New tax regime for charitable institutions

1. Charitable Institutions
Tax and Regulatory Outlook
A Bird's Eye View
June 2023

2. 01 Charitable Purpose
01 Charitable Purpose

3. Interpretation of "Charitable Purpose" - A Tough Nut to Crack
Charitable Purpose:
Inclusive Definition
Education Relief of the Poor
Preservation of monuments/
places/ objects of artistic or
historic interest
Preservation of
Environment
Yoga and
Medical Relief
• Carrying activities in the nature of trade, commerce,
business or related service2 and for a consideration?
Advancement of any
other object of General
Public Utility ('GPU’)
• In the course of actual carrying out
of advancement of any other object
of GPU?
+
• Aggregate receipts from this activity
< 20% of total receipts?
Charitable
Charitable
Key takeaways from Hon’ble SC Ruling2
• Evaluation of whether activities undertaken by the institution in
the nature of trade, commerce or business - incidental to or
connected with achieving GPU object
• What quantum of consideration charged could be excluded
from mischief of commercial activity - consideration charged on
cost basis or with nominal or significant mark-up?
1New Noble Educational Society vs Chief Commissioner of Income-tax [2022] 143 taxmann.com 276 (SC); Union of India & Ors vs Baba Banda Singh Bahadur Education Trust [2023] 150
taxmann.com 40 (SC); Sole Trustee, Loka Shikshana Trust vs Commissioner of Income-tax [1975] 101 ITR 234 (SC)
2ACIT (Exemptions) vs Ahmedabad Urban Development Authority [2022] 143 taxmann.com 278 (SC)
Recent Developments
• Rationalisation of income tax provisions governing
charitable institutions for ensuring effective monitoring
and implementation
• Application for obtaining tax exemption, being closely
scrutinized by Revenue Authorities, to test eligibility
• Recent SC pronouncements in the cases of New
Noble1, Baba Banda Singh1 and AUDA2 , have
quivered well-established interpretation of income tax
laws framed around charitable institutions, affecting
their ability to claim income tax exemptions
• Courts have made it explicitly clear that law governing
charitable institutions to be interpreted strictly, leaving
no scope for liberal interpretation
• Recent jurisprudence in this space suggest that
charitable institutions should cross all T's and dot all
I's in their functioning and compliances
• Remember tax litigation are won, not on good quality
of law, but on good quality of documentation
Key Considerations
• Restricted scope of the term Education,
held by several courts from time to time1
• Education not to include wider forms of
education, say, coaching etc, but 'solely'
restricted to imparting of formal scholastic
learning
• Only mainstream curriculum-based
education could be considered as
• activity in the nature of education
3

4. 02 Registration

5. Registration process – A Procedural Labyrinth
Not commenced activities
before making application
File application at least 1 month prior to
commencement of FY from which registration
is sought ie on or before February 28, 2023
Provisional Registration = 3 years
Application to be made within the earliest of
the below dates ie at least 6 months prior to
expiry of provisional registration or 6 months
from commencement of activities
Final Registration = 5 years
Renewal application to be made at least 6
months prior to expiry ie on or before
September 30, 2027
Renewal of registration = 5 years
Review of charter documents to ensure alignment of objects with those that are
permitted under income tax laws
Technical explanation that activities of the entity satisfy meaning of "charitable
purpose" as per Section 2(15) of the IT Act
Where the entity has commenced activities, undertaking a review of agreements
entered into by the entity for source and application of funds
Indicative checks - Registration process
Commenced activities
April 1, 2023
Sep 30, 2025
Sep 30, 2027
April 1, 2023
Application for final registration at
any time after commencement
Renewal application to be made at least 6 months prior
to expiry ie on or before September 30, 2027
Sep 30, 2027
Factually substantiating that operating model of the entity is for charitable purpose
and no commercial element involved
1
2
3
4
5
Overall, it is crucial to be prepared with key documentation to deal
with deeper scrutiny by the Revenue Authorities
Commenced activities
during the FY
Mar 31, 2028
No income has been
claimed as exemption
Expiry of
registration
Final Registration = 5 years
Renewal of registration = 5 years
Mar 31, 2028
Expiry of
registration
5
July 1, 2023
Commenced
activities
Dec 31, 2023
6
Review of previous years’ financial statements of the entity (in case the entity
was in existence before)
Reasonableness of related party transactions to be evaluated
7
Commercial element, if any, should be incidental to charitable activity
(principles laid down by Hon’ble SC ruling to be tested) + within quantified limits

