Finance Minister Nirmala Sitharaman’s Budget for 2019-20 has elements of potentially the good, the bad, and the ugly for the voluntary sector in India. Let’s look at all three in reverse order.
The Ugly: Cancellation of registration for trusts or institutions
Section 12AA of the Income Tax Act 1961 prescribes the manner of granting registration to a trust or institution for the purpose of availing tax exemption on its income under section 11 of the Act. It also provides for the manner of cancellation of this registration; this can be on two grounds:
(i) the Principal Commissioner is satisfied that activities of the trust or institution are not genuine or are not being carried out in accordance with its objects; and
(ii) it is noticed that the activities are being carried out in a manner such that any part of income–or the whole income–would cease to be exempt.
The budget has elements of potentially the good, the bad and the ugly for the voluntary sector in India.
In order to ensure that the trust or institution does not deviate from its objects, it is now proposed to amend section 12AA of the Income Tax Act, so as to provide that:
(a) at the time of granting the registration to a trust or institution, the Principal Commissioner shall, inter alia, also satisfy himself about the compliance of the trust or institution to requirements of any other law which is material for the purpose of achieving its objects;
(b) where a trust or an institution has obtained registration at any time under section 12A and subsequently it is noticed that it has violated requirements of any other law which was material for the purpose of achieving its objects, the Principal Commissioner may, by an order in writing, cancel the registration of such trust or institution after affording a reasonable opportunity of being heard.
This amendment shall be effective from September 1, 2019.
Related article: How GST affects nonprofits
This amendment is potentially very dangerous. Let us assume for argument’s sake that the Ministry of Home Affairs (MHA) decides to de-register an association registered under the Foreign Contributions Regulation Act (FCRA) 2010 on grounds that it’s activities around civil rights, advocacy, or policy has allegedly violated requirements of FCRA 2010. According to this new amendment, the association could now also potentially lose its 12AA registration.
It is important to note here that de-registration under Section 12AA would not just mean tax at the maximum marginal rate–which is 30 percent–of the income of the assessment year, but also tax on accreted income or what could be called ‘exit tax’ under Section 115TD which was introduced under the Finance Act 2016.
Accreted income means the amount by which the aggregate fair market value of the total assets of the trust or the institution, as on the specified date, exceeds the total liability of such trust or institution. This would hurt trusts and institutions having immovable property the most.
The latest income tax return in ITR 7 requires trusts and institutions to furnish details of all other registrations and approvals (for example, with the charity commissioner, registrar of societies/companies, FCRA, and so on).
The bottom line: Stay compliant with every single regulatory requirement. Do not falter.
In the words of the American abolitionist and liberal activist Wendell Phillips (1852), “Eternal vigilance is the price of liberty”.
The Bad: No reference to the Direct Tax Code (DTC)
A task force had been set up to submit a draft of the new Direct Taxes Code (DTC) by July 31, 2019, to replace the current Income Tax Act 1961. However, it did not find a mention in this Budget 2019.
While the government’s aim is to reduce corporate tax, ‘tax-deductions’ and ‘tax-exemptions’ may take a hit.
While the proposed DTC is still not final, it is likely that some of its provisions may not be favourable for charitable trusts and institution. Existing Sections 2(15), 12A, 80G may not just get renumbered, but, witness radical changes. While the government’s aim is to reduce corporate tax, ‘tax-deductions’ and ‘tax-exemptions’ may take a hit. Existing provisions for corpus donations and accumulating unspent income may also be made more stringent.
While the income of charitable trusts and institutions is generally tax-exempt and donations made are tax-deductible, the future may bring these benefits only at the cost of complex compliance.
The Good: Introduction of a social stock exchange
In the budget speech the Finance Minister has said, “it is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion”.
The Minister further stated, “I propose to initiate steps towards creating an electronic fund raising platform–a social stock exchange–under the regulatory ambit of Securities and Exchange Board of India (SEBI) for listing social enterprises and voluntary organisations working for the realisation of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund”.
A social stock exchange (SSE), is understood to be a platform that allows investors to buy shares in a social enterprise that has been vetted by the exchange.
A social stock exchange (SSE), is understood to be a platform that allows investors to buy shares in a social enterprise that has been vetted by the exchange.
There are a few international examples and they follow different models. In London, it acts more as a directory connecting social enterprises with potential investors, while in Canada it is an online platform where even retail investors can invest in funds or companies with social impact.
In India, the finance minister said the exchange will come under the ambit of the SEBI. She mentioned that it will be an electronic fundraising platform, However, the precise nature of its functioning is unclear so far. There is even less clarity about how a stock exchange will help raise capital for voluntary organisations.
The voluntary sector in India seems interested and excited about this proposal. However, at the same time it fears that this initiative may only benefit social enterprises that have a business model and traditional charities and nonprofits may not benefit.
This article is an edited version of a longer piece, published on the Centre for Advancement of Philanthropy (CAP) website.
