To,
The Union Finance Minister,
Government of India, New Delhi
Subject: Non submission of application for renewal of registration by charitable organizations liable for tax at maximum marginal rate (MMR) under section 115TD of Income Tax Act, 1961 – A cause of concern for unintentional lapse.
Finance bill 2023 has proposed amendments in Section 115 TD of ITA, as under
1) It is proposed to amend the provisions of section 115TD of the Act by inserting clause (iii) in sub-section (3) of section 115TD of the Act to provide that the provisions of Chapter XII-EB shall be applicable if any trust or institution under the first or second regime fails to make an application in accordance with the provisions of clause (i) or clause (ii) or clause (iii) of the first proviso to clause (23C) of section 10 of the Act or in accordance with sub-clause (i) or sub-clause (ii) or sub-clause (iii) of clause (ac) of subsection (1) of section 12A of the Act, within the period specified in the said clauses or sub-clauses. Upon violation of these, it shall be deemed to have been converted into any form not eligible for registration or approval in the previous year in which such period expires.
2) It is further proposed to amend clause (ii) of sub-section (5) of section 115TD of the Act to provide that principal officer or the trustee of the specified person, as the case may be, and the specified person shall also be liable to pay the tax on accreted income to the credit of the Central Government within fourteen days from the end of the previous year in a case referred to in clause (iii) of sub-section (3) of section 115TD of the Act;
3) It is also proposed to insert sub-clause (c) in clause (i) to the Explanation to section 115TD of the Act to provide that date of conversion shall also mean the last date for making an application for registration under sub-clause (i) or sub-clause (ii) or sub-clause (iii) of clause (ac) of sub-section (1) of section 12A or for making an application for approval under clause (i) or clause (ii) or clause (iii) of the first proviso to clause (23C) of section 10, as the case may be, in a case referred to in clause (iii) of sub-section (3) of section 115TD of the Act.
4) These amendments will take effect from 1st April, 2023 and will accordingly apply to the assessment year 2023-24 and subsequent assessment years.
Memorandum explaining the provisions in the finance bill has mentioned the rationale of introducing the above amendment ,relevant extract of same are being reproduced as under:
Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 amended the provisions related to application for registration by amending the first 59 and second proviso to clause (23C) of section 10 of the Act, clause (ac) of sub-section (1) of section 12A of the Act. The amended provisions provide the following:
a) All the existing trusts and institutions under the first and second regime are required to apply for re-registration/approval on or before 31.03.2021. The due date for re-registration/approval has been extended by the Central Board of Direct Taxes till 25.11.2022 vide Circular No. 22 of 2022 dated 01.11.2022. Such re-registration/approval shall be valid for a period of 5 years.
b) New trusts and institutions under the first and second regime are required to apply for the provisional registration/approval at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration/approval is sought. Such provisional registration/approval shall be valid for a period of 3 years.
c) Provisionally registered/approved trusts and institutions under the first and second regime will again need to apply for regular registration/approval at least six months prior to expiry of the period of the provisional registration/approval or within six months of the commencement of activities, whichever is earlier
d) The trusts and institutions under the first and second regime are required to apply at least six months prior to the expiry of re-registration/approval.
Instances have come to the notice where certain trusts and institutions under the first and second regime have not applied for the regular registration after taking the provisional registration. Further some trusts and institutions under the first and second regime have not applied for the reregistration/approval. Further, there may be possible instances where the trusts and institutions under the first or second regime will not apply for re-registration after the expiry of 5 years/3 years.
This will result in the following unintended consequences:
a) Once a trust or institution under the first or second regime enters in-to exemption regime, it is allowed to exit on payment of tax at the rate of maximum marginal rate on its accreted income (difference between the fair market value of assets and liabilities). This is because of the reason that the income of the trust or institution has been exempted from tax and the accreted income of the trust represents the income on which tax has not been paid and appreciation thereof.
b) By not applying for re-registration/approval or registration/approval, the trust gets an easy route to exit without payment of the tax on accreted income.
A trust or institution under the first or second regime may voluntarily wind up its activities and dissolve or may also merge with any other non-charitable institution, or it may convert into a non-charitable organization. In order to ensure that the benefit conferred over the years by way of exemption is not misused and to plug the gap in law that allowed the trusts and institutions having built up corpus/wealth through exemptions being converted into non-charitable organization with no tax consequences, a new Chapter XIIEB consisting of Sections 115TD, 115TE and 115TF was inserted in the Act by the Finance Act, 2016.
This chapter seeks to impose a levy in the nature of an exit tax which is attracted when the organization is converted into a non-charitable organization or gets merged with a noncharitable organization or a charitable organization with dissimilar objects or does not transfer the assets to another charitable organization
The main elements of these provisions are:
(i) The accretion in income (accreted income) of the trust or institution is taxable on conversion of trust or institution into a form not eligible for registration under section 12 AA or section 12AB of the Act or on merger into an entity not having similar objects and registered under Section 12AA or section 12AB of the Act or on non-distribution of assets on dissolution to any charitable institution registered under section 12AA of the Act or approved 60 under clause (23C) of section 1023C of the Act within a period of twelve months from the end of the month of dissolution.
(ii) Accreted income is the amount of aggregate of Fair Market Value (FMV) of total assets as reduced by the liability as on the specified date. The method of valuation has been prescribed in rules.
(iii) The taxation of accreted income is at the maximum marginal rate.
(iv) This levy is in addition to any income chargeable to tax.
In view of above proposals if any trust do not apply for re registration within prescribed time, tax liability will arise at maximum marginal rate i.e on Fair market value of all assets after reducing liabilities.
There are many trusts availing exemption for last so many years. Re -registration is required to be applied after every 5 years not every year, so there is every possibility that there is an unintentional lapse on part of trust to apply, which will cause huge tax liability in case of trusts having net FMV .
As per existing law, a trust if do not apply for re registration will not be eligible for exemption of income for the relevant year which is quite logical, However to pay huge tax at MMR on net assets at FMV for a procedural lapse is highly irrational .
Intention of legislature to introduce above provisions on the premise that there may be possible instances where the trusts will not apply for re registration to get an easy exit without payment of the tax on accreted income is not tenable for reasons as under:
By not applying for re registration trust do not get exit route as whenever trust will alienate its assets to a trust not having similar objects , it will liable to pay tax u/s 115 , so the apprehension of revenue that trust will not apply for re registration to get an exit route is not correct .
Our Suggestions
Hence the proposed amendment should be withdrawn. However if legislation is still of the view to introduce above provisions, It is proposed that an opportunity of being heard should be allowed to trusts to apply for re registration to avoid genuine cases of procedural lapse on part of trust / employee / consultant.
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