under section 115TD of the Income tax Act if a trust or institution registered under section 10(23C) or 12A or 12AA has not applied for re-registration or does not apply for renewal after expiry of five years or the trust or institution registered provisionally does not apply for regular registration after expiry of three years.
The above amendment will be applicable from Assessment year 2023-24 (Financial Year 2022-23) and onward.
Benefit of section 80G withdrawn for three trusts
Benefit of tax deduction under section 80G has been withdrawn for contribution to Jawahar Lal Nehru Memorial Fund, Indira Gandhi Memorial Trust and Rajiv Gandhi Foundation.