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Direct Tax Vista Your weekly Direct Tax recap Edn. 46 – 21st February 2023 By Vivek Jalan, Partner, Tax Connect Advisory Services LLP |
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Prepare for New ITRs 1-6 for AY 2023-24
The ITRs for AY 2023-24 have been notified well in advance of the start of the AY 2023-24 and therefore the CBDT has made it very clear that there would not be any extension of due dates. Hence it is important that taxpayers and professionals are return ready and immediately after the TDS/TCS credits reflect in the Form 26AS, they file the ITRs in June 2023 itself without waiting for last date. One can access our video on the same at https://www.youtube.com/watch?v=AGBDU09UxbI through https://www.vilgst.com/ home page.
1. Understanding the Code of Taxation of NGOs/ NPOs/Trusts
ITR-7 has seen a major overhaul of the form and we will come out with our video on the same soon. However, to understand the changes in ITRs, one needs to understand the developments in the bygone year and the amendments proposed in this Finance Bill 2023. Infact, taxation of NGOs/ NPOs/Trusts is a Code in itself and hence one needs to understand them wholistically –
A. There are two Exemption Regimes for NGOs/ NPOs/Trusts –
1. Regime 1 – U/S 10(23C) – Educational/medical Institutions/etc
2. Regime 2 – U/S 12AA/12AB – Others
B. The following are the major new amendments proposed in this Finance Bill 2023 –
1. Treatment of donation to other trusts: Under existing provisions, the income of trusts/ institutions is exempt if they apply at least 85% of their income towards charitable/ religious purposes either by themselves or by donating to another trust/ institution with similar objectives, other than by way of corpus. It is proposed to restrict the exemption to 85% of the total amount donated to another trust/ institution, under both the regimes.
2. Deemed exit in the event of failure to register: if the trust/ institution fails to make application for registration or approval it shall be deemed to have been converted into a form not eligible for registration or approval, on the last date for making such application, thereby, invoking the provisions of “exit tax” in such event.
Exit tax = FMV of Assets - FMV of Liabilities (Accredited Income)
3. Streamlining the process of registration: the application for provisional registration shall be made before the commencement of activities and not one month before the commencement of PY.
Further, the roll back provisions related to exemption for earlier Assessment years ("AY") in case of pending assessments are rendered ineffective as the trusts/ institutions are now required to mandatorily apply for registration prior to the commencement of their activities.
4. Mandatory filing of return of income within the due date: for claiming the exemption, the trust/ institution must mandatorily file the return of income ("RoI") within the due date specified under the Act. The option of filing an updated RoI upto 2 years from the end of AY shall not be available.
5. Time limit for furnishing the form for accumulation/ deemed application of income (Form 9A/10): The benefit of accumulation/ setting aside of income or deemed application of income, the requisite statement in the prescribed form (Form 9A/10) shall be furnished at least 2 months prior to the filing of RoI (i.e. 31st Aug 2023). This will ensure that the auditor in its (form 10B/10BB) to be filed 1 month before RoI Date (i.e. 30th Sep 2023), can include reporting the details of aforementioned forms.
6. Depositing back of corpus and repayment of loans or borrowings: The Finance Act, 2021 clarified that the application of income out of corpus or out of loans shall be treated as application not in the year of actual expenditure but in the year of reinvestment as per Sec 11(5)/ redeposit to corpus or repayment of such loan respectively. If trusts/ institutions have already claimed the exemption in the year of actual application, the exemption will not be available again in the year of reinvestment/ redeposit or repayment.
It is also proposed that the exemption out of corpus or loan is available only if the reinvestment/ redeposit to corpus or repayment of loan/ borrowing is made within 5 years of utilizing the funds from the corpus or borrowings and after satisfaction of certain conditions
Conditions to be satisfied for application of Corpus Donations -
- Deduction of TDS on application
- Expenditure in cash should not exceed INR 10,000
- Donation should not be by way of corpus to another trust
- No carry forward/set off of excess application
- Application to be in India
- Application eligible on Cash Basis
- Application should not directly/ Indirectly benefit any person mentioned u/s 13(1)
- Loan to be repaid/ Corpus donation repaid/ re-invested within 5 years for treatment as application for this purpose
7. Bringing defective applications within the ambit of specified violation: Presently, the provisional registrations/ approvals and re-registrations/ approvals are automatically approved by Centralized Processing Centre, without any verification or enquiry. This has resulted in granting of registrations/ approvals despite the applications being defective (viz false or incorrect or incomplete information).
