Union Budget 2020-21

Charitable Institutions – Decoding Union Budget 2020

The Chartered Accountant • March 2020 • pp. 70–73 (Journal pp. 1198–1201)

Khushhal Batra & Sunny Mittal

The authors are members of the Institute. They can be reached at cakhushhalbatra@gmail.com and eboard@icai.in

“Budget 2020 proposes to digitise the process of registration for Charitable Trusts, making it electronic. Even the existing charitable institutions are required to apply for fresh registration under the new provision. Further, duration of registration is proposed to be fixed to 5 years. Charitable institutions which are yet to start their activities can obtain provisional registration for 3 years, which can be regularised by filing an application immediately on commencement of activities. It is proposed that entities receiving donation shall also be required to file a statement and issue a certificate to the donor specifying the amount of donation received. Deduction under section 80G/ 80GGA shall be available to a donor only if the aforesaid statement is furnished by the donee. Read on...”

Background

‘Charitable institutions/ Trusts’ working as a not-for-profit entity plays a significant role in promoting economic development and social welfare objective therefore, always remained a focus point amid the tax authorities and tax payers. For this very reason, certain tax incentives, deductions, exemptions are provided to charitable institutions engaged in undertaking charitable or religious activities (education, healthcare, relief to poor, etc.) and registered under the provisions of the Income-tax Act, 1961 (‘the Act’).

The provision for exemption to charitable institutions is governed by Section 11 of the Act, which provide that a Trust registered under section 12AA of the Act may enjoy exemption from paying any income-tax on donations / grants received, provided that such income is applied for charitable purpose in accordance with the provisions contained in Section 11, 12, 12A, 12AA and 13 (which constitutes a complete code for taxation of charitable trust / charitable institution) of the Act.

Apart from the above, there are other provisions of the Act, wherein registration can be granted by the central government or income-tax authorities such as:

Section 10(23C) of the Act: Applies to institutions solely engaged in running hospitals, educational institutes, etc.
Section 10(46) of the Act: Applies to statutory bodies engaged in administering an activity for the benefit of general public.

Need for the Amendment

There were certain loose ends in the existing provisions which cause anomaly and practical challenge in obtaining registration/approval, such as:

Section 11(7) of the Act provides exclusion to institutions registered under section 10(23C) of the Act, but the same exclusion is not available to entities claiming exemption under section 10(46) of the Act.
Also, there is no limitation period under the existing law for registration of the charitable institution / trust. In other words, the registration of a charitable trust would remain valid indefinitely unless withdrawn by income-tax authorities.
There is no reporting by the trust in respect of donor from whom donation has been received and is eligible for claiming deduction under section 80G of the Act.

In order to address the aforesaid issues, the Budget 2020, presented before the parliament on 1st February 2020, proposed following amendments effective from 1st June 2020:

Section 11, 12, 12AA of the Act: Exemption and Registration of Trusts

a) Exclusion of exemption under section 10(46) of the Act if approved under section 12A

An amendment is proposed in Section 11(7) of the Act, to provide that exemption under section 10(46) of the Act shall not be available to a trust or institution registered under section 12A read with Section 12AA (Section 12AB w.e.f. 1 June 2020) of the Act.

Further, where such charitable trust / institution applies for registration under section 10(23C) or Section 10(46) of the Act, the registration of such institutions under section 12A read with Section 12AA of the Act would become inoperative from the date on which the entity is registered under section 10(23C) or section 10(46) of the Act.

However, an opportunity has been given to such institution for obtaining registration under newly inserted section 12AB of the Act whereby such institutions would have to permanently forgo the exemption under section 10(23C) or Section 10(46) of the Act.

b) Procedure for registration of trust (Section 12A, 12AA and 12AB of the Act)

Under the existing regime, the procedure for registration of trust is governed by Section 12A read with Section 12AA of the Act, which provides that every charitable institution seeking registration has to submit an application with Principal Commissioner or Commissioner of Income-tax.

In order to make the process of registration fair and speedy, to digitise and to keep a regular check on activities of the Trust Section 12A has been amended and Section 12AB has been introduced to provide the timelines for filing of an application for registration, which are tabulated below:

S. no.	Circumstances	Timeline for filing of application*
1	Trust registered under existing provision of Section 12A or Section 12AA of the Act	Within 3 months from 1st June 2020 i.e., by 31st August 2020.
2	Trust registered under new provision (Section 12AB of the Act) and period of registration is due to expire	Atleast 6 months prior to date of expiry
3	Trust provisionally registered* under section 12AB of the Act	Earlier of following: 6 months prior to date of expiry; or within 6 months of commencement of activities
4	Where registration of trust has become inoperative due to Section 11(7) of the Act	6 months prior to commencement of the Assessment Year from which said registration is sought to be made operative
5	Adoption or modification of object which does not conform with conditions of registration	Within 30 days from the date of such adoption / modification
6	Any other case (including new registration)	Atleast 1 month prior to commencement of financial year, thereby a provisional registration shall be granted for a period of three years.

*Provisional registration: From 1st June 2020, if a new charitable trust seeks registration, then instead of final / permanent registration, a provisional registration will be granted to such Trust. This registration will be provided for a maximum of 3 years within which the Trust has to obtain the final registration.

