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

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, 2020The 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.

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.

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. 

The important amendments in section 12AA, section 12A and section 12AB are explained below:—

1. Amendment in section 12AA: Section 12AA has been amended to provide that the provisions of section 12AA shall not apply from 01.06.2020. In other words, section 12AA shall become inoperative from 1st June 2020.

2. Amendment of section 12A:  Section 12A has been amended to provide the followings-

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. up to 31st August 2020 and obtain registration under Section 12AB.

In this way, all the existing trusts will be registered under section 12AB.

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.

The amended provisions of section 12A are tabulated as under-

(i) Time limit to make an application for re-registration under different situations-


Section
12A(1)(ac)
Situations
Time Limit
(i)
Where a trust or institution is registered   under section 12A or 12AA
Application shall be made within 31st August, 2020
(within 3 months from 01.06.2020)
(ii)
Where a trust or institution is registered under section 12AB
Application shall be made at least 6 months prior to the expiry date of 5 years
(iii)
Where a trust or institution is provisionally registered under section 12AB
Application shall be made-
(a) at least 6 months prior to the expiry date of provisional registration, or
(b) within 6 months of commencement of its activities,
whichever is earlier.
(iv)
Where registration of a trust or institution has become inoperative
Application shall be made at least 6 months prior to the commencement of the assessment year –
From which registration is to be made operative
(v)
Where the trust or institution has modified the objectives
Application shall be made within a period of 30 days from the date of such modification
(vi)
In any other case
Application shall be made at least 1 month prior to the commencement of the previous year relevant to the assessment year from which the registration is sought

(ii) Time limit to file Tax Audit Report Preponed-


Tax Audit Report
Time Limit
Where a trust or institution is required to file Tax Audit Report u/s 12A
Such Tax Audit Report shall be filed within one month prior to the due date of filing of return u/s 139(4A) read with section 139(1)

The due date for filing of return of income in Tax Audit cases is extended to 31st October. Hence, Tax Audit Report shall be furnished by 30th September.

(iii) Applicability of exemption u/s 11 and u/s 12-


Section
12A(1)(ac)
Situations
Applicability of Exemption
u/s 11 & u/s 12
(i)
Where a trust or institution is registered   under section 12A or 12AA
From the assessment year from which registration was earlier granted to the trust or institution
(iii)
Where a trust or institution is provisionally registered under section 12AB
From the first assessment year in which provisional registration was granted

(iv) The existing provisos to section 12A(2) have been suitably amended so as to make a reference of new section 12AB.

3. Amendment of section 12AB:  Section 12AB has been amended to provide the followings-

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.

It appears that in the case of re-registration of an existing trust or institution, the Principal Commissioner or the Commissioner is not empowered to call for any documents or information or to make any inquiry for granting the registration under section 12AB. The re-registration will be granted on the basis of the existing registration.

It is to be noted that at the time of renewal of 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. 

After being satisfied, the Principal Commissioner or the Commissioner shall pass an order granting registration under Section 12AB. Such order of registration shall also be for a period of five years only and this shall continue after every 5 years. All subsequent application for renewal of registration will need to be made at least six months prior to the expiry of the period of the earlier registration.

Such order of registration can be passed by the Commissioner within a period of six months from the end of the month in which the application for renewal of registration is made.

In case of a new trust or institution, the Principal Commissioner or the Commissioner shall grant a provisional registration within a period of one month from the end of the month in which the application for provisional registration is made.

Any application pending for approval of registration shall be treated as an application in accordance with the new provisions wherever they are being provided.

The amended provisions of section 12AB are tabulated as under-

(i) Granting of registration by the Principal Commissioner or the Commissioner after receipt of an application under the circumstances specified in section 12A(1)(i) to (vi)-


Application is made under Section
12A(1)(ac)
Procedure for fresh registration
u/s 12AB
Remarks
(i)
Registration will be granted for a period of 5 years
[Section 12AB(1)(a)]
It appears that in this case no documents will be called or inquiry will be made for granting the registration.
(ii)/(iii)/
(iv)/(v)
Registration may be granted for a period of 5 years if PCIT or CIT is satisfied about the genuineness of activities and compliances under any other laws of the trust or institutions.

Registration may be cancelled after providing a reasonable opportunity of being heard to the trust or institution.

[Section 12AB(1)(b)(ii)]
In this case, the PCIT or CIT shall have the powers to call for documents or information from the trust or institution or to make inquiries before renewal of the registration after 5 years.

Further, before cancelling the registration, the trust or institution shall be given an opportunity to present its case.
(vi)
Provisional Registration shall be granted for a period of 3 years from the assessment year from which the registration is sought.

[Section 12AB(1)(c)]
It appears that in this case no documents will be called or inquiry will be made for granting the provisional registration.

(ii) Any pending application filed under section 12AA as on 01.06.2020, the same shall be deemed to be an application made under section 12A(1)(ac)(vi).

