Non-profit entities get tax breather

The government today proposed a tax exemption threshold limit beyond which the income of non-profit organisations (NPOs) will be taxed.

According to the revised draft on the Direct Taxes Code (DTC), the NPOs would be able to carry forward 15 per cent of their surplus income, or 10 per cent of their gross receipts, to the next year as exempt from tax.

The carried forward amount will have to be used within three years from the end of the relevant financial year. “The government has responded to representations on taxation of NPOs and given several reliefs. The scope of exemption has been broadened for public religious organisations and been extended to partly religious and partly charitable organisations. The permission to accumulate income is a welcome relief which will provide flexibility to NPOs in their operations,” said Sunil Shah, partner, Deloitte.

The earlier discussion paper on DTC had stipulated that if the entire grant was not used by the NPOs in a given year, tax will have to be paid on the residual amount. The revision in the current draft will come as a great relief for NPOs whose surplus income generated from permitted welfare activities was earlier proposed to be subject to 15 per cent taxation in the first discussion paper.

The revised draft has taken into consideration that most of the donation funds flow into NPOs in the last two quarters of the year, making it difficult for them to utilise the funds during the year. However, donations by an NPO out of its accumulated surplus to another NPO will not be considered as funds used for a charitable purpose.

Furthermore, the first discussion paper on DTC had required NPOs to go for fresh registration after the tax regime came into effect. The new draft removes this stipulation and proposes that NPOs registered under the Income Tax Act of 1961 will not have to apply for fresh registration. They would only be required to provide additional information to facilitate the administration of new provisions.

Partly religious and partly charitable institutions will also be treated as NPOs if they are registered under the Code and income from charitable activities will also be liable to tax like other registered NPOs. The revised draft also proposes to empower the central government to notify any NPO of public importance as an exempt entity.

In order to maintain continuity and minimise litigation, the revised draft proposes to maintain the phrase “charitable purposes “(as used in the current act) in place of “permitted welfare activity” (as proposed earlier) in order to describe the charitable intent of the activities by NPOs.