Rationalization of Provisions for Charitable Trusts and Institutions: Analysis of Finance Bill (No. 2) 2024 Proposals

Executive Summary

The Finance Bill (No. 2) 2024 introduces significant changes to the provisions governing charitable trusts and institutions. This report outlines these changes, focusing on the consolidation of regimes, condonation of delay in filing applications, rationalization of timelines, and conditions for mergers. The goal is to simplify procedures, reduce administrative burdens, and provide greater clarity for trusts and institutions.

1. Consolidation of Provisions for Charitable Trusts

1.1 Two Main Regimes for Trusts

The Income Tax Act currently provides two regimes for trusts, funds, or institutions to claim exemptions:

• First Regime: Under sub-clause(s) (iv), (v), (vi), or (via) of clause (23C) of section 10.
• Second Regime: Under sections 11 to 13 of the Act.

Over the years, the procedures and conditions across these two regimes have been aligned to simplify processes and reduce the administrative burden.

1.2 Sunset of the First Regime

The Finance Bill (No. 2) 2024 proposes to phase out the first regime, transitioning all trusts, funds, or institutions to the second regime in a gradual manner.

Key Proposals:

1. Applications Post-1st October 2024: Applications for approval or provisional approval under sub-clauses (iv), (v), (vi), or (via) of clause (23C) of section 10, filed on or after 1st October 2024, will not be considered.
2. Pending Applications Pre-1st October 2024: Applications filed before 1st October 2024 and pending will be processed under the existing provisions of the first regime.
3. Continuation of Existing Approvals: Trusts, funds, or institutions already approved will continue to enjoy exemptions under the first regime until the validity of their approval expires.
4. Eligibility for Second Regime: Approved entities under the first regime will be eligible to apply for registration under the second regime, with amendments to section 12A facilitating this transition.
5. Protection of Eligible Investment Modes: Certain eligible investment modes under the first regime will be protected under the second regime through amendments in section 13.

Effective Date: 1st October 2024.

Important: The frequent amendments in provisions for charitable trusts over the last few years have posed significant compliance challenges. This consolidation aims to streamline processes and reduce complexity.

2. Condonation of Delay in Filing Applications

2.1 Application Timeline for Registration

Trusts or institutions must apply for registration under section 12AB within the timelines specified in clause (ac) of sub-section (1) of section 12A.

2.2 Challenges with Timely Filing

Trusts or institutions sometimes fail to file within the specified timelines, risking taxation on accreted income under Chapter XII-EB and potentially permanent exit from the exemption regime.

2.3 Proposed Amendment

The Principal Commissioner/Commissioner will have the authority to condone delays if there is a reasonable cause, treating such applications as timely filed.

Effective Date: 1st October 2024.

Important: This amendment is welcomed as it addresses delays and reduces the burden of appeals, providing relief to trusts and institutions by allowing the Principal Commissioner/Commissioner to condone delays.

3. Rationalization of Timelines for Filing Applications Under Section 80G

3.1 Approval for Donations

Section 80G provides for approval to certain funds or institutions to receive donations, which are deductible for donors.

3.2 Timelines for Application

The timelines for filing applications for approval are specified in the first proviso to sub-section (5) of section 80G. Delays in filing can lead to unintended permanent exit from section 80G approval.

3.3 Proposed Amendments

The first and second provisos will be amended to rationalize these timelines.

Effective Date: 1st October 2024.

Important: This amendment simplifies the process and addresses issues related to untimely applications, reducing the burden on the appellate system.

4. Rationalization of Timelines for Disposing Applications for Registration/Approval

4.1 Current Processing Timelines

Applications for registration under section 12AB or approval under section 80G must be processed within six months from the end of the month of receipt.

4.2 Proposed Rationalization

The processing period will be revised to six months from the end of the quarter in which the application was received, for better administration and monitoring.

Effective Date: 1st October 2024.

5. Merger of Trusts Under the Exemption Regime

5.1 Tax on Accreted Income

Mergers between approved/registered entities under the first or second regime may attract tax on accreted income under Chapter XII-EB.

5.2 Proposed Conditions

Conditions under which such mergers will not attract these provisions will be prescribed for clarity and certainty. A new section 12AC is proposed for this purpose.

Effective Date: 1st April 2025.

?Conclusion

The proposed changes in the Finance Bill (No. 2) 2024 aim to simplify and rationalize the provisions for charitable trusts and institutions, reducing administrative burdens and providing greater clarity. Trusts and institutions should prepare for these changes and ensure compliance with the new provisions to continue benefiting from tax exemptions.

Recommendations for the Client:

1. Review and understand the new provisions and their implications.
2. Prepare to transition from the first regime to the second regime.
3. Ensure timely filing of applications and take advantage of the condonation of delay provisions if needed.
4. Monitor the timelines for disposing of applications and plan accordingly.
5. Seek professional advice for any mergers to ensure compliance with the new conditions under section 12AC.

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