New tax regulations for charitable trusts to add to compliance burden

Earlier, there was no specific provision for maintaining books of accounts of trust. However, trusts are currently required to file audit reports.

While charitable trusts and institutions are ready to comply with the new requirements, analysts said more investment freedom should be granted to these institutions to generate funds for social work.
While charitable trusts and institutions are ready to comply with the new requirements, analysts said more investment freedom should be granted to these institutions to generate funds for social work.

The Centre’s new rules mandating charitable trusts to furnish wide-ranging personal details, maintenance of books of accounts and other documents for availing of income tax exemptions is aimed at curbing tax evasion, but they have also cast an onerous compliance burden on the genuine ones.

While charitable trusts and institutions are ready to comply with the new requirements, analysts said more investment freedom should be granted to these institutions to generate funds for social work.

According to Budget documents, the total amount of exemption sought by the charitable trusts/institutions jumped by nearly 50%, from Rs 2.25 trillion in FY15 to Rs 3.34 trillion in FY18.

According to a recent report by the comptroller and auditor general, an exemption to the tune of Rs 18,700 crore was allowed in 21,381 cases, although it was not registered under the relevant provision of the Income Tax Act. It also found that in 347 cases, the foreign contribution was received by the assessee though the registration details under the FCRA were not available.

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The new rules, notified by the Central Board of Direct Taxes (CBDT) last week, prescribed the maintenance of exhaustive records in respect of different segments such as sources of income, application, loans, records of properties and investments or deposits of money. It also includes maintenance of details such as name, address, PAN and Aadhaar number of every donor, as also of every person in respect of whom an application is made or claimed. The books of account and other documents are to be maintained at the registered office for 10 years from the end of the relevant tax year.

These rules, for which an enabling provision was enacted in the Finance Act, 2022, came into effect from August 10, 2022.

“I think this is a healthy practice, but it should not be confined only to the development sector. It should be scaled up to cover companies as well, because there are so many organisations which are not registered as foundations/trusts, but are operating as private limited companies,” said Naresh Chaudhury, CEO, Partners in Prosperity.

Currently, no documentation is required for foundations working as private companies as they don’t avail of any tax benefits, even though they can receive or disburse money as per their acceptance.

“In my view, it is an excellent step toward bringing transparency and accountability to this sector. It will further boost trust among the donor fraternity at individual and foundation levels,” said Sanjeev Dham, deputy CEO, MAMTA, a trust.

Earlier, there was no specific provision for maintaining books of accounts of trust. However, trusts are currently required to file audit reports.

The difficulty may arise when activities of the trust are carried out at multiple locations. In case books are not found in a relevant place, there is a risk that the trust’s income would be taxed even when it’s otherwise eligible for complete exemption under Section 11 of the Income Tax Act.

Tax officials reckon that the charitable trust structure has also been misused by many taxpayers, essentially to turn black money into legitimate money. One of the well-known methods has been to give donations cheques and get back cash for a fee.

Not just now, the attempt over the years has been to try and tighten those loopholes, said Sudhir Kapadia, partner, tax & regulatory services, EY India.

“However, a lot of philanthropy in India is through trusts. The government should also give a lot of empowerment and freedom to the legitimate and genuine trusts,” Kapadia said. In India, trusts are not allowed to invest in equity shares, whereas the US allows endowments to invest in equities to generate resources for social and charitable objectives. Harvard’s endowment, Harvard University’s largest financial asset, is a perpetual source of support for the university and its mission of teaching and research.

“While tightening the reporting norms and ensuring that money laundering doesn’t take place, trusts should be empowered to generate legitimate sources of income. Trusts in India should be allowed to invest in shares and income from that can be taxed at the applicable rate,” Kapadia said.

The Income Tax Act provides for tax exemptions to various entities engaged in charitable objects, in areas such as charity, religion, medical, education, etc. These entities receive donations, voluntary contributions and have other incomes from activities that are charitable in nature, which are required to be applied for the objects for which these have been set up.

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