Tuesday, January 2, 2024

Taxation for Charitable Institutions: A Simple Guide

Taxation for Charitable Institutions: A Simple Guide

Understanding taxes can be tricky, especially for charitable institutions with a noble cause. The Finance Act of 2022 introduced Section 115BBI, bringing changes that impact the way taxes are applied to specified incomes of trusts and institutions. Let's break it down in simple terms.

I - What Charitable Institutions Need to Know

Charitable institutions in India, doing good deeds for the community, usually organize themselves as trusts or societies. The government encourages their work by providing tax exemptions under sections 10 and 11 to 13 of the Income Tax Act, commonly known as the First and Second Regimes of Exemptions.

II - How Taxes Worked Before Section 115BBI

Before the recent changes, if a charitable institution broke the rules for tax exemptions, its registration and complete exemption were at risk. There wasn't a specific rule for taxing certain incomes of charitable institutions at a fixed rate. Then came Section 115BBI in the Finance Act, 2022, introducing a special tax rate for specific incomes, starting from the Assessment Year 2023-24.

III - Understanding Non-Compliance and Tax Rates

To boost charitable activities, the Income Tax Act exempted the income of trusts and charitable institutions. However, if this exemption was misused, taxes were imposed to prevent abuse. Some common violations included applying income outside India or not filing necessary reports. Section 115BBI now addresses the taxation of specified incomes.

IV - Impact on Charitable Institution Taxation

Here's what charitable institutions need to know about Section 115BBI:

  1. Who it Applies to: Section 115BBI applies to funds or institutions for charitable purposes, trusts for public religious purposes, educational institutions, hospitals for philanthropic purposes, and trusts under Section 11.

  2. Tax Rate: Charitable institutions covered by Section 115BBI face a flat tax rate of 30% on their specified income. No deductions or set-offs are allowed, making the calculation straightforward.

    Specified IncomeTax Rate
    Rs 20 croreRs 6 crore
  3. Exclusion of Deductions: No deductions for expenditure or losses are allowed when calculating specified income.

  4. Types of Specified Income: Section 115BBI taxes specific types of income, including accumulated income, deemed income, non-exempt income, benefit for particular persons, and foreign application of income.

  5. Reporting and Compliance: Charitable institutions must follow reporting requirements in audit reports (Form 10B & 10BB) and ITR-7, ensuring proper documentation of specified incomes.

  6. CBDT Clarifications: The Central Board of Direct Taxes (CBDT) clarified that charitable institutions can benefit from normal slab rates on the tax payable on specified income under Section 115BBI.

  7. Practical Case Scenario: Initial confusion led to challenges for charitable institutions, but clarifications allowed them to claim the basic exemption limit and benefit from normal slab rates.

In conclusion, Section 115BBI simplifies tax rates for charitable institutions, but compliance is crucial. Understanding these changes helps ensure transparency and fair taxation for institutions doing important work in our communities