To avoid disruption, it is proposed to include such instances within the scope of “specified violation” to vigilant the applicants about the possibility of having their registration or approval cancelled.
The Bill attempted to primarily focuses on plugging certain loopholes to curb the misused provisions, which goes to prove that the trusts and institutions utilizing the benefit of exemption are under the constant radar of Revenue. Even after registrations are granted, there may be a chance of cancellation due to “specified violations”
The registration and compliance norms for the Charitable Organisations are simultaneously being streamlined to foster smooth implementation of their activities.
8. Application of funds by donations to other trusts: would be allowable only to the extent of 85% of donations so made
C. Amendments made by Finance Act 2022 -
1. Application of 85% on payment basis and not on accrual basis - from FY 21-22
2. Books of Accounts to be maintained by entities covered under 1st / 2nd Regime
3. Cancellation of registration incase certain “specified violation” is found eg. Violations of objects, non-compliance with by-laws, application for religious purpose, etc. AO can also inform the PCIT. Such cancellation will happen within 6 months of initiation
4. If 85% Income is not applied in 5 consecutive years, then the excess of unapplied part is treated as the income of the entity for the 5th Year
5. “Exit Tax” for entities closing operations, but after deduction of expenditures (not gross)
6. Donations for places of worship repairs and renovation may be treated as Corpus/accumulated/applied at the option of the assessee from FY 2020-21
7. Penalty u/s 271AAE incase income is applied for benefit of related person u/s 13 or corresponding provision u/s 10(23C) of 100%/200% for 1st/subsequent violation.
D. What’s in The Supreme Court Judgement in the case of NEW NOBLE EDUCATIONAL SOCIETY VERSUS THE CHIEF COMMISSIONER OF INCOME TAX 1 AND ANR., [2022-VIL-23-SC-DT]: This judgement holds that the word “solely” used in Section 10(23C)(vi) is absolute and has to be strictly interpreted. Hence for Educational Institutions which are covered u/s 10(23C)(vi), even if they carry out any other activity incidental to their primary objective, they would be taxable to that extent. Section 10(23C)(vi) provides as follows -
“(vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the 122[Principal Commissioner or Commissioner; or”
Therefore, The theory of ‘pre-dominant’
activity is dilated to the extent of 10(23C)(vi). However, it does deal with
per-se category or GPU u/s 2(15).
E. What’s in The Supreme Court Judgement in the case of ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTIONS) Vs AHMEDABAD URBAN DEVELOPMENT AUTHORITY [2022-VIL-24-SC-DT]: This judgement holds only on the GPU limb u/s 2(15) but not on six ‘per-se’ categories viz. relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest. This judgement holds as follows -
1. Provisio to 2(15) has been amended for a reason. As opined in Circular of CBDT, that in garb of ‘GPU’, commercial activities are carried on by NPOs.
2. Surat Art Silk Mills decision was before the amended ‘provisio’ to Section 2(15)
3. Any ‘business distinct’ from the primary object of the NPO will not meet the purpose of provisio to 2(15) and hence will be taxable.
4. Consideration collected ‘just to recoup’ cost with a ‘nominal mark up’ is not commercial, to the extent carried on for activities incidental to the primary objective.
