Mr. Kapil Mahna and Ms. Sakshi Mittal (Chartered Accountants) delve into the amendments proposed by the Finance Bill, 2023 impacting the  non-governmental organisations (NGOs) in India, with an objective to ensure effective monitoring of the same. The authors shed light on the evolving tax, legal and regulatory landscape for NGOs  in India. They highlight that the key amendments proposed in Finance Bill, 2023 includes an additional condition with respect to inter-charity donation stating that if one charitable organisation donates to another charitable organization, only 85% of such donations given will be considered as application of income for the donor charitable organization. They also touch upon the proposed amendment with respect to application of corpus, exit tax, alignment of various due dates and timelines and registration for tax exemption. They are of the view that the said amendments are proposed with an intention to eliminate double deductions, to omit redundant provisions and to ensure timely compliances by NGOs, however certain open issues are required to be addressed for effective implementation of proposed amendments.

Budget 2023: An attempt to streamline and rationalize strangulated tax laws for philanthropy in India

“NGOs play a crucial role in bringing attention to neglected issues, serving as a voice for the voiceless, and advocating for those in need” – Ban Ki-moon, former Secretary General of the United Nations.

The philanthropic sector in India does not simply fill gaps in the government’s service delivery system, it contributes significantly to the country’s GDP. India has nearly 3.4 million non-governmental organisations (NGOs) working in a variety of fields ranging from disaster relief to advocacy for marginalised and disadvantaged communities. With the current legislative and policy regime, companies are increasingly being mandated to take social responsibilities as a means of delivering value. This requires them to work in partnership with credible & efficient civil society organization.

A. Evolving tax, legal and regulatory landscape for NGOs in India

The general perception is that NGOs are immune to all forms of taxation by all the means as they exist only for non-profit activities as an entity. However, this is a myth considering the prevalent tax, legal and regulatory environment in which the NGOs operate in India. In the recent times, the tax, legal and regulatory framework for NGOs operating in India has become complex and stringent. While some industry experts see this framework as disabling and discouraging for NGOs to function, the bureaucrats advocate for increased scrutiny of NGOs in order to curb mis-utilisation of funds in anti-social/ money laundering activities.

The following steps taken by the government in the recent past are testimony to its intent of enhancing accountability in the NGO sector:

• The cessation of perpetual tax exemptions to NGOs by introducing provisions for re-registrations in every five years under the Income-tax Act, 1961

• Introduction of Exit tax regime to restrict the practice of transfer of tax-free resources from registered charitable trusts to non-charitable hands

• Mandate to NGOs to ensure compliances with all laws other than Income-tax Act, 1961 in order to secure tax exemptions

• Amending the Foreign Contribution Regulation Act, 2010 (FCRA) and rules with respect to foreign funding received by NGOs including prohibition on sub-granting, reduced capping of 20% on administrative expenditure as against 50% earlier, acceptance of foreign contribution only in designated bank account opened with State bank of India, etc.

• Cancellation of registrations of various NGOs due to non-compliances under FCRA

• Registration with the Ministry of Corporate Affairs for receiving funds from corporate organisations

In nutshell, one can say that the NGOs have now been under the scanner with the clear intent to prevent opaque operations and to increase transparency.

B. Rationalisation of provisions impacting tax framework for NGO sector

With an objective of ensuring effective monitoring and implementation, bringing consistency in the provisions and providing clarity on taxation, the Union budget 2023 has proposed slew of amendments in the Income-tax Act, 1961 impacting the charitable organisations in India. The key amendments impacting the NGO sector are enumerated below:

i) Inter charity donations

Inter charity donations (i.e., one tax exempt charitable trust or institution donating to another tax-exempt charitable trust or institution) continue to be allowed but with various restrictions.

As per current provisions, NGOs need to spend atleast 85% of their income every year in order to secure their tax exemptions. However, if NGOs are unable to spend this minimum amount, they have the option to accumulate the same for upto five years. Further, tax exempted charitable organisations can donate to another charitable organization but with the following conditions:

• Inter charity donations cannot be made out of accumulated income

• Inter charity donations cannot be made, whether from its accumulated or current year’s income, towards the corpus of another charitable organisation.

Under Finance Bill 2023, it is proposed that in addition to the above - mentioned restrictions, if one charitable organisation donates to another charitable organization, only eighty five per cent of such donations given will be considered as application of income for the donor charitable organisation. Illustratively, if Trust A donates a sum of Rs. 100,000 to Trust B, in the books of account of Trust A while Rs. 100,000 will reflect as given, only Rs. 85,000 will qualify as ‘application of income for charitable purpose’.

