Friday, 28 April 2017

Finance Act 2017 - Implications for charitable organizations after amendments to Finance Bill 2017

Implications for charitable organizations after amendments to Finance Bill 2017

The Finance Bill 2017 has been approved after modifications by both Houses of Parliament and received the assent of the President of India on 31st March 2017. 

We are highlighting what is now law, relevant to charitable organizations in India:

Section 56(2)(x) not to apply to trust created for the benefit of relatives

Earlier exemption from the new clause (x) in Sec. 56(2) was provided to specified trusts and institutions referred to in Section 10(23C) or trusts registered u/s 12AA. However, after amendment, exemption from this section is extended for any sum of money or any property received from an individual by a trust created or established solely for the benefit of relative of the individual. Further, it is also extended to a trust registered u/s 12A.

Reduction in limit of cash transactions

The Finance Bill had proposed a new Section 269ST to provide that no person shall receive a sum of Rs. 3 lacs or more, otherwise than by way of an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account: (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. However, now after amendment, the limit of cash transaction has been reduced from Rs. 3 lacs to Rs. 2 lacs.

Restriction on inter-charity corpus donations

Under existing law, corpus donation by a charitable institution to another charitable organization out of its income is treated as direct utilization of funds (by the donor institution). At the same time, since corpus donation is not treated as income in the books of the recipient institution there is no compulsion for the recipient organization to utilize it. Ministry of Finance viewed this as ‘hoarding’ of funds among charitable organizations instead of applying the same for charitable objects. Finance Act 2017 has now plugged this alleged ‘loophole’.

The proviso inserted in section 10(23C) clarifies that any amount credited or paid out of income of an institution referred to in sub-clause (iv), (v), (vi) or (via), to any charitable trust or institution registered under section 12AA, being voluntary contribution with specific direction that they shall form part of the corpus of the institution, shall not be treated as application of income to its objects.

A corresponding change in section 11 has also been effected by insertion of Explanation 2 at the end of sub-section (1) which similarly provides that corpus donations through income referred to in clause (a) or (b) of sub-section (1) shall not be treated as application of income for charitable or religious purpose.

Additional conditions for applicability of Section 11 and 12

Registration under section 12AA is an essential condition for an organization to avail tax exemption on its income under sections 11 and 12. The Finance Act, 2017 has amended sections 12A and 12AA to impose following additional conditions on organizations registered under section 12AA :

  • To make application to the Commissioner of Income Tax (CIT) within 30 days if there is any change in the objects clause which do not conform to the conditions of registration and have it registered.
  • Mandatory filing of income tax returns within the time allowed under section 139(4A).

It is obvious that a change in the object of the trust or institution which does not conform to the original conditions of the registration would render the registration untenable.

The change with regard to mandatory filing of income tax return makes enjoyment of tax exemption under section 11 and 12 conditional on timely filing of return. It is a step towards increasing compliance under section 139(4A).

Restriction on cash donations

The Finance Act has amended sub-section (5D) of section 80G to mandate that in order to avail deduction under the section, donation for an amount larger than two thousand rupees be made in modes other than cash (i.e. only by cheque or electronic transfer). The amendment has further lowered the limit on cash donations under section 80G to two thousand rupees only. The move is in consonance with government’s overall efforts to push towards a cashless economy and increase transparency in the system.

Expansion of power of survey

Amendment of section 133A has now included the place of ‘activity for charitable purpose’ within the scope of Section 133A. This amendment expressly empowers the income tax authority to enter any places of activity of charitable purpose for inspecting books of accounts, verifying cash, stock or valuable articles or furnishing any relevant information.

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