Code of Taxation for NGOs (Part II)

Session layout

• Key amendments in Finance Acts in past 3 years and implications
• Forms, Returns & Proceedings
• TDS provisions
• Other miscellaneous provisions in Income Tax law applicable to NGOs
  

Key amendments in Finance Acts in past 3 years and implications

Finance Act 2023 Amendments for charitable entities

• Use of corpus or loans and borrowings permitted as application if replenished/repaid in 5 years
• Retrospective section 11 exemption benefit withdrawn
• Inter charity donation of local funds-85% of such amount only as application
• Exemption benefit not available for Updated IT Return
• Timeline prescribed for filing Form 9A and 10
• No provisional registration for existing entities
• Exit tax in case of non renewal, non re registration or not converting provisional to normal registration
• Incorrect or incomplete information in Form 10A a specified violations inviting cancellation of registration
  

Finance Act 2022 Amendments for charitable entities

A. Monitoring and effective implantation

1. Proper book of accounts to be maintained for 12AB and 10(23C) entities-form, manner and place as may be prescribed.

2. Power to cancel registration for specified violations i.e. spent income for other than object, business income not incidental and no separate books, private religious purpose, particular religious community/caste, violation of other laws, benefits u/s 13 not reasonable, section 11(5) non-compliance, conditions not complied as specified in registration certificate (Form 10AC). Reference to be made by AO to CIT/PCIT who shall pass order cancelling or refusing within 6 months from the quarter in which notice was issued.

B. Consistency in 2 regimes with a view to have one regime in future

1.  Accumulation of income-not spent in 5 years or taxed in 5th year itself, not 6th year and applicable to 10(23C) entities also. Delay due to court injunction etc, the period will be excluded in calculating the accumulation period. Repurposing of accumulation can be permitted by the Department.

2. IT return and books of accounts, s.115TD applicable also for 10(23C) entities .

3. Govt is looking at collapsing the two regimes of registration

C. Clarity

1. Tax @30% (S. 115BBI) on denied income for 13(1)© and 13(1(d) violations. 2. Penalty for providing unreasonable benefits to specified persons- s 271AAE penalty equal to amount of benefit in first year and twice for subsequent year

2. Provision cannot be claimed as application, actual spend/payment only is application.

3. VC received by religious institutions for repair and maintenance of religious institutions treated as corpus and not treated as income even without specific direction from the donor from FY 20-21 but should be invested in specified modes

4. Newly inserted section 13(10) & 13(11)-Computation of taxable income due to specified non compliance i.e. books of accounts, non filing ITR, Audit report, commercial receipts in excess of 20%. Claim admissible revenue expenditure from income subject to expenditure not from corpus, loans and borrowings, depreciation if cost claimed, donation to other organisations and after disallowing 40A(3) and 40(a)(ia) cases. Beneficial since entire income is not taxed

Finance Act 2021 Amendments for charitable entities

1. Use of Corpus no longer application : Application for charitable or religious purposes from the corpus fund shall not be treated as application of income for charitable or religious purposes. Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the amount, or part thereof, is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus, from the income of that year and to the extent of such investment or deposit.
2. Exclusion of Corpus Fund from Income (conditional): Any Voluntary Contribution made with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in the total income of such trust or institution unless such voluntary contribution is invested or deposited in one or more of the forms or mode specified in the act.
3. Use of Loans / Borrowings no longer applies except during repayment : Any expenditure made for charitable or religious purpose out of loan or borrowing shall not be treated as application for charitable or religious purpose. Provided such amount shall be treated as application for charitable or religious purposes at the time of repayment of such loan.
4. Carry forward of Losses not allowed: Calculation of income required to be applied or accumulated during the previous year shall be made without any set off or deduction or allowance of any excess application of any of the year preceding the previous year
   

Income Tax Return & Forms

In following sequence to file:

• Form 9A/ Form 10 (Deemed application/Accumulation)
• Form 10B/10BB (Audit Report)
• ITR-7 (Income Tax Return)

Form 9A & Form 10:

Section 11 of the Income Tax Act 1961 provides two options when the threshold of 85% application is not met by a charitable institution.

Section 11(1): be accumulated for application in the year of receipt/next year. {Form 9A}

Form 9A can be filled in two situations:

• For non-receipt of the income

• Any other reason ( the reason for shortfall needs to be communicated in writing in form)

Section 11(2):- accumulated or set apart for specific purpose for a maximum period of 5 years. {Form No. 10). Pass Board resolution for the purpose and period of accumulation and deposited in 11(5) investment mode.

Both Forms to be filed before filing of Form 10B and ITR-7 to be filed Online in prescribed application format.

Due date-2 months before due date for ITR filing although CBDT circular of May 2023 has relaxed as on or before due date of ITR filing.

Audit Report Form 10B/10BB

As per IT Rules 2023, eligibility for Audit Report in 10B is as follows:

• If the total income of the trust or institution exceeds Rs.5 crore during the previous fiscal year.

• In case a trust or institution receives any amount of foreign contribution.

