This article explains the special situation of charitable entities with the “12A” tag. What is this exemption? What are its requirements?
As charitable entities with 12A, all our societies, trusts and companies enjoy the exemption from income tax. However, this exemption is available only on the fulfilment of certain requirements as mentioned here:
Requirements for income tax exemption:
Here are the basic requirements to make a trust eligible for exemption from income tax.
The trust:
(1) should have been registered under 12A;
(2) should have all its income coming from the property owned by the trust or from donations raised by the trust;
(3) should have spent in India at least 85% of its annual income on the objects of the trust;
(4) keep its services open to all people, irrespective of caste, creed, religion, etc.;
(5) should have got its accounts audited;
(6) should have filed its income tax returns in time (by 30th September);
(7) should comply with section 11(2) in case of accumulation (Remember that the purpose for which accumulation is done has to be submitted and it cannot be changed later and no donation can be given out of the accumulated amount);
(8) should have invested all its funds as per section 11(5) [(a) Investment in Government Saving Certificates, (b) Deposits with Post Offices Saving Banks, (c) Deposits with scheduled banks or Co-operative Banks, (d) Investments in units of the Unit Trust of India, (e) Investments in Central or State Government Securities & others, (f) Investments in units issued under any scheme of mutual fund referred to in sec 10 (23D);
(9) should not have allowed the benefits of the trusts activities to any of its members directly or indirectly, and
(10) should not have more than 20% of its annual income from its business-like activities.
Recent changes in the income tax:
Here are some of the serious recent changes which will affect the trusts with 12A and which have come in to effect:
(1) No cash transaction beyond Rs 10,000 is allowed.
(2) Corpus donations from trust to trust are banned. Any amount donated by one trust to another as corpus cannot be claimed as application of its income. This means: We cannot claim that amount as part of the 85% required to be utilized. Still, if a trust wants, it can give a corpus donation to another trust from its own funds or corpus, without claiming any utilization for that amount.
(3) No 80G benefit can be claimed by the donor for a cash donation of more than Rs 2000 to a charitable trust. This means that for any amount beyond Rs 2000, only donations through bank transactions can be allowed this benefit.
(4) If TDS not deducted, 30% of the bill (30% of the amount of expenditure on which TDS is not deducted) will be disallowed u/s 40(a)(i).
(5) Every trust should apply for Tax deduction Account Number (TAN) within one month from the end of the month in which tax is deducted. A trust having various branches and maintaining individual accounting should obtain a separate TAN other than that of the main trust. Not having a TAN will attract a penalty of Rs 10,000/-
(6) Failure to file income tax returns before 30th September will attract a fine or other penalties, including withdrawal of 12A.
(7) As per section 115BBC, anonymous donations shall be taxed at 30%, if it exceeds 5% of the total donations received, or Rs 1 lakh, whichever is higher. However, this clause is not applicable to religious trusts.
(8) Any trust with the object of advancement of general public utility and having business activities that are incidental to the attainment of the objectives of the trust should maintain separate books of account related to such business and from AY 2016-17 onwards, the benefit of tax exemption may be lost if such income exceeds 20% of the total receipts (earlier it was Rs 2,50,000). However, this restriction does not apply to a trust having object other than the object of advancement of general public utility.
Cancellation of 12A: Registration of a trust under 12A may be withdrawn if: (a) the activities of the trust or institution are not genuine; (b) the activities are not being carried out in accordance with the objects of the trust; (c) investment of the trust’s funds are in contravention of section 11(5); (d) fresh registration u/s 12A for modification in the objects of trusts within a period of 30 days from the date of such modifications of objects in prescribed form and manner.
Other regulations to be noted by charitable trusts:
Please note the following well-known practices:
(1) For any donation between trusts, both the donor and the recipient should be registered under 12A and there has to be similarity of objects in both the trusts.
(2) There should be no mutual donations between the donor and recipient trusts.
(3) All FC regulations are to be followed.
(4) TDS has to be deducted wherever applicable and returns of the same have to be filed as per requirements
(5) GST registration has be done and its norms have to be followed, wherever applicable
(6) All donations should be accompanied with a donation letter, in which the name, address and pan number of the donor is mentioned.
(7) No cash donations of more than Rs 10,000 may be received by a trust.
(8) Any corpus donation should be accompanied with a corpus donation letter, in which the word “corpus” has to be mentioned by the donor.
(9) All funds have to be utilized for the purpose for which they were generated. Attention has to be given that the object (purpose) of any donation cannot be changed without the explicit written consent of the donor.
(10) It is also important that we observe everything related to legal matters such as the filing the required documents regularly before the Registrar/Charity Commissioner and all applicable taxes are paid to the appropriate legal bodies.
Some Tips:
Besides the required regulations mentioned above, it is important that we pay attention to the following:
(1) We must use secular terms in our books of accounts and annual returns, because it is important that the income tax officials are able to understand our terms.
(2) All our charitable activities have to be highlighted in the returns so that the income tax officials can easily take note of them and recognize the fact that we are charitable organizations.
(3) Sufficient care must be taken for any big donations with regard to getting the required request letter or project, verifying if the objects of the donor and recipient are similar and if the recipient trust also has 12A, passing the necessary resolution by the donor trust in its board, etc.
(4) The trust should not get into any activity which is not in line with its objects as given in its constitution.
(5) All major decisions should be taken following the procedures, preceded by the required resolutions from the board (decisions such as buying or selling properties, starting or closing down something, making a new policy decision, any expense involving a big amount of money, major administrative acts like construction, legal action on employees, etc.).
(6) FC funds, FC bank accounts and their accounts have to be kept separately and not mixed up with the local funds.
(7) It is better to keep the business account separately.
(8) Similarly attention may be given that we keep the TDS records, IT returns, FC returns, GST returns, PF and PT records in their respective files
(9) We should periodically monitor the expenses against the income to ensure 85% utilization by the end of the financial year.
As we know from experience, it is a great blessing to have 12A. We have to take all steps necessary to preserve it, for, if we do not have or lose the 12A exemption, we will end up paying income tax like any business entity on all the income of the trust. That would be a huge loss, indeed.
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