Saturday, February 1, 2025

Budget 2025: Simplifying Compliance for Charitable Organizations and Enhancing Donation Regulations

The Finance Bill 2025 introduces two key amendments aimed at simplifying the regulatory framework for charitable organizations and improving donation tracking. These changes primarily focus on:

  1. Extending the registration period for small charitable trusts from 5 years to 10 years.
  2. Revising the definition of 'specified persons' to accommodate more substantial donations and remove unnecessary classifications.

These changes are intended to reduce administrative burdens and improve the overall efficiency of charitable organizations. Below is an in-depth look at the amendments and their impact.

1. Extended Registration Period for Smaller Charities

Current Scenario Under Section 12AB, charitable organizations must apply for re-registration or renewal every five years. This requirement imposes a significant compliance burden, particularly for smaller charities that have minimal income. Additionally, the compliance requirements are uniform across all organizations, regardless of size.

Proposed Amendment The Finance Bill 2025 proposes extending the registration validity from five years to ten years for charitable institutions whose total income, before exemptions, does not exceed Rs. 5 crores in each of the two previous years. This change aims to alleviate the administrative burden for smaller charities.

Conditions for Eligibility

  • The change applies only to organizations seeking re-registration, renewal, or conversion from provisional registration to regular registration.
  • New charities can apply for provisional registration for 3 years, which can later be converted into regular registration for ten years if they meet the income criteria.

Impact of the Change

AspectBefore AmendmentAfter Amendment
Registration Period5 years10 years for eligible charities
EligibilityApplicable to all organizations, no income capOnly applicable to organizations with income below Rs. 5 crores in the last two years
New CharitiesDirect regular registration for 5 yearsProvisional registration for 3 years, can be converted into 10-year regular registration
Existing CharitiesRenewal every 5 yearsNo change unless renewing after 5 years
Impact on ComplianceFrequent renewals and documentationReduced documentation burden, longer validity

Challenges

  • The amendment will benefit charities only at the time of re-registration or renewal. It does not provide immediate relief to those with pending renewals.
  • There is no change to Section 80G, so smaller charities still face the requirement of applying for approval every five years.

2. Revised Definition of 'Specified Persons' Under Section 13(3)

Current Scenario Under Section 13(3), any person who contributes Rs. 50,000 or more to a charitable trust is classified as a 'specified person.' This threshold had become outdated, leading to unnecessary compliance and record-keeping for smaller donations made years ago.

Proposed Amendment The Finance Bill 2025 proposes increasing the donation threshold to Rs. 1 lakh for contributions made in the relevant year, or Rs. 10 lakh in total across all previous years. Furthermore, the relatives of donors and businesses where they have a substantial interest will no longer be classified as specified persons.

Impact of the Change

AspectBefore AmendmentAfter Amendment
Contribution ThresholdRs. 50,000Rs. 1 lakh for contributions in a single year, or Rs. 10 lakh in aggregate over several years
Relatives of DonorsClassified as specified personsExcluding relatives from the definition of specified persons
Donor's Business InterestsConcerns where the donor has substantial interest were considered specified personsExcluding businesses where the donor has substantial interest
Compliance BurdenRequired detailed reporting of past donations, relatives, and business interestsEasier to manage with updated donation thresholds and exclusions
Impact on CharitiesCharities had to disclose significant details for small donationsOnly donations above Rs. 1 lakh (or Rs. 10 lakh in aggregate) need reporting

Impact on Compliance

AreaBefore AmendmentAfter Amendment
Disclosure of Donors' RelativesRelatives of donors required to be disclosedNo longer required to disclose relatives
Donations DisclosureSmall donations and old contributions needed to be trackedOnly donations above Rs. 1 lakh (or Rs. 10 lakh in aggregate) need tracking
Compliance DifficultyHigh due to outdated thresholds and extensive reporting requirementsReduced difficulty, more practical thresholds

Challenges and Areas for Clarification

While the amendments provide significant relief, some issues remain unresolved:

  1. For Smaller Charities: The ten-year registration extension applies only when applying for re-registration or renewal. It does not provide immediate relief to those with pending renewals.
  2. Income Threshold Clarification: For new charities with no income history from the past two years, it remains unclear how they will meet the income requirement to apply for a ten-year registration.
  3. Section 80G: There is no corresponding change to Section 80G, so charities still have to renew their tax-exempt status every five years, which limits the overall benefit of the ten-year registration.

Conclusion

The Budget 2025 amendments represent a significant step towards simplifying the regulatory environment for smaller charitable organizations and making donation disclosures more manageable. The extension of registration validity and revision of specified persons' definition will reduce administrative burdens and streamline compliance for charities. However, the lack of changes to Section 80G and the delayed relief for existing charities with pending renewals may limit the full impact of these changes.