Income Tax News: With multiple significant changes made by the central government in recent years, the tax and regulatory landscape in India for nonprofit organisations is undergoing a significant upheaval. The provisions of the Income-Tax Act, 1961 (the “IT Act”) and the Foreign Contribution Regulations Act, 1999 (the “FCRA”) have resulted in significant changes to the tax and regulatory landscape for nonprofit entities, which are discussed in this article.
Five-Year Renewal Requirement for Nonprofit Organizations
Every five years, nonprofit organisations must apply for a renewal of their registration in order to claim an exemption from income taxes and to issue 80G donation receipts. In the past, nonprofit organisations had to register for income exemption and to issue 80G donation receipts for the duration of their existence, or until they were revoked. These registrations are now only good for five years, and in order to renew them, a request for a new registration must be made at least six months before the original registration expires.
Introduction to Form 10B and Form 10BB
Form 10B and Form 10BB, which apply from Financial Year (FY) 2022–2023 onward, must be provided with the audit report. The tax regulatory agencies have recently sent out notices regarding updated and comprehensive audit report formats that nonprofit auditors must provide on Forms 10B and 10BB. The following describes when Forms 10B and 10BB are applicable:
Form 10B
- If the trust or institution’s total income for the previous year exceeded Rs. 5 crores, without taking into account the provisions of sections 11 and 12 of the Act;
- if the trust or institution received any foreign contributions during that year; or
- if the trust or institution used any portion of its income outside of India
Form 10BB
In contrast to previous audit report versions, the new audit reports also call for a more thorough degree of disclosures.
Tax Treatment of Donations in FY 2023–2024
Tax treatment of donations made to other charitable organisations (effective starting in FY 2023–2024):-
Only 85% of the eligible donations made by a trust or institution registered under section 12AA/12AB to another trust registered under section 12AA/12AB shall be treated as an application for the donor nonprofit entity, according to a provision introduced by the Finance Act, 2023. This amendment was made in response to incidents that the Tax Department had observed in which certain nonprofit organisations attempted to circumvent the legislative intent by creating numerous trusts and earning 15% income at each level through internal donations.
Restrictive provisions
Limitations on contributions made by one nonprofit organisation to another (effective starting in FY 2017–18):
Restrictive clauses regarding donations made by one nonprofit organisation to another have been added to the tax laws. It is not permitted for a nonprofit organisation to apply its corpus donation to another nonprofit organisation as a means of earning revenue for that organisation. Similarly, a non-profit organisation may only donate non-corpus funds from its current year’s earnings to another non-profit organisation.
Corpus contributions
Requirement to invest received corpus contributions in certain modes in accordance with IT Act § 11(5) (effective from FY 2021–2022):
According to Section 11(1)(d) of the IT Act, donations made voluntarily with the intention that they become a part of the trust or institution’s corpus are not counted towards the trust or institution’s overall income. According to the Finance Act 2021, these voluntary contributions must be invested or deposited in one or more of the ways listed in section 11 subsection (5) that are kept expressly for such a corpus in order to be eligible for this exemption.
Form 10BD & 10BE
All donations must be electronically reported on Form 10BD, and donors must receive system-generated Form 10BE donation receipts (effective FY 2021–2022).
Nonprofit organisations are now required to file a report on receipt of all types of donations during a specific financial year in Form No. 10BD, which must be filed on or before May 31 of the immediately following the financial year in which the donation is received. This requirement is similar to filing TDS Returns and issuing system-generated TDS certificates.
Early filing of Form 9A & 10
Form 9A and Form 10 filing deadlines have been postponed by two months (starting in FY 2022–2023):
Form No. 10 or Form No. 9A, respectively, must be filed by trusts and institutions that choose to accumulate their income for future application purposes or opt for deemed applications. The deadline for submitting these forms has been postponed by two months starting in FY 2022–2023. These forms must now be submitted at least two months before August 31, 2023, which is the deadline for filing income returns.
The Foreign Contributions Regulation Act has been amended
Only after registering under the Foreign Contributions Regulation Act, 2010 (FCRA) or receiving prior authorization from the central government are charitable organisations permitted to accept contributions from overseas. Only bank accounts designated by the Federal Communications Regulatory Authority (FCRA) at the State Bank of India’s New Delhi Main Branch (NDMB), 11 Sansad Marg, New Delhi 110001, are acceptable for foreign contributions to Indian registered nonprofit entities. When a foreign donation is received by a nonprofit registered organisation, it must be used for its intended purposes; it cannot be donated to another nonprofit organisation that is registered with the Federal Communications Commission.
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