• In case any institution or trust has used any amount of its income outside India in the previous year. 

Applicable uniformly for 12A and 10(23C) entities If 10B not applicable, 10BB to be used in very elaborate form specially 10B as against simple form earlier.

Income Tax Return (Form-ITR 7)

• Charitable institutions u/s 11 have three types of income: AI (Aggregate Income), VC (Voluntary Contribution) and CG (Capital Gains) not the 5 heads of income
• ITR 7 covers all types of charitable institutions-charitable and religious, political parties, scientific research institutions, Univ, colleges
• S.139(4A) for 12A entities. 2 parts-Part A-General Part B-Total income and tax computation
• Details of registration or approval under Income Tax Act to be correctly selected in Part A General. The Details of other registration (80G and FCRA).
• Schedule I: amount set aside/accumulated for previous years
• Schedule J : Details of investments.
• Schedule VC : Voluntary Contribution (grants/donations/corpus)
• Schedule AI : Aggregate of Income excluding Voluntary Contribution (All incidental income from activities and interest income)
• Schedule ER Revenue Expenses and sources to meet ER (Establishment & Objects)
• Schedule EC Capital Expenses and sources to meet EC
• Total of “Source of Funds” under ER and EC Schedule match with the total expenditure.
• Schedule TI and TTI-Computation of income and computation of taxes
• Details of all bank accounts to be reported
• Expenditure incurred outside India, Provisions to be excluded
• The Registered Email ID and Phone Number updated on Income Tax Portal should be of organisation.
• Verify the Income Tax Portal and check the status of returns submitted in Past (Refunds / Outstanding Demands).

IT proceedings

1. Notice u/s 142(1)-filed return but AO needs more docs/info or return not filed

2. Intimation u/s 143(1)-assessment of ITR by CPC to determine demand/refund

3. Notice u/s 143(1A)- Based on ITR filed, intimation for adjustment for mismatch identified during centralised processing in Form 26AS

4. Notice u/s 143(2)-when there is discrepancy, notice for scrutiny assessment but processing of return u/s143(1) mandatory.

5. Notice u/s 143(3)-Income Tax Assessment-Scrutiny

6. Notice under Section 148A-income escaping assessment (3 years from end of AY in case of less than 50 lakhs and upto 10 years if more than 50 lakhs)

7. Notice u/s 245-set off of current year refund against previous demand

8. Penalty u/s 270(A) for concealment/under reporting of income in addition to tax

9. Intimation u/s 154 for rectification of mistakes by AO

Objectives of TDS

• Regular Inflow of Revenue for Government

• Checking of TAX EVASION

• Widening of TAX Base

TDS Sections

• Section 192 (Salary)

• Section 194 C (Contractual Payment)

• Section 194 J (Fees for Professional & Technical Payment) 

• Section 194 I ( Rent)

192 – TDS on Salary

• Deduct at rate of Income Tax computed on the basis of rates in force

• Rates in force for person other than Senior Citizens
  

192 – TDS on Salary

• Deduct at rate of Income Tax computed on the basis of rates in force

• Rates in force for person other than Senior Citizens
  

New Tax Regime (Option available)

• Rates in force:

• Any individual opting to be taxed under the new tax regime from FY 2020-21 onwards No exemptions and deductions available such as HRA, most Chapter VI-A deductions (80C,80D), Interest on housing loan etc. Standard decurion allowed.

194 C – Payments to Contractors

Tax is to be deducted as source:

• On the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or

• On the whole of the invoice value, if the value of the material is not mentioned separately in the invoice.

TDS Rate:

• 1% where payment is to an individual / HUF

• 2% where the recipient is any other person.

Limit:

• If the credit or payment in pursuance of the single contract does not exceed Rs. 30,000 in FY no deduction shall be made at source.

• However, if the aggregate of all amounts paid / credited or likely to be credited exceeds in F.Y. Rs. 1,00,000 then tax at source is to be deducted.

Section 194 C includes:-

• Advertisement

• Broadcasting and telecasting including production of programmes for such broadcasting and telecasting

• Catering

• Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer

• Engagement of manpower on contract

• Carriage of goods or passengers by any mode of transport other than by railways, - NO TDS of transport operators if PAN is provided and vehicles upto 10

194 J – TDS on Fees for Professional or Technical Services

Threshold Exemption Limit: Rs. 30,000 /- in a financial year.

Professional & Technical services

• “Professional services” means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section

• “Fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.

194 I – Rent

Threshold Exemption Limit: Rs. 2,40,000 in a financial year.

TDS Points to remember:

• Tax is to be deducted at the time of Credit or at the time of payment whichever is earlier, at the prescribed rate as the case maybe

• In case of salary, TDS is on estimated Income

• Section 206 AA: - Deductee furnish PAN number to the deductor and mention in correspondence, bills, vouchers and other documents. Tax is to be deducted at 20% if PAN is not mentioned by the deductee.

Monthly Deposit of TDS:

• By 7th of the following month

• Incase of TDS Deducted in Month of March – to be deposited by 30th April.

