What is Trust Exit Tax under Section 115TD?
A society or a company or a trust or an institution carrying on charitable activity may voluntarily wind up its activities and dissolve or may also merge with any other charitable or non-charitable institution, or it may convert into a non-charitable organization. Before the introduction of section 115TD there was no provision in the Income-tax Act which ensured that the corpus and asset base of the trust accreted over period of time, with promise of it being used for charitable purpose, continues to be utilized for charitable purposes and is not used for any other purpose.
The Finance Act 2016 has brought in a new chapter after Chapter XII-EB of the Income-tax Act, with effect from the 1st day of June, 2016, namely “Special provisions relating to tax on accreted income of certain trusts and institutions” and introduced a section 115TD. This chapter is introduced to ensure that the benefit conferred over the years by way of exemption claimed by charitable trusts is not misused by converting it into non-charitable organization.
It is a levy in the nature of an exit tax. Section 115TD prescribes circumstances under which exit tax is leviable. This tax is in addition to income-tax chargeable in hands of entity and leviable at the maximum marginal rate on the accreted income. No deduction under any other provision of this Act shall be allowed to the trust or the institution or any other person in respect of the income which has been charged to tax or the tax thereon.
When does section 115TD applies?
Section 115TD accreted income of the trust or institution is taxable in the below circumstances:
1) Trust is converted into any form which is not eligible for grant of registration under section 12AA. Trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA:
i) The registration granted to it under section 12AA has been cancelled or
ii) Trust has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it:
- has not applied for fresh registration under section 12AA in the said previous year.
- has filed application for fresh registration under section 12AA but the said application has been rejected.
2) Trust is merged with an entity which is not having similar objectives and not registered u/s 12AA.
3) Trust failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or approved u/s 10(23C) within a period of twelve months from the end of the month in which the dissolution takes place.
What is the rate of tax on accreted income u/s 115TD?
Section 115TD read with Rule 17CB provides for computation of net assets value of the Trust. Tax on accredited income is computed on the market value of net assets of the Trust. Tax on accreted income is to be paid at the ‘Maximum Marginal Rate’ (MMR). This levy is in addition income-tax chargeable in hands of Trust. With the highest surcharge of 37%, the effective peak MMR comes to 42.744% from the AY 2020-21.
What is due date of payment of exit tax u/s 115TD?
The trust or institution shall be liable to pay the tax on accreted income to the credit of the Central Government within fourteen days from the date specified in section 115TD(5).
Tax and Interest payable Timeline
(i) “Date Specified” means as follows,
|Scenario||Date of Payment|
|Cancellation of Registration||No appeal filed – Expiry of time allowed u/s 253 Appeal filed – Date of receipt of order by trust|
|Adoption or Modification of objects and not applied for fresh registration||End of the Previous Year|
|Adoption or Modification of objects and not applied for registration but application gets rejected||No appeal filed – Expiry of time allowed u/s 253 Appeal filed – Date of receipt of order by trust|
|Merger||Date of Merger|
|Dissolution||Date of expiry of 12 months|
What is the Method of Calculation of Accreted Tax?
Method of Calculation of Accreted Tax is as follows:
This levy is in addition income-tax chargeable in hands of entity and is calculated as below:
Accreted Tax = Accreted Income * Maximum Marginal Rate (42.744% for AY 2020-21)
Meaning of Accreted Income:
|Aggregate FMV of the total assets as on the specified date||XXX|
|Less: Total liability of such trust computed as per the prescribed method of valuation||(XXX)|
Calculation of FMV of assets
Part A – Assets:
For the purpose of section 115TD, the aggregate FMV of the total assets of the trust or institution, shall be the aggregate of the FMV of all the assets in the balance sheet as reduced by-
(i) any amount of TDS/ TCS or advance tax payment as reduced by the amount of income- tax claimed as refund under the act, and
(ii) Any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset.
FMV of assets
1. Quoted Shares and Securities: average of lowest and Highest price on valuation date on a recognizes stock exchange.
Note: If no trading of such shares and security on valuation date then average of lowest and highest price of immediately preceding the valuation date when such shares and security traded in recognize stock exchange
2: Unquoted Equity Shares:
A+B-L X PV
A = Book value of all assets (Other than covered in B) exclude TDS, advance tax in excess of income tax refund claimed and deferred expenditure shown in the asset side
B= FMV of bullion, jewellery, precious stone, artistic work, shares, securities and immovable property as determined in the manner provided in this rule
L= Book value of liabilities, but not including the following amounts, namely:-
(i) The paid- up capital in respect of equity shares.
(ii) The amount set apart for payment of dividends on preference shares and equity shares.
(iii) Reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation.
(iv)Any amount representing provision for taxation, other than amount of income tax paid, if any less than the amount of income tax claimed as refund, if any to the extent of the excess over the tax payable.
(v)Any amount representing provisions made for unascertained liabilities.
(vi)Any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preferences shares.
PE= Total amount of paid up equity share capital as shown in the balance sheet
PV= The paid up value of such equity shares
3. Unquoted shares or security date on the basis of valuation report of merchant banker or an accountant.
4. Immovable Property:
(i) SDV on Valuation date XXX
(ii) FMV/ NRV on valuation date XXX
Whichever is higher
5. A business undertaking: (A+B-L)
6. Any other assets: FMV/ NRV on valuation date
Part B- Liabilities
Total liability of the trust or institution shall be the book value of liabilities in the balance sheet on the specified date but not including the following amounts, namely:-
(i) Capital fund or accumulated funds or corpus, by whatever name called.
(ii) Reserves or surpluses or excess of income over expenditure, by whatever name called.
(iii) Any amount representing contingent liability
(iv)Any amount representing provisions made for meeting liabilities, other than ascertained liabilities
(v)Any amount representing provision for taxation, other than amount of TDS/ TCS or as advance tax payment as reduced by the amount of income tax claimed as refund under the act, to the extent of the excess over the income tax payable
What is the consequence in case of late payment of exit tax u/s 115TD?
As per section 115TE, If the principal officer or trustee or the institution and the trust fails to pay the whole or any part of the tax on the accreted income referred in section 115TD (1), within the time allowed u/s 115TD (5), simple interest at the rate of one per cent for every month or part thereof on the amount of such tax will be payable.
The Period of Interest shall be calculated frombeginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.