New Section 12AB to replace Section 12AA and Section 12A for Charitable Trust and NGO Budget 2020

Finance Act, 2020 has unleashed certain new compliance burdens on Charitable Trusts and Exempt Institutions. As per new provisions of the Finance Act, 2020, Charitable Trusts and exempt institutions will have to reapply for Income Tax registration.

The Finance Act, 2020 has made far-reaching and sweeping changes pertaining to the registration and exemptions of charitable institutions.

All the existing charitable and religious institutions (including NGOs) which are registered or approved under the following sections-

Section 12A

Section 12AA

Section 10(23C)

Section 80G

are compulsorily required to switch to section 12AB for fresh registration.

The Finance Minister in her Budget Speech iterated the fact of the new method of registration. The extract of her Budget  Speech is reproduced below-

 Further, in order to claim the tax exemption, the charity institutions have to be registered with the Income Tax Department. In the past, the process of the registration was completely manual and scattered all over the country.

 In order to simplify the compliance for the new and existing charity institutions, I propose to make the process of registration completely electronic under which a unique registration number (URN) shall be issued to all new and existing charity institutions. Further, to facilitate the registration of the new charity institution which is yet to start their charitable activities, I propose to allow them provisional registration for three years.

Currently, several hospitals, schools and colleges are registered simultaneously under section 10(23C) and 12AA. Charitable trusts and intuitions currently registered under both section 10(23C) and section 12AA will now be required to apply for revalidation or renewal of either the approval under section 10(23C) or registration under section 12AA, but not both.

Section 12AA dealing with the procedure for registration of a charitable trust will cease to be applicable from 01.06.2020; instead, a new section 12AB has been inserted prescribing the procedure for fresh registration. Further, instead of the CIT (Exemption), an application is required to be made to the Principal Commissioner of Income-tax or Commissioner of Income-tax.

The Government intends to create a National Register of all charitable and religious institutions and the Income Tax Department will issue an electronically generated Unique Registration Number (URN) to all charitable and religious institutions. The process of revalidation of all the charitable and religious institutions will enable the Government to weed out all the inactive and defunct charitable institutions. In the past, many registered trusts were found engaged in malpractices for private profiteering rather than doing any genuine social work. The department wants to curb those practices. The renewal of registration after every five years will provide an opportunity to withdraw the exemptions without going through the complicated cancellation provisions.

In 2019, the rules related to charitable trusts/NGOs were tightened to withdraw the registration even for violations under other laws as may be deemed material for achieving its objectives.

Charitable trusts and exempt institution which are already registered under section 12A or section 12AA of Income Tax Act, 1961 will now be required to reapply online for registration and approval by August 31, 2020.  Provisions of registration under section 12AA or section 12A will become redundant from 01st June 2020 and a new section 12AB will come into force with effect from 01st June 2020. All the existing registered trusts under the erstwhile section 12A or section 12AA would move to new provision section 12AB.

The new section 12AB proposes to change the registration process by prescribing the time frame for processing the application and validity of such a registration certificate so granted under the new section 12AB.

An order granting registration or approval shall be passed within 3 months of the application. Such registration or approval shall be valid for 5 years. 

Similarly, charitable trusts and exempt institutions which already have Section 80G certificate will now be required to reapply online for registration or approval by August 31, 2020. The registration shall remain valid for 5 years. 

The compliance burden on Charitable Trusts and Exempt Institutions goes further to file statements of donation received and issue of donation certificates to donors in line with TDS provisions. Hefty fines and penalties are imposed for any failure to file such statements. So henceforth, details of deduction under section 80G shall be auto populated in assessee's Income Tax return.

It appears that the concept of renewal of registration of trusts and institutions has been adopted from the FCRA. Under FCRA, 1976 and even under FCRA, 2010, there was no concept of renewal of registration. The registration was granted, was perpetual in nature unless cancelled. The Foreign Contribution Regulation Rules, 2015 has ushered the system of five years validity and renewal of registration certificates.

Presently, a charitable trust or an institution which are registered for several decades under section 12A or section 12AA of the Income Tax Act, 1961 are not required to renew the registration. A registration once granted under section 12A or section 12AA remains valid for the perpetual period unless it is withdrawn or cancelled under section 12AA(3) or section 12AA(4). 

