Implications of Finance Bill 2018 on Charities

Finance Bill 2018 has given no reason to charitable organisations to feel cheerful. There are neither compliance relaxations nor any tax incentives. The new additional relaxation under FCRA benefits government more than it does NGOs, but, what’s more disturbing are the seemingly minor changes to the Income tax Act 1961, whereby provisions under the head “Business & Profession” may apply with regard to taxation and assessment of trusts, societies and section 8 companies enjoying tax exemption u/s 11 or 10(23C) (iv), (v), (vi) & (via). 

Read on …

Amendment to Foreign Contribution Regulation Act (FCRA)

Clause 217 of the Finance Bill 2018 seeks to amend section 236 of the Finance Act, 2016 which relates to amendment to sub-clause (vi) of clause (j) of sub-section (1) of section 2 of the Foreign Contribution (Regulation) Act, 2010.

Readers may recollect that earlier companies registered under the Indian Companies Act 1956 or later under the Indian Companies Act 2013 having shareholding of more than fifty percent by Foreign Investors were deemed as ‘foreign source’.

Companies like HDFC Ltd. though registered and operating in India, but having more than fifty per cent foreign investors/shareholders were deemed as ‘foreign source’ under FCRA and consequently funds given by such companies whether to the company’s own foundation or other trusts, societies or section 8 companies was considered as ‘foreign contribution’.

Thanks to Amendment made to Section 2(1)(j)(vi) under the Finance Act 2016, Indian companies such as HDFC Ltd., which have more than fifty per cent FDIs or FIIs are now not treated as 'foreign source' with retrospective effect from 26th September 2010.

Please see our Blog Post of 29^th July 2016 for more details: https://capnewsviews.blogspot.in/2016/07/who-is-foreign-who-is-not-mysteries-of.html

The Finance Bill 2018 now proposes to bring the said amendment with effect from the 5th August, 1976 i.e. the date of commencement of the original Foreign Contribution (Regulation) Act, 1976, which was repealed and re-enacted as the Foreign Contribution (Regulation) Act, 2010.

Let’s get a few facts clear:

1) Whether the amendment of Finance Act 2016 or the proposed Amendment of 2018, the government has not relaxed the law to oblige the voluntary sector. The law had been amended in 2016 and proposed to be amended even now to protect political parties which had violated the provisions of Section 2(1)(j)(vi) of FCRA even more than forty years ago or from the time the law was originally enacted during Late Mrs. Indira Gandhi’s Emergency. Any benefit that has come to NGOs is negligible and purely incidental.

2) Legally FCRA 1976 stands repealed and is replaced by FCRA 2010. It is a matter of debate how this amendment could be made applicable to a law that has already been repealed.

3) FCRA is not revenue or finance related subject and it is even more debatable how amendment to this law can be repeatedly placed under the Finance Bill.

It’s a clear case of ‘might is right’ and ‘government can do no wrong’! It is a mockery of the current regime’s motto of ‘less government; more governance’

Change in Section 11 & Section 10(23C) of Income Tax Act

The third proviso to clause (23C) of section 10 of the Income Act 1961 provides for exemption in respect of income of the entities referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) where such income is applied or accumulated during the previous year for certain purposes in accordance with the relevant provisions.

Section 11 of the Act also encompasses provisions relating to income from property held for charitable or religious purposes.

At present, there are no restrictions on payments made in cash by charitable or religious trusts or institutions. There are also no checks on whether such trusts or institutions follow the provisions of deduction of tax at source (TDS) under Chapter XVII-B of the Act. This has led to lack of an audit trail for verification of application of income.

In order to discourage cash transactions and to reduce the generation and circulation of black money, it is proposed to insert a new Explanation to section 11 to provide that for the purposes of determining the application of income under the provisions of sub-section (1) of the said section, the provisions of sub-clause (ia) of clause (a) of section 40, and of sub-sections (3) and (3A) of section 40A, shall apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.

Section 40(a)(ia) of the Income tax Act disallows as application of income every category of payment made to a resident on which tax is required to be deducted at source.

The existing provision of Section 40A(3) of the Income tax Act, provides that any expenditure in respect of which payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or electronic transfer (e.g. RTGS, NEFT), exceeds ten thousand rupees, shall not be allowed as a deduction.

Further, section 40A(3A) also provides for deeming a payment as profits and gains of business of profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year of a sum exceeding ten thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft oe electronic transfer.

It is also proposed to insert a similar proviso in clause (23C) of section 10 so as to provide similar restriction as above on the entities exempt under sub-clauses (iv), (v), (vi) or (via) of the said clause in respect of application of income.

The proposed amendment under Finance Bill 2018 will make the provisions of Sections 40(a)(ia), 40A(3) and 40A(3A) applicable to organisations enjoying exemption u/s 11 and 10(23C) (iv), (v), (vi) & (via) of Income tax Act 1961.

What does all this mean?

To put it simply and in just one sentence, provisions under the head “Business & Profession” will apply with regard to taxation and assessment of trusts, societies and section 8 companies enjoying tax exemption u/s 11 or 10(23C) (iv), (v), (vi) & (via).

In other words, once the Bill becomes Act, the following amount shall not be considered as application of income for the purpose of tax exemption u/s 11 or 10(23C) (iv), (v), (vi) & (via):

• If any payment is made in excess of Rs.10,000/- other than by way of Account Payee Cheque or Account Payee Bank Draft or use of Electronic Clearing System (ECS) through a bank account or
• If any application of income is claimed and provided for as liability and subsequently the liability in excess of Rs. 10,000/- is paid other than by paying by way of Account Payee Cheque or Account Payee Bank Draft or use of ECS through a bank account.
• If the payments are subject to provision of Tax to be deducted at Source (TDS) and if TDS is not deducted thereon, then 30% of such sum payable shall not be considered as application. However, the same amount shall be considered as application in the year in which the corresponding tax is deducted & deposited with the government.

These amendments will take effect from 1st April, 2019 and shall, accordingly, apply in relation to the assessment year 2019-20 and subsequent years.