Preventing tax exemptions abuse: Changes in laws will make charitable trusts transparent

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New Delhi | Published: March 7, 2017 4:45:26 AM

A trust is considered charitable if the object of the trust is directed to the benefit of the community or a section of the community and not for an individual or group of individuals.

Under the extant provisions of the Income Tax Act, 1961, income of such charitable trusts is granted tax exemption.

A trust is considered charitable if the object of the trust is directed to the benefit of the community or a section of the community and not for an individual or group of individuals. Charitable purpose includes relief of the poor, education, medical relief or any other object of public utility.

Owing to its aim of social development of the country, a charitable trust has received favoured and preferential treatment since 1886. Under the extant provisions of the Income Tax Act, 1961, income of such charitable trusts is granted tax exemption.

With instances of misuse of funds by trusts owned by corporate entities, the government is tightening regulation governing such entities. The Budget 2017 saw a slew of changes in this direction.

In order to prevent a charitable trust’s practice of receiving money/property for inadequate consideration/without consideration, section 56 has been amended to provide that money/property received by charitable trusts for inadequate consideration/without consideration in excess of R50,000 shall be liable to tax as ‘income from other sources’ in the hands of the trust.

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Trusts are believed to engage in giving corpus donations without actual applications. Curbing these practices, any charitable/religious/private trust making any contribution to another trust with specific direction that such donation/contribution shall form part of corpus donation in the hands of recipient trust, will not be regarded as the application of income for the donor. This shall ensure that the income of the charitable trust is actually expended towards social causes.

In case of any modification or adoptions of objects, a charitable trust shall be required to obtain fresh registration by furnishing an application to assessing officer within 30 days from the date of such modification or adoption. This way the assessing officer shall be able keep a check on any changes in the objects of the charitable trust and ensure that the same qualify for the tax benefits provided under the tax laws.

Return of income must be filed within the time allowed under section 139 of the Act by every trust or institution which receives income chargeable to tax, else they may not be able to claim the tax exemption. This way trusts have been brought on the same page as any other taxpayer, sending a clear message that any taxpayer claiming tax benefits should report in time to ensure that the tax authorities have ample time to scrutinise their return of income.

Restriction has been imposed on cash donation under section 80G by reducing the capping from R10,000 to R2,000. This is to ensure that unaccounted money does not flow into the charitable institutions in the form of anonymous donations. Giving more powers to the tax authorities, it has been provided that now the income tax officers can conduct surveys under section 133A on trustees and places of activity for charitable purpose.

Section 35AC which allowed 100% tax deduction to individuals and companies making contributions to specific charitable organizations for specific schemes, shall no longer be available to donors starting April 1, 2017. With these changes, there will be substantial reduction in the corporate donations for specified charitable trusts. These changes will prevent abuse of tax exemptions and improve tax administration.

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