Similarly, all 80G certificates expiring after 1st October 2009 shall remain valid in perpetuity unless specifically cancelled or revoked. Prior to an amendment by Finance Act, 2009, 80G certificates were required to be renewed after the validity period.

It has now been proposed in the Finance Bill, 2020 that the provision of section 12AA shall not be applicable on or after 1st June, 2020.

Further, a new clause (ac) has been inserted in section 12A(1) from 1st June 2020 to provide that where the trust or institution is registered under Section 12A or under Section 12AA, it shall be required to make an application in the prescribed form to the Principal Commissioner or Commissioner for registration of trust within three months from 1st June 2020 and such trust or institution should obtain registration under section 12AB. Thus, all existing trusts or institutions which are registered under Section 12A or Section 12AA will mandatorily be required to reapply for re-registration within a period of three months starting from 1st June, 2020 i.e. upto 31st August, 2020 and obtain registration under Section 12AB. In this way, all the existing trusts will be registered under section 12AB and those which do not apply shall be deemed as cancelled registration. 

It is provided in section 12AB that where the trust or institution is already registered under section 12A or section 12AA and on an application is made under section 12A(1)(ac)(i), registration shall be granted by the Principal Commissioner or the Commissioner by passing an order within a period of three months from the end of the month in which the application was received and such registration shall be valid for a period of 5 years. This amendment will require every trust or institution which are already registered to apply again and in case such application is not made, then, by implication, the registration shall stand cancelled on the expiry of three months i.e. 31st August 2020, with the consequence that such trust or institution shall not be eligible for claiming exemption under section 11 of the Act.

It is to be noted that there is no threshold exemption and all trusts or institutions registered will have to mandatorily apply for re-registration.

It is to be noted that at the time of re-registration, the Commissioner shall call for such documents or information and make an enquiry to satisfy himself about the genuineness of the activities of the trust or institution and also the compliance of such requirement of any other law for a time being enforced by the trust or institution which may be material for the purpose of achieving its object. It is only after being satisfied about the objects of the trust, the genuineness of the activities of the trust and the compliance of the requirement of any other law for the time being enforced that the Commissioner shall pass an order granting registration under Section 12AB. Such order of re-registration shall also be for a period of five years only and such trust shall again be required to apply for re-registration at least for six months before the expiry period of re-registration of five years. Such order of registration or re-registration can be passed by the Commissioner within a period of six months from the end of the month in which the application for registration or re-registration is made. 

This amendment will require every trust or institution which are already registered to apply again and in case such application is not made, then, by implication, the registration shall stand cancelled on the expiry of three months i.e. 31st August 2020, with the consequence that such trust or institution shall not be eligible for claiming exemption under section 11 of the
Act.

It is to be noted that there is no threshold exemption and all trusts or institutions registered will have to mandatorily apply for re-registration.

Further, the due date to file the Tax Audit Report in Form 10B is prescribed and is required to be filed one month prior to the due date of filing of return of income. The Finance Bill, 2020 has amended the return filing due date and the due date earlier specified as 30th September is extended to 31st October. Hence, Tax Audit Report in Form 10B is prescribed and is required to be filed within 30th September of the assessment year.

It is further provided that a trust or an institution applying for re-registration can avail the exemption under section 11 and under section 12 from the assessment year from which registration was earlier granted to the trust or institution. It means the exemption will continue and there will be no break in the exemption that the trust or institution is enjoying.

In case of provisional registration, the exemption under sections 11 and 12 can be claimed from the first assessment year in which provisional registration was granted. In other words, the benefit of exemption can be claimed immediately. Further, where a provisional registration was granted earlier being a new trust, the application for final registration is to be made at least 6 months prior to the expiry of the period of provisional registration or within 6 months from commencement of the activities of the trust.

Similarly, where any modification is made to the objects of the trust which do not conform to the conditions for registration, an application shall be made within a period of 30 days from the date of such modification.

In any other case, application is to be filed at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought. Application for provisional registration for a newly incorporated trust falls under this category.