Note:

i. Earlier any registration granted under the Act was for lifetime (unless withdrawn) but from 1st June 2020, registration (excluding the provisional registration) granted in accordance with proposed provision shall be valid for a period of 5 years.

ii. Under the proposed provisions, income-tax authorities are not required to conduct detailed inquiry in case of registration of existing trust. However, registration under s.no. 2 to 5 shall be granted only after satisfaction of the tax authority about the objects, genuineness and compliances under any other law.

c) Timelines for grant of registration by Principal Commissioner or Commissioner

Earlier, any order for registration or rejection of application has to be passed within 6 months from the date of the application. However, in the proposed provisions, an order of registration shall be passed as per the timeframe given in the adjacent table:

S. no.	Scenario	Timeline for granting of approval*
1.	Application for registration under new provisions of a trust already registered under old provisions	Within 3 months
2.	Application for: registration after expiry of registration granted under section 12AB; provisional registration; modification of object; or in accordance with section 11(7)	Within 6 months
3.	Any other case	Within 1 month

*Period is to be calculated from end of month in which application was received.

d) Due date for filing of return of income

Earlier, for every charitable institution/ trust, liable for audit under section 12A(1)(b), the due date for filing return of income was 30th September of the Assessment Year, but it is now proposed to extend the due date for filing return of income for such institution to 31st October.

Section 80G of the Act: Deduction to Donor for Donation made —

a) Reporting requirement for donee

Section 80G of the Act provides that an exempt entity may accept donations or certain sum for utilisation towards its objects or activities in respect of which the donor shall get deduction in computing his taxable income. At present, there is no reporting obligation of the donee in respect of such donation. Only the donor who intends to claim deduction under section 80G of the Act, is required to provide in its return of income, details of donee institution along with other details (like Permanent Account Number of the charitable institution, amount of donation, etc.). Often, under this procedure people used to obtain back dated receipts or blank receipts from the institutions and claim the same as deduction.

In order to curb the aforesaid practice and to keep a track on the donations, the Budget 2020 has proposed to amend Section 80G of the Act, to cast a responsibility on the donee to furnish details of donations to the prescribed income-tax authorities within stipulated time period (details of timeline and forms are yet to be notified/ prescribed).

In addition to the aforesaid, such institution shall also be required to furnish a certificate to donor specifying the details of date, amount of donation, etc.

In order to have a strict compliance, it is proposed that any institution failing to deliver the statement containing details of donor in accordance with aforesaid provision shall be liable for late fee of lower of the following:

₹ 200 per day; or
Amount for which reporting was to be made.

b) Penalty in case of non-reporting by the charitable institutions

In addition to above, it is also proposed that any charitable institution failing to deliver the statement containing details of donor in accordance with aforesaid provision shall be liable for penalty of ₹ 10,000 to ₹ 1,00,000.

c) Procedure for approval under section 80G of the Act

In order to standardise the process of approval of trust, the provisions of Section 80G of the Act are also proposed to be amended. Earlier, in order to avail the benefit of this section, the institution was required to obtain approval from the Commissioner. It is now proposed that such approval can also be obtained from Principal Commissioner.

Similar to existing Section 12AA of the Act, if a charitable institution / trust has obtained approval under section 80G of the Act, the same was valid for lifetime but from 01 June 2020, any approval (excluding provisional approval) obtained under this section shall be valid for a maximum 5 years.

d) Timelines for filing of application of approval

It is now proposed that an application to obtain approval under this section can be made within the time period. Please refer Table 1.

Table 1
S. no.	Scenario	Timeline for filing of application
1	Trust approved under existing provision of Section 80G(5)(vi) of the Act	Within 3 months from 1st June 2020 i.e., by 31st August 2020.
2	Trust approved under new provision and period of approval is due to expire	Atleast 6 months prior to date of expiry
3	Trust provisionally approved under new provisions	Earlier of following: 6 months prior to date of expiry; or Within 6 months of commencement of activities
4	Any other case (including new registration)	Atleast 1 month prior to commencement of financial year, thereby a provisional approval shall be granted for a period of three years

e) Timelines for grant of approval by Principal Commissioner or Commissioner

An order of approval under the new provision shall be passed as per following timelines:

S. no.	Scenario	Timeline for granting of approval*
1	Application for approval under new provisions of a trust already approved under old provisions	Within 3 months
2	Application after expiry of approval / provisional approval	Within 6 months
3	Any other case	Within 1 month

*Period is to be calculated from end of month in which application was received.

Section 80GGA of the Act: Deduction of Donation made for Scientific Research or Rural Development

It is proposed that no deduction under this section shall be available to donor with respect to an amount exceeding ₹ 2,000 paid to research association for scientific research or to a university, in cash. Earlier, the said limit was of ₹ 10,000.

Section 10(23C) of the Act: Exemption to Institutions Solely Engaged in Running Hospitals, Educational Institutes, etc.

Earlier, to avail the exemption, approval from the Commissioner of Income-tax (exemption) was required by Trust or Institutions or University or other education institutions or hospitals or medical institutions referred in sub-clause (iv), (v), (vi) and (via) of Section 10(23C) of the Act. It is now proposed that, such approval can also be obtained from Principal Commissioner / Commissioner.

The timelines for making an application under this Section and grant of approval by Principal Commissioner / Commissioner are same as proposed under section 80G of the Act, which have been discussed in earlier paragraphs in the article.