6. Normal Registration = 5 Years Prior Permission
In existence for > 3 years
Reasonable activity to be undertaken in
its chosen field of charitable purpose
Expenditure > INR 15 lakhs spent on
core activities during last 3 FYs
Foreign Contribution
Exclusively for receipt of specific
amount from specific donor for
carrying out specific activities/
projects
Types of Registration
Charitable Institutions required to obtain a certificate of registration under FCRA, 2010 to accept foreign contributions
Registration under FCRA – Key Considerations
Application for registration in Form FC-3A
Application for prior permission in
Form FC-3B
To
be
received
in
designated
FCRA
1
Account
only
April 1, 2023
September 30, 2027
Certificate of Registration
obtained upon application in
Form FC-3A
Renewal of registration in Form FC-3C any
time between the below 2 dates ie within 6
months prior to expiry
Annual Return for FY 2023-24 in
Form FC-4
December 31, 2024
Timelines for key filing compliances
Details of all office bearers
Affidavit from office bearer in
Proforma AA
Activity Report and Audited FS
Proof of Appointment
Details of foreign donors along with
utilization details
01
02
03
04
05
Important documents/ details to be
submitted along with application/ return
Non-renewal within time - Validity of certificate of registration deemed to cease post completion of 5 years
from date of grant of registration ie April 1, 2028. Institution needs to apply for a fresh grant of registration
6
Registration = 5 years
March 31, 2028
Expiry of
Registration
1 Bank account should be opened only in SBI Main Branch, New Delhi
Critical Considerations
• Foreign contribution cannot be transferred to any other
person
• Prior permission of CG required to utilise foreign contribution
> 20% towards administrative expenses
• Post registration/ obtaining prior approval, mandatory to
furnish NIL annual return, even if no receipt/ utilisation of
foreign contributions during a particular year

7. 03 Application of Income

8. With effect from AY 2024-25
Invested amount to
be spent/ applied
within 5 years
ie within end of Year
6. Else same would
become taxable
To be spent/
applied in
Year 2
Amount allowed
as application:
₹ 61,412
8
Differential can be
invested in prescribed
modes1
Not less
than 85%
of income
Trust
Claim differential as
Deemed Application
in Year 12
To be spent in the
Year of receipt of such income
or in the subsequent year
Amount spent/ applied subsequently (as above) would not
be treated as "Application of income" for that year
Application of income by way of donations to other charitable institutions
Income received =
₹ 100,000
Allowed as
application:
₹ 72,250
Trust 1
Additional
amount to be
applied:
₹ 12,750 (A)
Income received =
₹ 85,000
Allowed as
application:
₹ 61,412
Trust 2
Amount donated to
Trust 3: ₹ 72,250
Additional amount to
be applied:
₹ 10,838 (B)
Income received =
₹ 72,250
Trust 3
Amount applied
for charitable
purpose:
₹ 61,412 (C)
Cumulative amount applied
for charitable purpose
Impact on Charitable Institutions
• Charitable institutions merely operating as pass-through by collecting donations and making
onward contribution to other similar trusts can claim exemption only up to 85% of total donations
received
Towards Charitable
objects
(A) + (B) + (C) = ₹ 85,000
Changing tunes of taxation for Charitable Institutions
Unable to apply 85%
Shortage is on account of:
Reasons other than
non-receipt of income
Non-receipt of
income
Application
of income
Amount to be
actually paid /
applied. Accruals not
considered as
application
Amount donated to
Trust 2: ₹ 85,000
Claim differential as
Deemed Application
in Year 12
1Section 11(2) rw Section 11(5) of IT Act
2 Explanation 1 to Section 11(1) of IT Act

