Union Budget 2023: strict clauses continue to challenge charitable institutions

The Income-tax Act provides that when an amount is spent out of corpus, the same would be allowed as application only upon recoupment of corpus. Also, in case of loans, repayment of loans would be allowed as application in the year of repayment. Currently, the law does not provide for any time-limit for such recoupment / repayment. Now, a new amendment is proposed allowing application only where recoupment of corpus or repayment of loans is completed within a period of 5 years. This may restrict the ability of charitable institutions to incur large capital expenditure, where the returns would flow in after a few years.

Charitable institutions that have already initiated their activities are now allowed to apply for final tax exemption registration directly instead of a provisional one. While this is a welcome amendment, Principal Commissioner / Commissioner of Income-tax are now empowered to examine the objects, genuineness of activities and past compliances of the institutions before granting registrations. 

Charities are exposed to the provisions of ’exit tax’ and are liable to pay tax at 34.94%  on the accreted income (FMV of assets less FMV of liabilities) upon violation of certain conditions (viz. conversion into non-charity form, transferring assets to any non-charitable entity, merger with entity not having similar objects etc). Now, in addition to these conditions, if there is a delay in filing of application for registration / re-registration for tax exemption, it would be deemed that the charitable institutions have been converted into non-charitable form, thereby triggering exit tax implications. This is an unrelenting amendment and would put additional pressure on charitable institutions from an administration and compliance standpoint. 

Charitable institutions are required to apply 85% of their income every year to claim tax exemption. In a year where they fall short of 85% application, they are allowed to carry forward the balance to subsequent years for application. The law requires institutions to intimate tax authorities (in prescribed form) about such accumulation before the due date of filing of tax return. The timeline of filing this form has been preponed by two months (i.e. one month ahead of due date of audit). This amendment would be difficult to execute since in the absence of completion of audit, charities would struggle to finalize their numbers and determine the amount for which intimation is required to be made to the tax authorities in a time-bound manner.

If there is a single day of delay in filing of tax returns beyond statutory due dates, charitable institutions will lose their tax exemption. Many may consider this amendment to be very rigid and strict, and would expect institutions to tightly follow compliance timelines to miss out on tax exemption. 

With constant changes in the tax laws and ever evolving jurisprudence, charitable institutions are expected to be more vigilant about their activities, compliances and governance than ever before. While the government is aiming to bring parity between different schemes of exemption for charitable institutions under the income tax Act, it is only adding complexity in charity administration and taxation. The need of the hour is clearly having a uniform tax regime which should not only be easy to follow but also help avoid misinterpretation and reduce litigation.

This article is written by Sheetal Shah, Associate Partner, EY India