In India, an NPO can be constituted in the form of a trust, society, or a company. All three forms are widely prevalent in the country. To encourage charitable activities, Indian tax law grants tax exemption to these philanthropic organizations. However, to enjoy tax-exempt status in respect of their income, the NPOs must comply with certain pre-requisites such as obtaining the registration with the tax authorities, and spending on charitable activities at least up to the prescribed thresholds. The activities of these organizations are largely funded by voluntary contributions. The Indian tax law allows the donor to claim the donation made to such exempt entities as an eligible deduction from its income, up to specified limits, irrespective of the tax category of such donor. However, these institutions are required to obtain a separate approval to qualify as ‘eligible donee’ and enable the donor to claim the deduction.
In the past few years, the government has made several changes in the laws governing the NPOs. Recently, some amendments were done in Income-tax Act related to NPOs vide Finance Act 2021.
One of the key changes is to streamline the tax registration and approval process for the NPOs. In the past, different tax officers adopted different yardsticks while granting approval for tax-exempt status. Every application was treated differently because of which NPOs faced some practical challenges.
On the other hand, it was also becoming difficult for the tax authorities to keep a check on the nature of activities undertaken by such entities. Thus, to standardize this process, the government has introduced a new scheme of registration and approval for the NPOs. While these changes were brought in a year ago, due to the ongoing pandemic, the implementation was deferred till 1 April 2021. The new framework not only covers the registration process but also changes the way donors can claim the benefit of tax deduction, which is discussed below.
Key highlights of new scheme:
— All existing as well as new NPOs must obtain registration under the new scheme to be eligible to claim tax exemption going forward. Even approval for ‘eligible donee’ is required to be re-validated as per the new norms. Applications for revalidation by NPO already approved should be made by 30 June 2021.
— Application for registration/ approval must be made online through the income-tax portal.
— Entities making an application for the first time may move an application even before the commencement of the activities. Provisional registration will be given in such cases. Subsequently, this should be converted into normal registration within the prescribed timelines.
— A Unique Registration Number will be allotted for each NPO upon granting of approval. This is in addition to Permanent Account Number (PAN) i.e. unique tax identification number required to be obtained under the domestic tax laws.
Applications made under the old scheme and pending for disposal as on 1 April 2021 shall be deemed to be applications made under the new scheme. Such applicants are not required to apply afresh under the new scheme. However, it is pertinent to note that detailed guidelines on how such pending applications will be considered under the new scheme by the tax administration while granting registration/ approval are awaited.
Introduction of validity period
Under the erstwhile provisions, approval once granted was perpetual unless specifically cancelled/surrendered. Now, all registration/approval shall be valid for a defined time.
Provisional registration shall be valid for a period of three years. Once activities are commenced, then such provisional registration needs to be converted into full-fledged approval within six months. In any case, normal registration should be applied at least six months before the expiry of provisional registration.
A normal registration shall be valid for a period of five years (including the period for which an NPO was provisionally registered). Thereafter, NPOs will have to get their registration renewed every five years to continue enjoying the tax benefits.
Disposal of application
Re-validation and provisional registration cases will be granted registration based on documents submitted at the time of making the application. No additional information is likely to be called upon by the tax authorities in such cases. However, all requests for renewals or conversion of provisional to normal registration etc. are likely to be subject to detailed scrutiny.
The department is obligated to dispose off the applications promptly. Further, an application can be rejected only after allowing the applicant to explain the case and recording reasons for such rejection, as applicable.
Incorrect or incomplete applications may lead to rejection of an application. This may happen even in the case of re-validation and provisional registration.
Also, if it is subsequently noticed by the tax authorities that the details submitted, or claims made by the organisations are incorrect, the department may cancel the registration. Such cancellation would be effective from the date of grant of registration/ approval. Hence, the NPOs should exercise caution while furnishing any information and/ or details along with the application and ensure that it is complete and accurate in all respects.
First-time applicant and renewals
At the stage of conversion of provisional into normal registration, tax authorities are likely to examine the nature of activities carried out by NPO in detail. Hence, necessary information/details should be kept ready to substantiate the information submitted in the application.
Also, NPOs are required to apply for renewal every five years. This would facilitate the tax authorities to re-examine the affairs of NPOs and satisfy themselves about the genuineness of the activities carried out by them.
NPOs should ensure their activities are always as per their charitable objectives. This should be supported by robust documentation. Further, adherence to compliances even under other governing laws is also important and may be examined at the time of renewal. The intention is to reduce roving inquiries made into the day-to-day affairs of tax-exempt entities, and instead focus on substantiating the key objectives for the which the NPO has been formed.
Filing a statement of donation
As discussed above, every NPO accepting donations will have to seek separate approval to be considered as ‘eligible donee’. Under the erstwhile mechanism, the NPOs were required to obtain such approval only once and did not have any further reporting obligations in respect of donations received. Going forward, all such entities will have to submit an Annual Statement in respect of donations received during the year with effect from the financial year 2021-22. It is intended to make the details of donations available in the centralized tax records of the taxpayer/donor basis this statement. The objective is to aid the donor in claiming the benefit at the time of filing his tax return. A deduction would be likely be available only for donations appearing in the tax records of donors. It seems that the process flow would be like one for withholding tax. This should help plug loopholes and help genuine donors in claiming the tax benefits. This will be possible through facilitation of one-on-one matching between donations received by exempt entities and donations claimed by the donor.
Key features of annual statement
— Reporting is required in respect of each receipt. Details of donors such as name, address, and the prescribed identification number are required to be reported. Furnishing incomplete details of donors may lead to denial of the tax benefit in the hands of the donor. On the other hand, this could have potential exposure of such donations being treated as “anonymous donation”, which would be taxable at a higher rate in the hands of donee.
— Donations of all kinds i.e. whether received in cash, kind or through cheque/ electronic payments should be reported. It is worth noting that cash donations over `2,000/- and donations in kind are not considered as eligible deduction.
— The annual statement can be rectified to correct mistakes. However, a detailed process for making such rectification is yet to be announced.
— A certificate of donation shall be issued to each donor. This certificate is likely to get generated based on the annual statement filed by the donee. Detailed procedure in respect of a generation of such certificate is yet to be announced.
— Delay in submission of annual statement or issuance of certificate may attract late fee and penalty.
The introduction of new scheme, interlinking of the eligible donation benefit with the annual statement is a welcome move. The changes introduced by the government shall ensure transparency in the functioning of the NPOs and their philanthropic activities to ensure that the intent is met both in law and spirit.
Pankaj P. Khodaskar and Mrinal Chandak contributed to this article.
Vikas Vasal is national leader-tax at Grant Thornton Bharat LLP.
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