The income tax segment of the Finance Minister’s Budget speech 2022 was one of the shortest in recent years and most of the amendments appeared procedural. However, challenges were lurking in the fine print for Not-for-Profit & Charitable sector. While the Government emphasised that the proposed changes would result in simple, stable and trust-worthy tax regime, the tax proposals for charitable organizations could have far reaching implications on their operations.
Apart from the requirement to maintain books as well as notified documents and reduction in carry forward window for unspent receipts, charities would need to be aware about all regulations that are applicable to them. Reason of saying so is that the budget proposals empower the Revenue authorities to review and cancel the tax exemption status of a charity for default under any law that may be applicable to it. In other words, a minor default under regulations such as labour law, FCRA or functional law could lead to loss of tax-exempt status.
Further, the budget proposals also provide for penalty of up to 200% in case income of the charity is utilised for benefit of specified persons such as the settlor or promoter of the charity or their families. Absence of definition of ‘benefits’ could potentially result in disputes.
The proposals also empower the Revenue authorities to cancel the tax exempt status in case the funds of the charity are utilised for any other purpose apart from the one for which it was initially set up.
Finally, a provision has been introduced to expressly allow expenditure only on cash basis. This would mean that any expenditure not paid during the year would not be treated as application for tax purposes.
While the sector is still reeling from the effects of recent FCRA changes, the above direct tax proposals would only add to their woes. This would only make it imperative for the not-for-profit entities to keep themselves abreast about the regulations applicable to them and strengthen their governance mechanism.