The Indian government has introduced amendments to simplify tax provisions for charitable trusts and institutions registered under Section 12AB of the Income Tax Act. These changes aim to streamline compliance, reduce administrative burdens, and provide clarity regarding registration, exemptions, and violations.
Tax Exemption for Charitable Trusts and Institutions
Charitable trusts and institutions registered under Section 12AB of the Income Tax Act enjoy tax exemptions under Sections 11 and 12, provided they fulfill the prescribed conditions. The key provisions governing this exemption include:
- Section 12A: Lays down the procedure for applying for registration to claim tax exemption.
- Section 12AB: Details the approval and cancellation process for registration.
- Section 13: Specifies conditions under which the exemption will not be available to a trust or institution.
To further rationalize these provisions and ease the compliance burden on charitable organizations, amendments have been proposed in Section 12AB regarding the treatment of ‘specified violations’ and the registration period for smaller trusts.
Rationalization of ‘Specified Violations’ for Cancellation of Registration
Currently, Section 12AB(4) allows the Principal Commissioner or Commissioner of Income Tax to cancel the registration of a trust or institution if it is found to have committed one or more specified violations. The existing Explanation to this sub-section defines a “specified violation” to include instances where the registration application under Section 12A(1)(ac) is incomplete or contains incorrect information.
Amendment in ‘Specified Violation’ Definition
- Existing Issue: Even minor errors or incomplete applications could lead to cancellation of registration, resulting in tax liability on accreted income under Chapter XII-EB.
- Proposed Change: Incomplete applications will no longer be treated as a specified violation, ensuring that minor errors do not lead to cancellation of registration.
- Effective Date: These changes will come into effect from April 1, 2025.
This amendment provides relief to trusts and institutions by ensuring that only material violations lead to cancellation, thereby safeguarding their tax-exempt status.
Extended Registration Period for Smaller Trusts and Institutions
Under the current provisions of Section 12AB, charitable trusts and institutions are granted registration for five years or provisional registration for three years (if activities have not yet commenced). Upon expiry, these entities must reapply for continued registration, creating a frequent compliance burden.
Proposed Changes in Registration Validity
- Existing Issue: Re-registration every five years creates administrative difficulties, particularly for small trusts and institutions.
- Proposed Change: The registration period for eligible small trusts and institutions is extended from five years to ten years, provided the following conditions are met:
- The trust or institution applies under sub-clause (i) to (v) of clause (ac) of Section 12A(1).
- The total income (before applying exemptions under Sections 11 and 12) does not exceed ₹5 crores in each of the two previous years preceding the application year.
- Effective Date: This change will apply from April 1, 2025.
This extension significantly reduces the compliance burden for smaller charitable organizations, allowing them to focus more on their social objectives rather than frequent tax filings.
Summary of Key Amendments
| Provision | Existing Law | Proposed Amendment | Effective From |
|---|---|---|---|
| Specified Violations for Cancellation of Registration | Even minor errors (such as an incomplete application) could lead to cancellation. | Incomplete applications will no longer be treated as specified violations. | April 1, 2025 |
| Registration Validity for Small Trusts | Registration valid for 5 years; provisional registration valid for 3 years. | Registration valid for 10 years for small trusts (income ≤ ₹5 crores in preceding two years). | April 1, 2025 |
Impact of These Amendments
Benefits for Charitable Trusts & Institutions
- Reduced risk of registration cancellation due to minor errors in the application process.
- Lower compliance burden with extended registration periods for eligible small trusts.
- Increased administrative efficiency as trusts need to reapply only once in ten years instead of five.
Government’s Objective
- Encourage more organizations to register and avail tax exemptions.
- Reduce procedural hurdles for smaller non-profits and charitable institutions.
- Ensure genuine violations lead to penalties, while minor administrative errors do not disrupt operations.
The proposed amendments in Section 12AB bring much-needed relief to charitable trusts and institutions, ensuring fair treatment in registration processes while reducing their compliance burden. With a longer registration validity and more rationalized cancellation rules, the government aims to create a simpler and more transparent tax environment for non-profits in India.
Charitable institutions should take note of these changes, prepare for the new compliance framework, and ensure timely applications to continue benefiting from tax exemptions under the Income Tax Act.
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