Converting charitable trust into for-profit commercial entity set to become taxable under the direct tax code

As per the changes proposed by the new code, a non-profit organisation will have to pay tax at a rate of 30% as per its net worth when it converts itself into an entity that does not qualify as a non-profit organisation. In fact, tax would be levied even if it fails to transfer upon its dissolution all its assets to any other non-profit organisation.

It may be recalled that sale of Escorts Heart Institute and Research Center to Fortis Group had stirred a controversy with Anil Nanda, a trustee on EHIRC trust, challenging the transfer. The matter was also taken up by the income tax authorities, as EHIRC trust had received certain concessions such as low cost land and income-tax exemption since its constitution. The hospital venture was converted into a for-profit entity and sold for a consideration of Rs 565 crore.

The provision clearly conveys the intent of the government… if you change the charitable nature of your activities, you better pay all the taxes you saved and may be much more.

The code has proposed sweeping changes in the present tax regime with a view to make it more efficient, equitable and transparent. Tax liability of a non-profit organisation would be 15% of the amount of surplus generated from permitted welfare activities and the amount of capital gains arising on transfer of an investment asset that is in the nature of a financial asset. The surplus will be equal to gross receipts less outgoings of the organisation.

Gross receipts will include all voluntary contributions, donations, proceeds, subscriptions received by an organisation during a financial year, any rental income, and income derived from a business incidental to permitted business activities.

But, voluntary contributions received during the financial year by a non-profit organisation that goes on to become a part of its accumulated corpus would be treated as outgoing. The concessional treatment as charity is not available to institutions engaged in advancement of general public utility where fee is charged for the services. This would bring a number of institutions into the tax net.

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