In India, an NPO can be set up in the form of a trust, a company or a company. All three forms are widespread in the country. In order to promote charitable activities, Indian tax law grants these philanthropic organizations a tax exemption. In order to be tax-exempt on their income, however, the NPOs must meet certain requirements, such as registration with the tax office and expenses for charitable activities at least up to the prescribed thresholds. The activities of these organizations are largely funded through voluntary contributions. Indian tax law allows the donor to claim the donation made to these exempt facilities as an eligible deduction from their income, up to certain limits, regardless of the tax category of that donor. However, these institutions must obtain separate approval in order to qualify as an “Eligible Recipient” and allow the donor to claim the deduction.
In recent years the government has made several legislative changes for NPOs. Recently, some changes have been made to the 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 applied different standards when granting tax exemptions. Each application was treated differently, which is why NPOs faced some practical challenges.
On the other hand, it has also become increasingly difficult for the tax authorities to control the nature of the activities of these companies. In order to standardize this process, the government has therefore introduced a new registration and approval procedure for NPOs. While these changes were introduced a year ago due to the ongoing pandemic, implementation has been postponed to April 1, 2021. The new framework not only includes the registration process, but also changes the way donors can claim the tax deduction discussed below.
The main highlights of the new program:
– All existing and new NPOs must register under the new system in order to be able to claim a tax exemption in the future. Even the approval as an “authorized recipient” has to be validated again according to the new standards. Applications for an extension of the already approved NPO should be submitted by June 30, 2021.
– The application for registration / authorization must be submitted online via the income tax portal.
– Agencies that submit an application for the first time can submit an application before starting work. In these cases, a preliminary registration takes place. This should then be converted into a normal registration within the prescribed deadlines.
– Each NPO is assigned a unique registration number after approval has been granted. This applies in addition to the Permanent Account Number (PAN), ie a unique tax identification number that is required under domestic tax laws.
Applications not rejected
Applications under the old system that are made available by April 1, 2021 are considered applications under the new system. These applicants do not have to reapply under the new rules. However, it is important to note that detailed guidance on how to consider such pending applications under the new regime is expected by the tax administration when granting registration / approval.
Introduction of the period of validity
According to the previous regulations, the authorization once given was unlimited in time, unless it was expressly canceled / abandoned. All registrations / permits are now valid for a defined period of time.
The preliminary registration is valid for a period of three years. After the start of the activities, the preliminary registration must be converted into a full approval within six months. In any case, normal registration should take place at least six months before the end of the provisional registration.
A normal registration is valid for a period of five years (including the period for which an NPO has been tentatively registered). According to this, NPOs have to renew their registration every five years in order to continue to benefit from the tax advantages.
Revalidation and provisional registration cases are registered on the basis of the documents submitted at the time of the application. In such cases, the tax authorities are unlikely to request any additional information. However, any requests for renewal or conversion of a provisional registration into a normal registration etc. are likely to be subject to thorough scrutiny.
The department is obliged to dispose of the applications immediately. In addition, an application can only be rejected after the applicant has presented the case and, if applicable, noted the reasons for such a rejection.
Incorrect or incomplete applications can lead to an application being rejected. This can also be the case with a renewed validation and preliminary registration.
If the tax authorities subsequently discover that the information or allegations made by the organizations are incorrect, the department can cancel the registration. Such a cancellation would be effective from the date the registration / authorization was granted. Therefore, NPOs should exercise caution in providing information and / or details with the application and ensure that it is complete and accurate in all respects.
First-time applicants and renewals
At the stage of converting provisional to normal registration, the tax authorities are likely to examine in detail the nature of the NPO’s activities. Therefore, necessary information / details to substantiate the information given in the application should be kept ready.
In addition, NPOs have to apply for an extension every five years. This would make it easier for the tax authorities to review the affairs of NPOs and to satisfy themselves of the authenticity of the activities they carry out.
NPOs should ensure that their activities are always in line with their charitable goals. This should be supported by solid documentation. In addition, compliance with other applicable laws is also important and can be checked at the time of renewal. The intention is to reduce the constant inquiries in the day-to-day business of the tax-exempt companies and instead to concentrate on the specification of the main objectives for which the NPO was founded.
Submit donation receipt
As discussed above, each non-profit organization that accepts donations must obtain separate approval in order to be considered an “eligible recipient”. According to the previous mechanism, the NPOs only had to obtain such a permit once and had no further reporting obligations with regard to received donations. In the future, all these companies will have to submit an annual statement for the donations received during the year from the 2021-22 financial year. It is intended that the details of the donations will be made available in the taxpayer / donor’s central tax records based on this declaration. The aim is to support the donor in claiming the benefit at the time of submitting his tax return. Deduction would likely only be possible for donations that are listed on donor tax records. It seems that the process flow would be like withholding tax. This should help close loopholes and help real donors get the tax breaks. This is made possible by facilitating a one-on-one comparison between donations received from exempted institutions and donations claimed from the donor.
Main features of the annual financial statements
– Reporting is required for each receipt. Information on donors such as name, address and the required identification number must be reported. Providing incomplete information about donors can lead to the donor being denied tax benefits. On the other hand, this could lead to such donations being treated as “anonymous donations”, which would be taxed at a higher rate in the hands of the recipient.
– Donations of all kinds, whether they are in cash, in kind, or by check / electronic payments, should be reported. It is worth noting that donations in cash over 2,000 / – and donations in kind are not considered deductible.
– The annual accounts can be corrected to correct errors. However, a detailed process for such a correction is to be announced.
– A donation receipt is issued to each donor. This certificate will likely be generated based on the annual accounts submitted by the recipient. The detailed procedure for generating such a certificate will be announced.
– Delay in filing the financial statements or issuing the certificate may result in late fees and penalties.
The introduction of a new system, linking the eligible donations with the annual accounts, is a welcome step. The changes introduced by the government are intended to ensure transparency in the functioning of NPOs and their philanthropic activities to ensure that the intent is fulfilled both legally and spiritually.
Pankaj P. Khodaskar and Mrinal Chandak contributed to this article.
Vikas Vasal is the national tax officer with Grant Thornton Bharat LLP.
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