Budget 2020 – Sweeping changes in Charitable Trust and Exempt Institution Taxation

Introduction:

The finance bill 2020, has brought in some dynamic changes in respect of Public charitable trust ("PCT"), institutions registered under section 10(23C) of the Income Tax Act, 1961 ('ITA') (hereinafter referred as 'exempt institutions').

The changes proposed in the finance bill, 2020 will have far reaching effect on the registration process of PCT and exempt institutions. The proposed amendments also provide an opportunity to the tax department to identify PCT or exempt institutions which are not in charitable activity. Further, it empowers them to deny registration to such PCT or exempt institutions if they are not able to satisfy the charitable activity to the satisfaction of the tax department.

In this background, this article attempts to highlight the changes and challenges around the budget proposal.

Rationalization of registration:

Earlier provision relating to registration of PCT was cumbersome with respect to no clear timeline given to Income tax department to approve the PCT application. However, registration once granted is for the life and can be annulled in only certain scenario.

The erstwhile provision of registration under section 12AA of ITA will be redundant from 01st June, 2020 and the new section (12AB of ITA) proposed to be introduced with effect from 01st June 2020. Proposed section 12AB of the ITA propose changes with respect to registration process by prescribing the time frame for processing the application and validity of such exemption certificate granted.

Proposed changes for registration of PCT is summarized below:

• For Existing PCT's: Existing PCT'S are required to make fresh application to the Principal Commissioner of Income Tax / Commissioner of income Tax ("PCIT/CIT") within 31st August 2020 (i.e. 3 months) seeking for renewal of registration. While grating exemption, PCIT can call for such other information or documents which are indispensable. Also PCIT is obligated to ensure the PCT has not violated any law which are for time being in force relating to trust. PCIT is required to dispose of the application within three months from the end of the month in which the application is received. The validity of the exemption granted by PCIT is only for 5 years. For the transition period the existing registration obtained before the new process stands to be valid.
  This can be cumbersome process for the existing PCT as they now required to apply afresh and provide discretion to PCIT/ CIT either to provide PCT registration or reject it. It would have been ideal to automatically transit the existing PCT into new regime with validity of 5 years.
  Further, only three months' window is provided to PCIT/ CIT to dispose of all the application of the existing PCT which can be challenging and cumbersome.
• Provisional Registration: It is proposed that new PCT are required to make an application to the PCIT/ CIT one month prior to the commencement of the previous year in in which the registration is sought. It is also proposed that such PCIT can grant provisional registration immediately without making a detailed enquiry into the objects/ activities or compliance with any other laws etc. PCIT is required to dispose of the application within one month from the end of the month in which the application is received. The order granting provisional registration is valid up to six months from the date of commencement of activity of such PCT or for a period of three years whichever is earlier.
  Subsequent to the provisional registration, when PCT satisfies any one of the condition mentioned therein is required to make an application again to PCIT for regularizing the registration. Such application made therein is required to be validated by PCIT after an exhaustive examination of the activities carried on, and other information or documents which are essential for grating exemption. Any approval granted by PCIT in such case will be valid for five years.
  By introducing this healthy scheme, the plethora of trial involved around granting 12AA registration is brought to an end. This is will be appreciated by the chartered accountant's fraternity. With such an expiated process in place the nightmare of registration is now been simplified.
  Though, allotment of provisional registration immediately is a welcome change however requirement of applying for such registration by PCT one month prior to the commencement of the previous year will only defer the setting up of PCT.
• Modification in the object clause: Whenever the registered PCT alters its object clause, they are required to make an application within 30 days from the date of alteration before the PCIT. PCIT is sought to verify the object clause and other documents before granting the registration. The order must be passed within 6 months from the end of the month in which the application is received and validity of the order passes is effective only for 5 years.
• PCT which is in-operative but desirous of being operative: The provisions relating to the same are discussed under Dual registration paragraph of this article.
• Renewal: Every PCT, at least 6 months prior to expiry of 5 years is required to reconsider the registration process again for obtaining the exemption under section 11 and 12.

Dual registration:

Currently an eligible assessee can possess registrations as PCT and exempt institution simultaneously. By doing so, even if the condition under section 13 of the IT Act is violated, such assesee has option to avail benefit under section 10(23C) of the IT Act. There are plethora of judgments upholding that that both section 12AA and 10(23C) of the IT Act are two different sections, though they have similar provisions, cancelation of one of the registration will not automatically render the other registration inoperative and hence the assesee is eligible to take benefit under the surviving registration.

In this back drop the finance bill 2020 propose to insert a new proviso in section 11 of the IT Act which provides that PCT can either claim exemption under section 11 & 12 of the IT Act or under section 10(23C) of the IT Act. The PCT has the discretion to choose only one of the above exemptions.

In case an PCT registered under section 12AA of the IT Act, opts stream of exemption (i.e. either 10(23C) or 10 (46) of the IT Act), the existing registration under section 12AA of the IT Act becomes inoperative. However, if PCT desires, it can apply for fresh registration under section 11& 12 of the IT Act. In that scenario the registration under section 12AB will become operative. The process relating to fresh application for non-operative PCT to operative PCT is almost similar to the one discussed above with some minor changes.

It may be noted that consequential changes have not been made under section 10(23C) of the IT Act and hence those who PCT who avail exemption under section 11 and 12 of ITA will continue to be also registered as exempt institution. Only in the year they avail benefit as exempt institution, automatically PCT registration under section 12AA/ 12AB of IT Act will be inoperative. It may be expected that in case of existing or new PCT prior to giving PCT registration under the new regime of section 12AB of IT Act, the tax department may insist as pre- condition to surrender the existing exempt institution registration. However, in such scenario this pre-condition can be challenged as the provisions do not forbid an assessee to have dual registration.

Avoiding benefits to Undue Donee

In recent times it has come to notice of tax department that many assessee avail benefit under section 80G of the IT Act without even contributing to the PCT. It is also difficult for the tax department to validate each 80G benefits. In order to eliminate this menace, finance bill 2020 provides that PCT entities who are receiving donation is required to file a prescribed statement in a prescribed manner for all the donation received. Also the done is required to generate a certificate on the basis of which the donor can claim chapter VI-A deductions. This process is akin to filing of withholding returns. The Rules relating to same are expected to be unveiled soon.

Procedural changes proposed

The time limit for submitting the accountant's certificate in prescribe format for PCT or exempt institution is now to be done one month prior to filing the return of income, earlier this was required to be done at the time of filing of the tax return. The time limit for filing the return of income in case of a PCT or exempt institution required to get its account audited is now 31st October of each year.

Conclusion

Proposed time limit to allot the registration by the Income tax department is a welcome move. Further, aligning the list of donee detail similar to withholding tax compliance will help reduce the tax leakage. Though on down side this will increase the compliance cost for the PCT.

Proposal to ask for all the existing PCT to get afresh registration will be cumbersome and even some of the deserving PCT may denied the registration considering the small window for tax department to approve or reject. Further, timeline of new PCT to apply one month prior to commencement of the previous year can be avoided and can be amended to apply one month prior to commencement of proposed charitable activity.

This article was originally published on Taxmann.