5. Higher mark up is also permitted when ‘20%’ threshold not violated as envisaged u/s 2(15)
6. Amendment to Section 2(15) is retrospective and is only clarificatory
7. 11(4) & 11(4A) to be read harmoniously – they are not distinct
F. In this backdrop, the following are the amendments in ITR-7 of AY 23-24 –
1. ITR 7: Sch I amended and New Schedule IA introduced to track application, especially payment to other trusts and accumulations in various years -
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2. ITR 7: Sch D amended and new Sch DA introduced to track ‘deemed application’ -
3. New disclosures in Balance sheet to track “Investments” as per Section 11(5) -
4. Amendments in Schedule A to summarise ‘receipts’. ‘applications’ and ‘accumulations’ as per objects -
To sum-up and conclude, the ITR-7 is designed very clearly how to track firstly receipts, secondly applications and lastly accumulations & investments as per the two regimes. So NPOs need to now restructure their activities as per the following broad principles -
1. The judgements are not applicable to ‘inter’se’ activities u/s 2(15).
2. For GPU Category –
i. Only those incidental activities (falling under the mischief of commerce) provided ‘in course’ of GPU will be exempt.
ii. Consideration collected ‘just to recoup’ cost with a ‘nominal mark up’ is not commercial
iii. Higher mark up is also permitted when ‘20%’ threshold not violated incase of GPU
3. The receipts from activities have thus to be classified from –
a. Inter-se activities
b. GPU activities
c. Activities incidental to GPU activities and
d. Activities not incidental to GPU activities.
4. Actions have to be taken for activities incidental to GPU activities and activities not incidental to GPU activities as per the judgements.
5. A decision need to be arrived at for Taxation for the above four activities.
6. Proper books of accounts have to be maintained to track receipts, application, accumulation and investment.
2. Global Minimum Tax (GMT) on track for a 1st Jan 2024 launch: Agreed Administrative Guide released in Feb 2023
The OECD/G20 Inclusive Framework (IF) on BEPS released “technical guidance” to assist governments with implementation of the GMT, which will ensure Multi-National Entities (MNEs) will be subject to a 15% effective minimum tax rate. The guidance was approved by the OECD/G20 Inclusive Framework on BEPS (IF) and is therefore not subject to public consultation. Implementing jurisdiction will apply the GloBE Rules consistent with Agreed Administrative Guidance, subject to any requirements of domestic law. The Administrative Guidance is expected to play an important role in promoting certainty under the GloBE Rules by clarifying the interpretation of the GloBE Rules and by providing guidance to tax administrations on how to apply the GloBE Rules.
Among other issues, the administrative guide provides guidance on Conversion of Euro/ Non-Euro Based thresholds. Jurisdictions should rebase their non-Euro denominated thresholds annually, based on the average foreign exchange rate for the month of December determined by the foreign exchange reference rates as quoted by the European Central Bank (ECB) and apply the rebased thresholds to any Fiscal Year that starts on (or by reference to) any day of the following calendar year. Where the local currency of the jurisdiction is not quoted in the foreign exchange reference rates of the ECB or the jurisdiction faces legal or practical impediments to using such exchange rate when setting their own monetary thresholds under domestic legislation, the jurisdiction should rebase their non-Euro denominated thresholds based on the average foreign exchange rate for the month of December as quoted by the jurisdiction’s Central Bank.
Further the guidance allows for variation in design of Qualifying Domestic Minimum Top-Up Tax (QMDTT) vis-à-vis GloBE Rules, stating that “some degree of customisation of a QDMTT in each jurisdiction is to be expected” and “variations in outcomes between the minimum tax and GloBE Rules will not prevent that tax from being treated as a QDMTT if those variations systemically produce a greater incremental tax liability.”
India is likely to implement Pillar 2 as IF member, active participant in development of GloBE rules. It holds that 15% MTR is just and fair, and it should be ensured that companies don't go to tax havens. Further, Pillar 2 proposal vindicates India’s stand on addressing the issue of cross border profit shifting. For MNEs in India, it is expected that the GMT should be studied and an “Impact Analysis” should be done in the Indian scenario to start with so that one is prepared for the change. On the other hand, this is a new area in International Taxation and professionals world-wide are looking forward to work in this area. Readers may go through the following publications of OECD to have an in-depth understanding of this new area -
A. Feb 2023 : Agreed Administrative Guidance for the Pillar Two GloBE Rules
B. Dec 2022: Safe Harbours and Penalty Relief document
C. Commentary to the GloBE Model Rules : approved and released by the Inclusive Framework on 14 March 2022
D. Public consultations on the GloBE Information Return
E. October 2021 Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.
(The author is a CA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Lead - Indirect Tax Core Group of CII- ER and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)