Understanding Finance Bill 2023 and its Impact on Charitable Organizations

Charity organizations, particularly non-governmental organizations^[1] (NGOs) operating in India, are expected to be significantly impacted by the Finance Bill 2023’s proposed tax law changes.   Regulations will be introduced to regulate inter-charity donations, modify filing requirements, change the regulations for corpus fund applications, and introduce new measures for registration and cancellation. In this blog, we’ll review the main ideas in the Finance Bill 2023 and consider how they can affect NGOs.

Restrictions on Inter-alia Donations

The introduction of inter-charity donations is one of the most important amendments to the Finance Bill 2023.   Only 85% of the donation from one charity organization to another will be taken into consideration under the new regulations when figuring out the donor organization’s use of money. Organizations that give out grants and save some of their money may be negatively impacted by this change. Until NGOs spend 100% of their annual total income, they may be unable to donate their accumulated funds to other charitable organizations.

Modifications to Filing Requirements

The filing procedures for NGOs are modified by the Finance Bill 2023. Forms 9A and 10 filing, which were formerly due on October 31st, must now be finished two months prior to the deadline for submitting the tax return in ITR 7. Consequently, NGOs will have until August 31 to submit these applications. This change attempts to ensure prompt compliance while streamlining the reporting process. For NGOs to keep their tax-exempt status, it is essential that they follow these new deadlines.

Filing of Returns on Time

The Finance Bill 2023 requires NGOs to file their income tax returns by the deadline specified, which is by October 31st or by the extended deadline specified in section 139(4) of the Income Tax Act, in order to be eligible for tax exemption under sections 10(23C) and 12AB. The benefits of tax exemptions could be lost if returns are not filed by the deadlines. NGOs must prioritize the timely filing of their income tax returns in order to retain compliance and benefit from the associated tax incentives.

Corpus Application

The Finance Bill 2023 includes modifications to the corpus fund application as well.   Previously, if a non-profit organization utilized funds from its principal or took out a loan and subsequently repaid it, the funds were considered a form of revenue utilization.   Even if the money is returned later, any request for a donation or loan for a religious or charity organization made before April 1, 2021, will not be considered according to the current proposal.   This clause is present to prevent multiple tax deductions.   If the corpus money is returned or the loan is paid off within five years of the initial withdrawal, the deduction will only be accepted.

Modifications in Registration Procedure

The registration procedure for tax exemptions is altered by the Finance Bill 2023. Organizations that were granted tax exemption under sections 10(23C) or 12A/12AA in the past have to revalidate their registration. The new regulations, however, only let organizations that have not yet begun their operations to apply for temporary registration; organizations that have already begun their operations, on the other hand, may do so for regular registration. The Principal Commissioner or Commissioner will examine the applications to evaluate the goals of the organization, the sincerity of the activities, and conformity with legal requirements. Depending on whether the Principal Commissioner or Commissioner is satisfied, registration or approval will be issued for a period of three or five years.

Exit Tax Implementation

The inclusion of a proposed “Exit Tax” under section 115TD of the Income Tax Act is one major change to the Finance Bill 2023. When five years have passed without a reregistration or renewal application, trusts or institutions registered under sections 10(23C) or 12A/12AA shall be subject to this tax. Similar to this, the Exit Tax will take effect if a trust or institution that has been registered provisionally fails to submit an application for regular registration after three years. To prevent unforeseen tax effects, NGOs should be aware of these laws.

Period for Disposal and Registration Cancellation Powers

The Principal Commissioner or Commissioner must issue an order approving or rejecting registration requests under the Finance Bill 2023 within six months of the end of the month in which the request was submitted. With this clause, the registration procedure will go more quickly, and NGOs’ legal standing will be made clear. In addition, the Finance Bill gives the Principal Commissioner or Commissioner the authority to revoke temporary registrations or re-registrations that were granted based on incomplete or inaccurate applications. This cancellation may happen after giving the impacted NGO a chance to be heard. Beginning with the evaluation year 2023–2024, these modifications will be in effect.

Removing the Section 80G Benefit

The Finance Bill 2023 eliminates the section 80G tax break for donations made to the Rajiv Gandhi Foundation, Indira Gandhi Memorial Trust, and Jawaharlal Nehru Memorial Fund. NGOs and donors who fund these groups will need to review their tax planning techniques and look at alternate options for maximizing deductions.

Conclusion

The fiscal environment for charitable organizations in India is significantly altered by the Finance Bill 2023. It is impossible to overstate the effects of these developments on NGOs because they have a direct impact on inter-charity donations, filing requirements, registration processes, corpus fund applications, and even tax deduction advantages. One of the most significant changes is the cap on donations between charities, which requires organizations to count only 85% of the donation as revenue. Grant-making organizations that depend on accumulated funds or choose to support other charitable organizations may face difficulties as a result of this.

To ensure compliance and preserve their tax-exempt status, NGOs must also take a proactive approach in light of the changes to filing requirements, such as the early deadlines for Form 9A and Form 10 filings. Another essential need for maintaining tax exemptions is the timely submission of income tax returns. Additionally, the Finance Bill 2023 adds new registration and cancellation processes while reiterating the importance of having the right paperwork and following the law. The six-month period for handling registration requests offers NGOs clarity and a streamlined procedure.

The addition of an Exit Tax for trusts or institutions that neglect to submit applications for re-registration or renewal adds yet another layer of compliance and potential penalties for non-compliance. Finally, the elimination of the section 80G benefit for donations to particular foundations emphasizes the necessity for NGOs and donors to re-evaluate their donation plans and look into alternative options for maximizing tax benefits. In short, the Finance Bill 2023 seeks to improve the taxes system for non-profit organizations by making it more transparent, accountable, and effective. To maintain continuous compliance and the successful execution of their charitable missions, NGOs must carefully manage these changes, seek professional guidance, and alter their financial plans.

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