These amendments are effective from financial year 2023-24 onwards.

ii) Application of corpus

Under an earlier amendment vide Finance Act 2021, if a charitable organisation decides to use its corpus or borrow by way of a loan, that amount would be considered as application of income only in the year the amount is put back into the corpus fund or the loan is repaid.

In order to avoid double deduction, the Finance Bill 2023 has proposed that application out of corpus or a loan before April 1, 2021 shall not to be allowed as application for charitable or religious purposes even when such amount is put back into corpus or the loan is repaid.

Further, deduction shall be allowed only if the amount taken from the corpus is put back into corpus or the loan is repaid within five years of application out of the corpus or loan. Such redeposit/repayment is proposed to be allowed only if the earlier usage of funds from the corpus/loan has satisfied the prescribed conditions, such as appropriate withholding tax, non-cash payments, application on a payment basis, payment not to benefit specified related parties, and application to be in India.

These amendments are effective from financial year 2023-24.

iii) Exit tax

In an attempt to ensure that the NGOs comply with the provisions of registration/ re-registration for tax exemptions, Finance Bill 2023 has proposed an ‘Exit Tax’ under section 115TD of the Income tax Act, 1961 if a trust or institution registered under section 10(23C) or 12A or 12AA has not applied for re-registration or does not apply for renewal after expiry of five years or the trust or institution registered provisionally does not apply for regular registration after expiry of three years.

The above amendment will be applicable from financial year 2022-23.

iv) Aligning various due dates and timelines

To reiterate, in every financial year, a tax exempt charitable organisation is required to spend at least eighty five per cent of its total income. In case income is received late in the financial year the trust can exercise option under section 11(1) to use the income in the immediately following financial year by filing Form 9A or accumulate the unspent income under section 11(2) for up to five years by filing Form 10. It has been proposed that filing of forms for accumulation of income (Form 9A/10) needs to be done at least two months prior to the due date for furnishing return of income for it to be completed before the due date of the audit report, which is a month prior to the due date for furnishing returns. Thus, for instance, if the due date of filing return of income is 31 October, Form 9A/10 will have to be filed on or before 31 August.

It is pertinent to note that tax exemption will be available only if the return of income has been furnished within the time allowed for filing the original return of income or for filing belated returns (and not in the case of updated returns).

v) Registration for tax exemption

In order to address the practical challenges faced in seeking provisional/regular registration, it is proposed that trusts or institutions apply for provisional registration only before the commencement of activities. The trusts or institutions, which have already commenced their activities, will directly make an application for regular registration. This amendment is applicable from 1 October 2023.

C. Thoughts to ponder upon

The amendments proposed in the Union budget seem to be an attempt to plug in certain gaps/loopholes in the tax laws to eliminate double deductions, to omit redundant provisions, and to ensure timely compliances by NGOs. The proposed amendments also aim to simplify the tax exemption process by merging the provisional and final registrations in genuine cases.

However, there are following open issues that need to be addressed/clarified for effective implementation of proposed amendments:

• The amendment in relation to inter charity donations may lead to a situation where charitable organisations may not have actual funds for future application. For example, if Trust XYZ donates the entire amount of income of the current (say INR 100) to Trust ABC. Trust ABC applies entire amount for charitable purposes. In the hands of Trust XYZ, only INR 85 shall be allowed as application, whereas the Trust XYZ shall not have actual residual funds of INR 15.

• Even prior to financial year 2021-22, the capital expenditure incurred from borrowed funds was allowed only on repayment of loans. In such a case, where capital expenditure is incurred prior to 31 March 2021 from borrowed funds and has not been claimed as application as per mandate in the Income tax return form, the repayment of same loan going forward would also not be allowed as application in accordance with the proposed amendment. This would result in expenditure not being allowed even once and will cause undue hardships to the charitable institutions.

• Loans taken for a period of 5 years may be deterrent for NGOs in view of the proposed amendment not allowing deduction if the loan is not repaid within five years of application out of loan.

• For the purposes on amendment proposed under section 115TD i.e. Exit tax, date of conversion is kept as the last date for making application for renewal of registration (the application for renewal has to be made atleast 6 months before expiry). This would result in a situation where accredited income is taxed despite registration being valid for at least 6 more months

While it will be interesting to wait and watch out for some guidance through circulars/ notifications that may be issued by government in order to provide clarity on the open issues, the NGO sector needs to ensure readiness and preparedness in order to deal with the proposed amendments.

Disclaimer: Please note that the views expressed in this article are the personal opinions of the authors and do not represent a view of any organisation or any other person. No assurance is given if such view is acceptable by any judicial or tax authorities. It is advisable to have independent research before reaching any conclusion.