Chapter XV
Taxation of non-profit organisations and other trusts
15.1 Charitable purposes deserve to enjoy tax exemption. The questions that arise are : What is a charitable purpose? Who is entitled to the exemption ? And what is the extent of the exemption ?
15.2 The Code replaces the phrase "charitable purpose" by the phrase "permitted welfare activities". Permitted welfare activities has been defined to mean any activity involving relief of the poor, advancement of education, provision of medical relief, preservation of environment, preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility. Advancement of any other object of general public utility will not include any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a fee or for any other consideration, irrespective of the nature of use, application or retention of the income from such activity.
15.3 Trusts and institutions established for charitable purposes have generally enjoyed tax exemptions. However, the following shortcomings have been observed in the exemption regime :
(a) The exemption regime is complex, overlapping and dissimilar since it varies across institutions based on their activities.
(b) The provisions fail to meet the test of efficiency inasmuch as they provide different conditions for institutions carrying on similar activities.
(c) The provisions also do not meet the test of equity inasmuch as the compliance cost for an institution varies depending upon the provision of law under which the exemption is granted.
(d) The concept of income of such an institution has been the subject matter of litigation. Should gross receipts of the institution or the net income of the institution be reckoned as the income ? This question has been the subject matter of extensive debate.
(e) A vexed issue is whether the institution should be allowed to accumulate income not applied or utilized for charitable purposes and how the accumulation should be treated.
(f) There is unending dispute whether a business is incidental to attainment of the objectives of the institution or not, since the income from incidental business is exempt from tax.
15.4 With a view to removing the aforesaid shortcomings, the Code proposes a new tax regime for all trusts and institutions carrying on charitable activities. The salient features of the new regime are as under :
(a) The regime will uniformly apply to all non-profit organizations irrespective of the nature of their activities.
(b) An organization shall be treated as a non-profit organization if,—
(i) it is established for the benefit of the general public ;
(ii) it is established for carrying on permitted welfare activities ;
(iii) it is not established for the benefit of any particular caste ;
(iv) it is not established for the benefit of any of its members ;
(v) it actually carries on the permitted welfare activities during the financial year and the beneficiaries of the activities are the general public ;
(vi) it does not intend to apply its surplus or other income or use its assets or incur expenditure, directly or indirectly, for the benefit of any interested person ;
(vii) any expenditure by the organisation does not enure, directly or indirectly, for the benefit of any interested person ;
(viii) the funds or assets of the organisation are not used or applied, or deemed to have been used or applied, directly or indirectly, for the benefit of any interested person ;
(ix) the surplus, if any, accruing from its permitted activities does not enure, directly or indirectly, for the benefit of any interested person ;
(x) the funds or the assets of the non-profit organisation are not invested or held in any associate concern or in any prescribed form or mode ;
(xi) it maintains such books of account and in such manner, as may be prescribed ;
(xii) it obtains a report of audit in the prescribed form from an accountant before the due date of filing of the return in respect of,—
(A) the accounts of the business, if any, carried on by it ; and
(B) the accounts relating to the permitted welfare activities ; and
(xiii) it is registered with the Income-tax Department under the Code.
(c) The "permitted welfare activities" have been defined as discussed in para 15.2.
(d) The tax liability of a non-profit organisation shall be 15 per cent. of the aggregate of the following :
(i) the amount of surplus generated from the permitted welfare activities ; and
(ii) the amount of capital gains arising on transfer of an investment asset, being a financial asset ;
(e) The amount of surplus generated from the permitted welfare activities shall be the "gross receipts" as reduced by the "outgoings".
(f) The "gross receipts" shall be the aggregate of the following :
(i) The amount of voluntary contributions received during the financial year ;
(ii) Any rent received in respect of a property consisting of any buildings or lands appurtenant thereto ;
(iii) The amount of any income derived from a business which is incidental to any of the permitted welfare activities ;
(iv) Full value of the consideration received from the transfer of any investment asset, not being a financial asset ;
(v) Full value of the consideration received from the transfer of any business capital asset of a business incidental to its permitted welfare activities ;
(vi) The amount of any income received from any investment of its funds or assets ; and
(vii) All other incomings, realizations, proceeds, donations or subscriptions received from any source.
(g) The amount of outgoings shall be the aggregate of,—
(i) voluntary contributions received during the financial year by the non-profit organisation made with a specific direction that they shall form part of the corpus of the non-profit organisation ;
(ii) the amount actually paid during the financial year for any expenditure, excluding capital expenditure, incurred wholly and exclusively for earning or obtaining any "gross receipts" ;
(iii) the amount actually paid during the financial year for any expenditure, excluding capital expenditure, on the permitted welfare activities ;
(iv) the amount of capital expenditure actually paid during the financial year in relation to,—
(a) any business capital asset of a business incidental to any of the permitted welfare activities ; or
(b) any investment asset, not being a financial asset.
(v) any amount actually paid during the financial year to any other non-profit organisation engaged in a similar permitted welfare activity ;
(vi) any amount applied outside India during the financial year if the amount is applied for an activity which tends to promote international welfare in which India is interested and the non-profit organisation is notified by the Central Government in this behalf.
(h) The surplus generated from permitted welfare activities will be determined on the basis of cash system of accounting. Capital gains arising on the transfer of an investment asset, being a financial asset, will be computed in accordance with the provisions under the head "Capital gains".
(i) A non-profit organisation will be prohibited from investing any of its funds or holding any of its asset in any associate concern or in any prescribed form or mode.
(j) It will be mandatory for every non-profit organisation to register with the Income-tax Department by making an application to the Chief Commissioner or Commissioner concerned. The Chief Commissioner or Commissioner will be required to pass an order within three months from the end of the month in which the application is received. If the order is not passed within three months or registration is refused, the applicant shall have the right to appeal before the Income-tax Appellate Tribunal.
(k) The registration, once granted, shall be valid from the financial year in which the application is made till it is withdrawn.
(l) The donations made to a non-profit organisation will be eligible for deduction in the hands of the donor at the appropriate rates.
15.5 A non-profit organisation shall be liable to income-tax at the rate of thirty per cent. in respect of its net worth if,—
(a) it converts into any form of organization which does not qualify as a non-profit organization ;
(b) it ceases to be a non-profit organization in the relevant financial year and any two financial years out of four financial years immediately preceding the relevant financial year ; or
(c) it fails to transfer, upon its dissolution, all its assets to any other non-profit organisation.
15.6 The income of any trust or institution recognised/registered under the Religious Endowment Acts of the Central Government or the State Governments shall be fully exempt from income-tax. However, donations to such trusts or institutions will not enjoy any deduction in the hands of the donor.
15.7 The new regime shall not apply to any person who—
(a) holds any business under trust, notwithstanding a specific direction that the business shall form part of the corpus of such person or a specific direction that the income from the business shall be applied only for permitted welfare activities ;
(b) carries on the permitted welfare activity involving the relief of the poor, advancement of education, provision of medical relief, preservation of environment or preservation of monuments or place or objects of artistic or historic interest and also carries on a business which is not incidental to the aforesaid permitted welfare activity ; and
(c) ceases to be a non-profit organisation at any time during the financial year.
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