Know 5 important Changes in Tax for Public Trusts and NGOs from FY 2021-22
Charitable organization is a kind of institution or a business that falls under the category of NPO or non-profit organization and can be based on providing educational, religious or public interest activities. There are different kinds of activities of the charitable organizations. Some of them offer relief to the needy people who are in distress, poverty or are underprivileged. There are also some who are related to educational, scientific or religious affiliations.
Some of the activities of charitable organization also include the creation of public building and monuments and take care of them. All these are done by the donations that a charitable organization gets. Due to their distinct organisation and objective entire income of such charitable or religious trusts are taxed as per the provisions of section 11-13 of the Income Tax Act, 1961, which provides for various tax benefits to them.
In the new age of taxation of Trusts-Facing the challenges ahead amid a shift in the Regulatory Scheme along with some additional compliance burden for the Financial Year 2020-21. In the last two Finance Acts, many of such issues were addressed and the Government has shown its will power to deal abuses of the law with firm hand.
The Finance Act, 2021 has made significant changes in the provisions governing such institutions to eliminate the possibility of unintended double deduction / double-counting while calculating application or accumulation of funds. There were dual benefits, double claims and unjustified set off the surplus expenditure. In this article let us learn more about the changes that were brought about for Charitable Institutions in Finance act 2021.
Five Major Changes made in the Income Tax Act
Below are the 5 changes made in the Income Tax Act applicable from 1st April 2021
1. Corpus Contributions to be exempt only if invested
As per currently law, corpus donation, are excluded from income for the year without any further compliance requirement and/or conditions. There are restrictions regarding utilisation of such funds. As per Finance Act 2021, Voluntary contributions made with a specific direction after 1st April 2021 shall form part of the corpus shall be eligible for exemption only if it is invested/ deposited in modes specified under Section 11(5) maintained specifically for such corpus. These changes will affect corpus donations received after 1st April 2021. Corpus donations received before 31st March 2021 are not required to be statutorily invested and can be used in the specified manner.
This is a pre-requisite condition made to avail tax exemption in respect of Corpus contributions under Finance Act, 2021. Further, the amount spent from such corpus shall not be considered as an application against the mandatory 85% application of non-corpus income. Below are some of the key features of the above proposed change:
- Corpus funds should be earmarked and invested separately in modes specified under Section 11(5) and must not be mixed with other general/ non-corpus funds.
- Corpus made at the time of incorporation of the trust or out of basic accumulation, anonymous donations, etc. would remain outside the purview of this. Investment condition applies only in respect of corpus contributions which are claimed as tax-exempt.
- Corpus donations utilised towards the objects can be considered as tax deductible application only in the year of re-investment in the corpus.
- Corpus funds will no longer be available as a part of free cash
- Trust can utilize such corpus contribution by Investing in immovable property and such move is permissible provided the asset is used only for the advancement of charitable or religious objectives of the institution.
- Any shortfall in investments out of the current corpus donations would be fully taxable. Advantage of tax exemption on minimum utilisation is not available to such corpus contributions.
2. Amount applied out of loans not to be considered as an application of Income
As per Finance act 2021, it has been proposed that utilization of borrowed money shall not be considered as an application of income for charitable or religious purposes. However, when loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as an application in the previous year in which it is repaid.
The main purpose of introduction of this change in the provision is that the money utilised from the borrowing were being claimed as application of income though in such year the borrowings were being ignored. Again at the time of repayment of such borrowings, the same were eligible for deduction. So it was a double deduction that was been drawn. In order to curb such unintended double deduction, it has now been proposed
Application of income shall include only such expenditure which has been out of current year’s non-corpus income. Expenditure made from corpus funds and/or loans and borrowings shall not be considered while computing amount applied for that year. Instead, such expenditure would be considered as tax-deductible application in the year in which – it is re-invested in the corpus funds out of non-corpus income; or loan is repaid (to the extent of repayment amount). The total income applied for the year will be restricted to the extent of non-corpus receipts for the year resulting into ‘no deficit situation’. Excess spending, if any, shall be ignored and be allowed in subsequent year(s) following the proposed amendment.
3. Set-off of deficit not to be allowed to Charitable Institutions
As per Finance act 2021, has made amendment that the charitable trusts are not permitted to claim any carry forward of losses. Therefore, no set-off/deduction/allowance of any excess application of any preceding year shall be allowed while computing income required be applying or accumulating during the previous year by such institutions. Until now, the institutions were able to set-off excess application /deficit of one year against the income of subsequent year(s) by treating the same as an application for that latter year. While there was no express provision in this regard, this position was adopted by relying on the principles enunciated in various judicial pronouncements. It has been specifically clarified that excess of expenditure over income, if any cannot be carried forward. The intention is that minimum 85% application should be met on a year-on-year basis out of current year’s contributions for claiming tax exemption. To further solidify this position, set-off or deduction of excess application of earlier year(s) for meeting the minimum 85% application threshold in the subsequent year(s) has been specifically prohibited. It is worth noting that these changes are in line with the other changes which state that utilisation out of corpus and/or borrowed funds shall be disregarded. Thus, going forward, a deficit scenario is not likely to arise.
4. Exemption to educational or medical institutions having annual receipt of up increased to Rs. 5 crores
Section 10(23C) of the Income Tax Act provides for exemption of income received by any person on behalf of different funds or institutions etc. Section 10(23C)(iiiad) provides for the exemption for the income received by any person on behalf of university or educational institution. Section 10(23C)provides for the exemption for the income received by any person on behalf of hospital or institution as referred to in that sub-clause. The prescribed limit for these two sub-clauses was Rs 1 crore as per Rule 2BC of the Income-tax Rule. The said limit is proposed to be increased to Rs. 5 crores.
Under the proposed change consolidated receipt have also been defined , for the purpose of determining eligibility to said limit, single entity having more than one educational and/ or medical institutions will have to consider aggregate annual receipts of all the institutions under it. Many large trusts were taking benefit of recognising the various institutions as independent institutions and thus not coming up with consolidated figures till now. Now, such so called independent recognition of such institutions has to dispense with. The benefits will surely pass to small educational and medical institutions.
5. Fresh Registration in case of Change in Objects of Trust
Earlier there was a requirement of intimating the Income Tax Department in case of change in the objects of the trust which is registered under 12 A/ 12 AA. The objects which have been modified and which do not conform to the conditions for registration, an application was prescribed to inform the appropriate authority within a period of 30 days from the date of such modification.
Finance Act, 20200 has made amendment in section 12A (1)(ab) and made changes in such requirement and stated that if after granting of registration the institution amends its objects which are not in conformity with the conditions of registration, by virtue of section 12A(1)(ac), such institution is required to obtain fresh registration under section 12AB. When a registered trust or an institution after modifying any or all of the objects of the Trust/Institution on which registration was granted then the trust shall be granted a normal registration for a validity period 5 years.
However, while granting registration after the modification in the objects, the verification will be on the object, genuineness of activities and compliance with other laws in line of new registration. Once registration is granted, the exemption will be given from the assessment year immediately following the financial year in which the application is made. Hence, there will be no break in availing exemption by the trust or institution. The Trust will enjoy the continuity of exemption without any gap. However, it may be noted that the CIT has the power to reject the application in this case. Any order of approval or rejection shall be required to be passed within a period of 6 months from the end of the month in which application is received.