9. 04 Borrowings and Corpus

10. Charitable Institutions
Re-deposit of corpus or Repayment of loans or borrowings
• Application for charitable purposes out of corpus or loans/ borrowings only in the year of
're-deposit' into corpus or repayment of loan (wef AY 2022-23)
• Application from corpus or loan prior to April 1, 2021 - Not eligible for double benefit on
re-deposit or repayment
Newly prescribed timeline for re-depositing corpus/ repayment of borrowings
(corpus or loan taken on or after April 1, 2021) (wef AY 2023-24)
• Exemption on re-deposit into corpus or repayment of loan only if re-deposit/ repayment within 5
years of utilisation of funds from corpus or loan taken
Impact Analysis
Borrowed/
deposited in
corpus on
April 1, 2019
INR 100,000
Illustration 1
Funds utilised from
loan/corpus and
claimed as application:
INR 50,000
April 1, 2021
Repayment of loan/
re-deposit into
corpus: INR 100,000
Amount allowed as
application
INR 100,000
Nil
FY 2023-24 onwards
FY 2019-20 FY 2020-21
Illustration 2
Loan borrowed : INR 500,000
Amount deposited into Corpus: INR 300,000
Amount utilized from loan: INR 500,0000
Amount utilized from Corpus: INR 300,000
FY 2024-25
FY 2023-24
FY 2028-29
Loan repaid: INR 200,000
Amount reinvested into Corpus: INR 150,000
FY 2030-31
Loan repaid: INR 300,000
Amount reinvested into Corpus: INR 150,000
Impact on application
INR 350,000 allowable
in FY 2028-29
INR 450,000
Not allowed
– Trusts to maintain robust tracking mechanism to map application with source on a year-on-year basis (for past years as
well)
– Repayment of loans/ borrowings and re-deposit of corpus ought to be made within 5 years. If not, benefit of application
would have to be permanently foregone
– Repayment of loan/ depositing back into corpus would not be allowed as application, if other prescribed conditions not
fulfilled
Key Takeaways
Pre-amendment
Proposed amendment
Old regime – Exemption in year of
application
New Regime – Exemption in year
of re-deposit/ repayment
It is not always about the Income…
10

11. 05 Compliances

12. September 30 of AY
August 31 of AY October 31 of AY
May 31 of AY
(extended to June 30 for FY
2022-23)
Compliances - Staying ahead of the Curve
Form 10B
or 10BB ?
March 31 of FY
Form 10BD and Form 10BE
Form 10BD - Statement of donations to be
filed by the Company providing details of
donors and the contributions (if 80G
registered). The form could have impact on
ITR (Refer Slide 14 for detailed analysis)
Form 10BE - Certificate of donation to be
issued to donors specifying the amount of
donation made by them
Form 9A and Form 10
Form 9A - Application for exercise of
option of deemed application
(Refer Slide 8)
Form 10 - Form to be furnished where
the Company invests unutilised funds in
prescribed modes
Audit Report in Form 10B/ 10BB
Form 10B - Audit report where the institution has:
• Total income > INR 5 crores without considering
application of income or
• has received foreign contribution or
• has applied income outside India
Form 10BB - Audit report in any other cases
Filing ITR in Form ITR-7
End of FY
Important Considerations
• Tracking mechanism to be maintained
as ITR and audit report call for
exhaustive disclosures on deemed
application, investment of surplus in
prescribed modes and their
subsequent utilization over the years,
utilization and recoupment of corpus,
etc
• Imperative to maintain consistency and
align disclosures in audit report, Form
10BD and other forms, as it may have
a bearing on processing of ITR
12
Form
10BD
Maintenance of Books of Accounts
and other relevant documents, at the
registered office (in terms of newly
introduced Rule 17AA of IT Rules vide
Notification 94/ 2022 dated August 10,
2022)

13. 06 Areas of caution

14. Applicable on:
• Failure to transfer assets to another trust registered under Section 12AB of IT Act within
12 months, on dissolution
• Cancellation of registration or modification of objects of trust, which do not conform to the
conditions for registration
• Converted into another form not eligible for registration, or
• Merger into an entity not registered under Section 12AA or Section 12AB of IT Act
Prior to FA 2023 Post FA 2023 (wef AY 2023-24)
Also applicable on
• Failure to apply for a final registration within prescribed
timeline after obtaining provisional registration
• Failure to apply for a renewal of registration within
prescribed timeline
1 Rule 17CB of IT Rules
• Difference between amount reported in Form No 10BD and total voluntary
donations could be questioned to be anonymous donation chargeable at
30%?
Areas of disclosures - Potential exposure to Section 115BBC
Points to be noted while reporting
• Imperative to freeze the financial numbers at Form 10BD stage as the
same has an impact on subsequent filings viz Form 10B/ 10BB and Form
ITR-7
• Ensure reconciliation of numbers and alignment of disclosures in Form
10BD vis-à-vis audit report in Form 10B/ 10BB and Form ITR-7
• New Penalty provisions under Section 271AAE: 100 -200% of income
applied, directly or indirectly
• Where the total income includes
anonymous donation, the same is
chargeable to tax at 30% [Section
115BBC of the IT Act]
• Per guidance from jurisprudence-
Maintaining Name and Address of
donors mandatory to prevent trigger
of anonymous donation. Whether
unique identification number of donor
such as PAN/ AADHAAR required
(mandatory field in Form 10BD)?
Dodging the bullet
14
Exit Tax
Anonymous Donation
Trigger Event
• First day afterr the lapse of due date for making an application
under both the above situations
Section 115TD taxes accreted income (ie FMV of assets less FMV of liabilities) at MMR as per prescribed rules1