TAN – Tax Deduction & Collection Account Number

• The Person responsible for deducting tax at source has to apply for TAN in FORM NO 49B within one month from the end of the month in which tax is deducted for the first time.

Interest on late deduction/deposit of TDS

• Interest for Late Deduction of TDS is 1% every month or part of a month till the date of deduction
• Interest for Late Deposit of TDS is 1.5% every month or part of a month till the date of deposit.

Issue of Form 16/16A-TDS certificate

Deductors shall issue TDS certificate in Form No 16 / 16A generated through TIN central system and downloaded from the TIN website (TRACES) with a unique TDS certificate number in respect of sums deducted on or after the 1st April 2012 under any of the provision of Chapter XVII-B. 

Filing of Quarterly TDS Return

Penalty in respect of non filing or incorrect filing of quarterly TDS return:

• Section 234 E :- Fee for default in furnishing quarterly return of TDS

• 200 Rs Per day till the time failure continues or total amount of TDS deducted during the quarter (Whichever is less)

• This is in addition to the penalty u/s 271H

• Section 271H :- Penalty for Incorrect information or failure to furnish quarterly return etc.

Penalty u/s 271H:

The penalty shall be a minimum of Rs. 10,000/- and it can be extended up to Rs. 1,00,000/-
This penalty is mandatory in nature and cannot be waived.

Anonymous donation-Section 115BBC of IT Act
Accreted Income or Exit Tax-Section 115TD of IT Act

• S.115BBC

1. For charitable trust, if the name and address of the donor is not known, it is an anonymous donation.

2. Not applicable to Religious Truss or charitable cum religious trust except where the donation is for an educational or medical institution

3. Tax payable 30% plus SC and Edu cess. Threshold: Rs.1 lakhs or 5% of total donation received whichever is higher.

• S.115TD-1.6.2016

1. Accreted income is excess of fair market value of assets over total liabilities of Trust

2. Conditions when 115TD triggered:

   • 12AA registration cancelled

   • Modification of objects not applied for regn/not in line with condition of registration and application rejected

   • Merged into an entity not with similar objects and not registered under 12AA

   • Failure to transfer assets upon dissolution to another 12AA/10(23C) entity within 12 months

   • Newly added: non registration, non renewal, non conversion of provisional to regular registration wef 1.10.23

3. Accreted income is taxed at MMR

Section 269ST: Receipt of cash donation

Finance Act 2017 restricts a person receiving Rs. 2 lakh or more in cash from a person in aggregate in a day or in respect of a single transaction or in respect of transactions relating to one event or occasion from a person. The contravention of such provision shall attract a penalty under section 271DA i.e. equivalent to the amount so received by the recipient. 

In case of receipt of cash donations by a trust (may be charitable or religious) in contravention of section 269ST, then relevant trust shall attract penal consequences.

Section 206AB of IT Act wef 1.7.2021

• TDS rate if the amount is paid/ credited to a specified person, being highest of the below rates
  • At twice the rate specified in the relevant provision of the Act; or
  • Twice the rate /rates in force; or
  • At the rate of 5%.
• A Specified Person is one who has not filed the Income Tax Return (ITR) for the preceding year immediately before the previous year in which tax is required to be deducted and the aggregate TDS/TCS is Rs. 50,000 or more in each of the previous year.
• The time limit of ITR filing under sub-section (1) of Section 139 is expired for calculating non filing for previous year
• Not applicable for certain sections-mainly Section 192 and others
• Compliance check functionality created by Department for confirming specified person

194 Q-TDS on purchase of goods wef 1st July 2021

Section 206C(1)-TCS on NTFP items

1. Seller collects from buyer tax on purchase value of specificized goods:

1. Tendu leaves-5%

2. Timber under or other than lease: 2.5%

3. Any other forest produce other than a and b: 2.5%

2. TCS u/s. 206C(1) shall not be required to be collected from a resident buyer, if the goods are to be utilised for the purpose of manufacturing, processing or producing articles or things or for the purposes of generation of power and not for trading purposes. 

Section 194R-TDS on perquisites/benefits made to service provider

A person, who is responsible for providing any benefit or perquisite to a resident, to deduct tax at source @ IO% of the value or aggregate of value of such benefit or perquisite. The benefit or perquisite may or may not be convertible into money but should arise either from carrying out of business or profession, by such resident. 

If the perquisite/benefit is estimated to be less than Rs.20k in a FY, no TDS is to be deducted.

Please note:

• If the Invoice of expenses incurred is in the name of ultimate service recipient – No TDS u/s 194R
• If the Invoice of expenses incurred is in the name of Service Provider –TDS to be deducted u/s 194R

Effective from 1st July 2022

Lower Tax deduction Certificate (LTDC)

• 197. (1) Where income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions of sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194-I, 194J, 194K, 194LA and 195, the Assessing Officer is satisfied] that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax , as the case may be, the Assessing] Officer shall, on an application made by the assess on this behalf, give to him such a certificate as may be appropriate.

• (2) Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the Assessing] Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.

 

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