Impact of Finance Bill 2017 on Charities (Revised Note)

Finance Minister Arun Jaitley’s fourth Budget is not particularly ‘charity friendly’!

Sections 10(23C), 11, 12 & 80G have been amended leading to the following outcome:

1) With effect from 1st April 2017, if any amount is credited or paid out of income of any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via), of Section 10(23C) to any trust or institution registered under section 12AA, being voluntary contribution made with a specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income to the objects for which such fund or trust or institution or university or educational institution or hospital or other medical institution, as the case may be is established.

2) Section 11 exempts from tax Income from property held for charitable or religious purposes. However, a new “Explanation 2” has been proposed for insertion according to which any amount credited or paid, out of the income a trust or institution to any other trust or institution registered under section 12AA, being contribution with a specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income for charitable or religious purposes.

As of now, charitable organizations were not allowed to make a corpus donation or a grant to another charitable organization out of their accumulated income. They were allowed to make corpus donations/grants out of their current or non-accumulated income.

However, now, with the proposed amendment, giving a corpus donation or grant by one charitable organization to another charitable organization will no longer be allowed for organisations that are tax exempt and who wish to retain their tax exempt status.

3) Section 12A has been amended to the effect that, if a trust or institution has either applied for registration u/s 12AA or already is registered under the old section 12A or the new 12AA and, subsequently adopts or undertakes  modifications of the objects which do not conform to the conditions of registration, the trust or institution must apply in the prescribed form and manner, within a period of thirty days from the date of said adoption or modification, to the Principal Commissioner or Commissioner.

Also, the return of income must be filed by every trust or institution registered u/s 12A or 12AA in accordance with the provisions of section 139(4A), within the time allowed under this section (within six months of the close of the financial year or 30th September).

4) Finance Act 2012 had inserted a new sub-section (5D) to Section 80G making any payment exceeding a sum of ten thousand rupees allowed as a deduction only if such sum was paid by any mode other than cash. The Finance Minister has now proposed that this limit of Rs. 10,000/- be further reduced to just Rs. 2,000/-.

This does not mean that cash donations in excess of Rs. 2,000/- cannot be accepted by charitable organisations. It simply means, the donor cannot claim tax deduction u/s 80G while computing his/her income liable to tax, for sums given in excess of Rs. 2,000/- to any charity by way of cash. There is no limit on donations made by cheque or e-transfer. In other words, a donor may write out a cheque of any amount or contribute using his/her credit card and claim tax deduction.

Where charitable organisations are concerned, they should make it clear to all donors that they cannot claim tax deduction for contributions exceeding Rs. 2,000/- by way of cash. Donation receipts issued to donors contributing in cash exceeding Rs. 2,000/-, should indicate that the amount was received in cash and being in excess of Rs. 2,000/- it would not entitle the donor to claim tax deduction. As a matter of abundant caution, charitable organisations should obtain the full contact details of the donor and his/her PAN.

In the current environment, cash transactions are likely to bring charities under greater scrutiny of Assessing Officers and our advisory would be to discourage cash donations.

Noshir Dadrawala -