Charitable Trusts and Section 12AB: Navigating Compliance Challenges

Introduction

Significant modifications were made to India's income tax structure for charitable and religious trusts under the Finance Act 2020. The substitution of Section 12AB for the previous registration procedure under Section 12A/12AA was one of the most significant changes. This change was made in an effort to improve transparency, expedite the compliance procedure, and stop tax exemption abuse. In order to preserve their tax-exempt status, trusts that were registered under Section 12AB in 2021 need to be alert to important deadlines and compliance requirements.

Important Aspects of Section 12AB

• Validity of Registration: Charitable trusts and institutions are only allowed to register under Section 12AB for a set amount of time, usually five years. Within six months of their registration expiring, trusts must submit a fresh application for renewal.
• Provisional Registration: Under Section 12AB, new charitable trusts or organizations may register for a three-year period. They have to set up their operations and submit an application for permanent registration during this time.

Deadlines for Applications

Prior to the implementation of Section 12AB, trusts registered under Section 12A/12AA had to switch to the new system by submitting Form 10A by March 31, 2021. To avoid possible tax repercussions, those who missed the original deadline must submit their applications as soon as possible.

Requirements for Compliance Under the Finance Act 2020

• Annual Filing Requirements: Every year, trusts must submit Form 10B (Audit Report) and ITR-7 (Income Tax Return). Penalties and the loss of tax-exempt status could result from failure to comply.
• Records Maintenance: To guarantee that money is used for charitable purposes, trusts must keep accurate records of all contributions, revenues, and expenses.
• Use of Income: The trust must use a minimum of 85% of its income on religious or philanthropic endeavors. Unless it is set aside for specific purposes under Section 11, unspent income may be subject to taxation.
• Periodic Renewals: In order to keep their tax-exempt status from expiring, trusts must file for registration renewals within the allotted time frames.

Consequences of Non-Compliance

Serious repercussions may result from breaking the rules outlined in Section 12AB, including:

• Loss of Tax Exemption: Trusts may no longer be exempt from paying taxes on their income if they neglect to renew their registration or meet filing requirements.
• Fines and Interest: Failure to comply may result in fines and interest on overdue taxes, which would put additional pressure on the trust's budget.
• Enhanced Scrutiny: If a trust violates the rules, the income tax department may examine it closely, which could present financial and legal issues.

How Charitable Trusts Can Maintain Compliance

• Verify the validity of your registration under Section 12AB and start the renewal process as soon as possible.
• On-time Form Submission: To avoid fines, submit Form 10B and ITR-7 before the deadline.
• Keep Thorough Records: Maintain detailed records of all your earnings, outlays, and philanthropic endeavors.

Conclusion

The Finance Act 2020 and the introduction of Section 12AB brought significant changes to how charitable trusts are regulated. To maintain their tax-exempt status, trusts registered under Section 12AB in 2021 must remain watchful, fulfill filing requirements, and adhere to compliance norms.

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