(iii) Time limit to grant the registration by the Principal Commissioner or the Commissioner after the receipt of an application under the circumstances specified in section 12A(1)(i) to (vi)-


Application is made under Section
12A(1)(ac)
Procedure for fresh registration
u/s 12AB
Time limit to grant registration
(i)
Registration will be granted for a period of 5 years
[Section 12AB(1)(a)]
Within 3 months from the end of the month in which application is made
(ii)/(iii)/
(iv)/(v)
Registration may be granted for a period of 5 years if PCIT or CIT is satisfied about the genuineness of activities and compliances under any other laws of the trust or institutions.
[Section 12AB(1)(b)(ii)]

Within 6 months from the end of the month in which application is made
(vi)
Provisional Registration shall be granted for a period of 3 years from the assessment year from which the registration is sought.
Within 1 month from the end of the month in which application is made

(iv) Any registration granted u/s 12AB(1)(a) or u/s 12AB(1)(b) can be cancelled subsequently if the Principal Commissioner or the Commissioner is satisfied that -
(a) the activities of the trust or institution are not genuine; or
(b) are not carried out as per the objects of the trust or institution; or
(c) the trust or institution has not complied with the requirement of any other law for the time being in force as is material for the purpose of achieving its objects and the order or direction or decree, by whatever name called, holding that such non-compliance has occurred has attained finality or has not been disputed, 
after giving a reasonable opportunity of being heard to the trust or the institution.

The enabling provision empowering the Principal Commissioner or the Commissioner to cancel the registration of a Trust or institution in the new section 12AB is on the same line of the existing section 12AA.

Some issues discussed which needs clarification

1. It is provided that after the receipt of an application for registration or renewal of registration, the Principal Commissioner or the Commissioner shall pass an order of registration within a period of 3 months, 6 months or 1 month, as the case may be. The legislation has used the word 'shall' which means the Principal Commissioner or the Commissioner is mandatorily required to decide on the application for registration within the stipulated time period.

However, it is not provided what will happen to the registration of the trust if the Principal Commissioner or the Commissioner does not pass the order of registration within the stipulated time period of 3 months, 6 months or 1 month. In such a case, in the absence of any deeming provision, whether it will be correct to presume that registration is deemed to have been granted. This is important because after the expiry of 5 years from the date of earlier registration, the trust will become an unregistered one to which exemption under section 11 and 12 are not allowed. It is also not clarified whether the trust can continue to claim the exemption in case there is any delay in deciding the application for renewal of registration by the Principal Commissioner or the Commissioner even after the expiry of 5 years.

2. It is provided that a trust or an institution which is already registered under section 12A or section 12AA is required to apply for re-registration within 31st August 2020. The Principal Commissioner or the Commissioner shall grant the new registration certificate within a period of three months from the end of the month in which application is made. It is further provided that the exemption shall be available from the assessment year from which registration was earlier granted to the trust or institution. In other words, it implies that the new registration certificate will be applicable from the Assessment Year from which the registration was issued originally. The certificate will remain valid for 5 years.

Now consider a case where a Trust was registered in 2011. Then the validity of the period of the registration certificate would have expired in 2016. The draft language of the provision does not suggest that the same will applicable from AY 2021-22 or like. Necessary correction or amendment is expected when the Bill will be enacted.

3. The new law requires that in case of a new trust, the application for provisional registration shall be made at least 1 month prior to the commencement of the previous year relevant to the assessment year from which the registration is sought. It means that in case a trust wants to take registration from FY 2020-21, it has to apply for registration by February 2020. Now consider a case where a new trust is incorporated in the month of June 2020. Ideally, its exemption benefit should begin from the FY 2020-21 itself but it is impossible for the trust to get the registration effective from FY 2020-21. This is because, for getting the exemption benefit from April 2020, the application should have been made by February 2020 whereas the trust is incorporated in June 2020. Hence, it can only avail the exemption from FY 2021-22 only. It means the trust will not be entitled to benefit of exemption in the first year of incorporation.

4. The new section 12AB enables Principal Commissioner or the Commissioner to cancel the registration in case he is satisfied that, inter alia, the Trust or institution has not complied with the requirement of any other law for the time being in force as is material for the purpose of achieving its objects. This provision even exists in the existing section 12AA which was introduced by Budget 2019. It has wider implication and many doubts were raised even then also. The same is continued here.

The amendments expect the tax authorities to have expert knowledge in all the applicable laws in force and gives them unfettered powers to raise huge tax demands in case of cancellation of registration.

If after the cancellation of registration based on non-compliance of law, the trust has taken steps to comply with such law, then whether the registration would automatically be restored, or the trust has to re-apply for registration.

Further, it is not clarified which non-compliances of applicable laws to a Trust is material for the purpose of achieving its objects.

A question arises whether a violation under Employees Provident Fund Laws, FCRA, GST, etc. are also covered under this ambit which is not at all connected with the activities of the Trust. 

There are certain laws which are related to the activities of the Trust. Certain laws are related to the employees or workforce of the Trust. Certain laws are fiscal in nature. Even a minor violation of any nature of law may lead to cancellation of the registration.




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2 Comments

  1. VERY NICE PRESENTATION.

    I have query that, trust is incorporated in 2016, till now it has not applied for 12A and 80G,
    query is today is 10th July,2020 . can i apply for 12A nd 80G from F.y.2020-21?

    and it also defered till october, so if i file today then it will be under 12AA or 12AB

    ReplyDelete
    Replies
    1. Only the new system introduced by the Finance Act 2020 is deferred till Oct 2020

      Delete