15. 07 How we can help

16. How we can help?
16
Structuring of Operating Model
• Understand the charitable object and proposed operating model of
the entity
• Review of charter documents, draft master agreements proposed
to be entered into by entity with its donors, existing MoUs from
income tax perspective and suggest requisite modifications, if any,
for compliance with exemption conditions under IT Act
• Assess channels from which the entity receives donations and
various projects undertaken/ proposed to be undertaken by the
entity to apply such funds
• Evaluating various modes of application of funds and eligibility of
the same for claiming exemption under the provisions of the IT Act
• Highlight key aspects/ restrictions/ prohibitions/ hindrances for the
operating model adopted by the entity and suggest safeguards to
mitigate potential risks
Income tax compliances and support services
• Detailed evaluation of receipts/ expenses and advisory on specific
positions to be adopted in respect of such receipts/ expenses
• Identify potential exposures representing risk areas based on tax
positions adopted by the institution
• Assistance in preparation of the income tax return and related
annexures in the prescribed form
• Assistance in review of Audit Report (Form 10BB/ Form 10B),
Form 10BD and other event-based forms for the year to ensure
that all the reporting's are aligned
Statutory registrations and related support services
• Assistance in obtaining registrations under Section 12A and
Section 80G of the IT Act
• Time to time follow-ups with the Revenue Authorities, draft
responses to the queries raised in the notices and representation
services
• Assistance in obtaining registration under the FCRA where the
entity proposes to collect donations or contributions from foreign
sources
Litigation Support Services
• Representation services before the Revenue Authorities
• Responding to tax authorities on tax notices/ queries on behalf of the
entity in respect of the tax returns, withholding tax, etc and providing
explanations/ information on tax-related positions
• Evaluating the litigation matters in order to advise whether the matters
are fit for further litigation
• Appellate proceedings before the Commissioner of Income Tax
(Appeals) and Income Tax Appellate Tribunal
• Assistance during the audit/ investigation/ inquiry by the Revenue
Authorities

17. Glossary
17
Term Abbreviation
AY Assessment Year
ACIT Assistant Commissioner of Income Tax
AUDA Ahmedabad Urban Development Authority
CG Central Government
FMV Fair Market Value
FA Finance Act
FS Financial Statements
FY Financial Year
FCRA Foreign Contribution Regulation Act, 2010
GPU General Public Utility
Term Abbreviation
INR Indian Rupee
IT Act Income Tax Act, 1961
IT Rules Income Tax Rules, 1962
ITR Income Tax Return
MMR Maximum Marginal Rate
MoU Memorandum of Understanding
PAN Permanent Account Number
rw read with
SC Supreme Court
wef with effect from

18. Thank You
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Sandeep Jhunjhunwala
Sandeep specializes in the areas of corporate international tax with
expertise in strategic transaction advisory, cross-border tax structuring
and controversy management. He also works closely with regulators and
policy formulators, in providing inputs to aid in the development of new
regulations. He has worked on a number of leading multi-national
companies in Information Technology, Communication, Real Estate,
Pharmaceuticals and e-commerce sectors. He has worked closely with
charitable institutions to steer them through the registration process,
compliances and advisory.
Sandeep has been an eminent speaker and panelist on tax and
regulatory matters at various forums. He is a regular columnist and has
written several articles and contributed podcasts on tax and regulatory
matters. He is also a mentor for the Government of India’s Start-up India
programme and serves as a mentor of the Direct taxes Committee of
Karnataka State Chartered Accountants Association (KSCAA) and
ASSOCHAM Karnataka council.
Partner
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