With instances of misuse of funds by trusts owned by corporate entities on rise, the government has started tightening regulation governing such entities.
The Union Budget 2017-18 has proposed a slew of changes including mandatory filing of returns and provisions to prevent misuse of funds and conduct of search operations.
The Finance Bill, 2017, which was tabled in the Lok Sabha on February 1 along with the Union Budget, has proposed to restrict contributions by an exempt trust from its income to another exempt entity or trust with a specific direction that it will become a part of the latter’s corpus.
“This shall not be treated as application of such contribution to charitable or religious purposes,” said the Bill. The proposed amendment to Section 11 of the Income-Tax Act will take place from April 1, 2018 and will apply from the assessment year 2018-19.
“This will ensure that their income is actually expended towards charitable purposes,” said PwC in a note.
Similarly, the Bill has also proposed that a trust or institution will have to seek fresh registration from the Central Board of Direct Taxes to claim tax exemption in case of any modification in its objective or purpose.
Trusts will also be expected to file their return of income and within the prescribed deadline of July 31 or September 30, failing which they would lose exemption from capital gains tax under Section 11. In a follow up to last Budget’s announcement of an “exit tax” on charitable trusts that convert to for-profit entities, the Finance Bill has also clarified that for computing capital gains at the transfer of such asset of the trust or institution, the “cost of acquisition” would be the fair market value of the asset taken into account for computation of the exit tax.
“This proposed amendment is applicable retrospectively from 1 June, 2016,” it said.
More powers
The Finance Bill also proposes to extend the powers with income tax officers to conduct surveys under section 133A to include trustees and places of activity for charitable purpose.
Similarly, along with political parties, cash donation to a trust by one person has been capped at Rs. 2,000.
“While these changes are intended to improve tax administration and to prevent misuse of income tax exemption allowed to charitable trusts, however at the same time, this also gives significant additional power to tax authorities and increases compliance burden of trusts,” said Sanjoli Maheshwari, Director-Direct Taxation, Nangia & Co.
Charitable or religious trusts, including many non-government organisations, can claim tax exemptions on income from property, capital gains tax and contributions. To avail themselves of these exemptions, they have to be registered with the Central Board of Direct Taxes under Section 12A and 12AA of the Income-Tax Act.
While there is no exact data on the number of such trusts registered with the CBDT, as many as 1.19 lakh such entities electronically filed income tax returns during 2015 and the Finance Ministry has pegged the total amount applied by such entities for charitable and religious purposes at Rs. 2,36,326 crore.
Tax officials said that the objective of the proposal is to ensure that trusts that claim tax exemption use their income for the intended charitable purposes and not act as a front for making profits or illegal activities.