Trusts and institutions carrying out charitable activities will face more stringent taxation regime when the new direct taxes code comes into play from April 1, 2011.The new Code will particularly hit non-governmental organisations (NGOs). All NGOs and charitable trusts registered with the Tax Department may be required to fork out 15 per cent tax on their surplus, computed on cash basis. Currently, registered NGOs are under the income-tax net, but not liable to pay tax.
Any tax planning done through the trust route may require a re-look under the proposed new regime. Charitable public trusts and foundations have been a popular vehicle among corporate houses for several decades as they also brought in huge tax benefits. Such trusts and institutions may not go out of fashion because of the new Code, but will certainly lose their charm, say tax experts.
Currently, there are over 70,000 trusts and charitable institutions registered with the Income-Tax Department and get tax exemption on their activities. The new code proposes a new tax regime for trusts carrying on charitable activities as it was felt that the existing taxation regime had many shortcomings. It will apply to all non-profit organisations irrespective of the nature of their activities.
The discussion paper to the new code highlighted that the existing exemption regime was complex, overlapping and dissimilar as it varied across institutions based on their activities.
Also, the existing provisions did not meet the test of efficiency besides the test of equity. There was also a vexed issue of whether the institution should be allowed to accumulate income not applied or utilised for charitable purposes and how the accumulation should be treated.
There was also the unending dispute whether a business was incidental to attainment of the objectives of the institution or not, since the income incidental business is exempt from tax.
Summary of proposed new Regime:-
- All NGOs likely to come under tax net, may also be subjected to 15% tax.
- Trusts registered under religious endowment act to be fully tax exempt.
- Donation to such religious trust will not enjoy deduction in donor’s hand.
- Direct Tax code will replace “Charitable Purpose” by the phrase “Permitted welfare activities”.