Unlocking the mysteries behind amendments proposed under Finance Bill 2017 for charitable institutions!
Since readers were anxious to know the impact of the much-awaited Finance Bill 2017 on charitable organizations, we uploaded a brief summary on 1st February 2017 itself! Based on several queries that we have received from those who diligently follow our Blog, we are pleased to provide a deeper analysis together with our advisory on several issues arising out of this Bill.
1) Amendment to Section 10(23C)
Generally, universities, educational institutions, hospital and medical institution claim tax exemption u/s 10(23C).
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) Amendment to Section 11
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 are not allowed to make a corpus donation or a grant to another charitable organization out of their accumulated income. But, they are 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.
What is the government’s rationale?
Currently, donations given by tax-exempt entities to other tax exempt entities, with specific direction that it shall form part of corpus, is considered application of income in the hands of donor trust and not considered as income of the recipient trust, (corpus being a capital receipt). Thus, in the opinion of the Central Government, charitable entities are engaging in giving corpus donations without actual applications.
‘ABC Foundation’ gives a corpus donation to ‘XYZ Trust/NGO’.
For ‘ABC Foundation it is application of income (out of the 85% of the income which it is required to apply in any given fiscal year. In the meantime, ‘ABC Foundation’s’ donation towards corpus is neither applied immediately by ‘XYZ Trust/NGO’ for charitable objects nor accounted for as ‘income’, because corpus being in the nature of a capital receipt is accounted for as capital in the Balance Sheet. Therefore, in the view of the revenue authority, large sums of money are simply hoarded and not applied for charitable purposes.
The view taken by the Central Government is of course flawed. Corpus helps charitable institutions and NGOs tide over lean periods and enhances sustainability of on-going activities. Hence, from a sector point of view, this is regressive step taken by the government and yet another step away from creating an enabling environment for the growth and sustainability of the philanthropic/voluntary sector.
Please Note: Inter-charity donations between one tax-exempt charitable organization to another tax exempt charitable organization is not disallowed!
One tax-exempt charitable institution may contribute to another tax-exempt charitable institution, provided it is not for corpus. This way, for the donor institution it would be application of income and for the recipient institution it would be income to be applied for charitable purpose according to its objects.
Does this mean charitable institutions cannot receive corpus donations/grants?
NO! Giving corpus donation/grants has been restricted only for inter-charity donations between one tax exempt charitable institutions to another tax exempt charitable institution.
Charitable intuitions may continue to receive corpus donations/grants from other sources as follows:
a) Individuals may continue to give towards corpus of any charitable institution and also enjoy tax deduction u/s 80G.
b) Companies too may continue to give towards corpus of any charitable institution, out of their CSR or other funds (including to their own corporate foundation) and also enjoy tax deduction u/s 80G. However, the corporate foundation of a company would not be able to give a corpus donation/grant to another charitable institution/NGO.
c) Overseas individuals and institutions too may continue to give towards corpus of any charitable institution registered or having prior permission under the Foreign Contribution (Regulation) Act 2010.
3) Amendment to Section 12A
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.
At present, there is no explicit provision in the Income tax Act which mandates trusts or institutions to approach the income-tax authorities for intimation in the event of adoption or undertaking modifications of the objects after the registration has been granted.
It has been propose that section 12A may be amended so as to provide that where a trust or an institution has been granted registration under section 12AA or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996] and, subsequently, it has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, it shall be required to make an application within a period of thirty days from the date of such adoption or modifications of the objects in the prescribed form and manner.
4) Amendments concerning filing of Return of Income:
Entities registered under section 12AA are required to file return of income under section 139(4A), if the total income without giving effect to the provisions of sections 11 and 12 exceeds the maximum amount which is not chargeable to income-tax. However, there is no clarity as to whether the said return of income is to be filed within time allowed u/s 139 of the Act or otherwise. In order to provide clarity in this regard, it is proposed to further amend section 12A so as to provide for further condition that the person in receipt of the income chargeable to income-tax shall furnish the return of income within the time allowed under section 139 of the Act (i.e. within six months of the close of the financial year or 30th September).
Fees for late filing of Return
i) Fee of Rs. 5,000/- u/s 234F will be levied if the income tax return is filed after 30th September, but, before 31st December and Rs. 10,000/- if filed after 31st December. However, the penalty of Rs. 5,000/- and Rs. 10,000/- will be reduced to Rs. 1,000/-, if the taxable income is less than Rs. 5 lakh. Since charitable organizations are tax exempt their taxable income would be Nil and therefore the penalty for late filing will be Rs. 1,000/- only.
ii) The option of filing revised income tax return will now be allowed only till the end of the assessment year. In other words, if the last date of filing income tax return for the fiscal year 2016-17 is 30th September, 2017 then such return may be revised before 31st March, 2018 and no later.
5) Cash donations in excess of Rs. 2,000/-
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 order to move towards a less cash economy and reduce generation and circulation of black money, it is proposed to insert a new section 269ST in the Act to provide that no person (with the exception of the government, any banking company, post-office, savings bank or co-operative bank) shall receive an amount of three lakh rupees or more:
(a) In aggregate from a person in a day;
(b) In respect of a single transaction; or
(c) In respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account.
Thus, 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.
6) Sections 35AC & 35(1)(ii) & (iii).
Finance Bill 2017 makes no reference to these sections because Finance Act 2016 has already amended these sections.
a) Section 35AC: No deduction shall be available with effect from 1.4.2017 (i.e. from previous year 2017-18 and subsequent years).
b) Section 35(1)(ii): Weighted deduction shall be restricted to 150 per cent from 01.04.2017 to 31.03.2020 (i.e. from previous year 2017-18 to previous year 2019-20) and deduction shall be restricted to 100 per cent from 01.04.2020 (i.e. from previous year 2020-21 onwards)
c) Section 53(1)(iii): Deduction shall be restricted to 100 per cent with effect from 01.04.2017 (i.e. from previous year 2017-18 and subsequent years).
7) Powers of survey u/s 133A
Powers of survey u/s 133A are now extended to cover offices charitable institutions as well.
The power of survey under the Income tax Act has been provided U/S 133A and 133B.
The provisions contained in section 133A are independent and to the exclusion of the other provisions of the Act since the wording of the section starts with: ‘Notwithstanding anything contained in any other provisions of the act.
The power of survey can be exercised by the following U/A 133A:
i) A Commissioner
ii) A Joint Commissioner
iii) A Director
iv) A Joint Director
v) An Assistant Joint Director
vi) A Deputy Director
vii) An Assessing officer
viii) A Tax Recovery officer
ix) An Inspector of Income Tax
An Income Tax authority is empowered under section 133A to enter any place within the limits assigned to him or the place occupied by any person in respect of which he exercises jurisdiction or the place in respect of which he is authorized by such an income tax authority, who is assigned the area in which such place is situated or who exercises the jurisdiction in respect of any person occupying such place.
No survey can be conducted at the residential premises unless the residential premises are shown to as the business premises by the assessee concerned. Since the power of Survey is limited to the business premises only, therefore, the survey can be conducted only during business hours i.e. after sunrise and before sunset.
Noshir H. Dadrawala