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By Kishore M. Deshpande, FCA, 06.05.2012- Bhilai 16/5/2012Kishore M Deshpande.

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Presentation on theme: "By Kishore M. Deshpande, FCA, 06.05.2012- Bhilai 16/5/2012Kishore M Deshpande."— Presentation transcript:

1 By Kishore M. Deshpande, FCA, Bhilai 16/5/2012Kishore M Deshpande

2 About topic today Myself Kishore M. Deshpande, FCA a practicing Chartered accountant is dealing with large numbers of NPO’s audit, taxation, FCRA & other matters. I have been asked to speak generally about Various aspects of Charitable entities right from formation to other aspects as most of professionals wants to know various aspects for professional practice. I would be covering some salient features only. These types of entities are growing in numbers and is promising field for CA’s. I am using word “NPO” for all types of Charitable entities. 26/5/2012Kishore M Deshpande

3 Formation of NPO The legal status could be:- Society Public Trust Company u/s.25 of Companies Act Creation by Law (Universities, other creation of law) 36/5/2012Kishore M Deshpande

4 Formation-Society Society Registration Act, 1860 governs. State has made own sub law. CG had adopted MP law. Registrar of Society is authority to register & monitor. You have to make Memoranda containing objects and Bye law regulating administration (draft available in Rules) Normal requirements: 7 persons (competent to contract) of state, Objects to be charitable, Proof of address, Prescribed fee to be paid by challan, activity should be confined to state. Administration: Regular meeting of GB & General Body, Elections, decisions (as per law and by laws) Other follow ups with ROS: Submission of audited accounts, list of elected GB members, permission to acquire/ sale properties. Advantages: Secure, stable as general members elect office bearers, property can be held in name of society, easy formation Disadvantages: In action or mismanagement by GB members. 46/5/2012Kishore M Deshpande

5 Public Trust Act governs, Collector of state/place registers same. The Trust deed (with regulation of trustee’s management) should be made. There should be Author/ Settler, Beneficiaries, Trust property (may be nominal), Trustee named consent or signature, Normal requirements: Documents to be submitted (preferable through advocate), Other follow ups: Submission of audited accounts, change in trustees, permission to acquire/ sale properties, trust property. Advantages: Controls in hands of trustees, property can be held in name of Trust. Disadvantages: In action or mismanagement by Trustees, Change in objects difficult (through Court order) Formation- Trust 56/5/2012Kishore M Deshpande

6 Formation- Company u/s.25 Company Act, 1956 Section 25 governs, ROC, License u/s.25 of Regional Director required. The Articles & Memorandum to be made. Company limited by Guarantee, No distribution of Profits. Normal requirements: Name availability, fees, documents Other follow ups: Submission of audited accounts, Annual return, Changes in Directors. Advantages: Stability, good for large establishment on all India base. Disadvantages: Winding up, change in objects with permission of Central Govt. 66/5/2012Kishore M Deshpande

7 Objects of NPO- drafting Care must be taken while framing objects None of the objects should appears as non charitable or business motivated. Charitable objects are defined u/s.2(15) of IT Act, Education, Medical, relief to poor etc. See case laws and other relevant commentaries. Objects must be philanthropic and not for earning profits (in action also care be taken) No business activity should be aimed or carried on. Refer Section 2(15) of IT Act. (25 lacs even incidental) Avoid copy, paste. Write what is actually proposed and may be taken up activities. 76/5/2012Kishore M Deshpande

8 Taxation of NPO (IT) The Taxation of NPO under IT Law is a separate code of taxation as given in Section 10(23C) and 11 to 13. It is quite different from normal taxation of Company, firm or Individuals. This code would be applicable only if the NPO is either exempt under Section 10(23C) or has obtained registration u/s.12A(a) of IT Act. Various conditions of law for obtaining registration and be under this code of taxation is strictly adhered to, or else Tax would be payable as normal AOP. 86/5/2012Kishore M Deshpande

9 How tax code operates-10(23C) Purely Educational or purely Hospital activity (for philanthropic purpose) carried on, not for the purposes of profit would be exempt u/s.10(23C). Where wholly & substantially financed by Govt. it is exempt u/ss.(iiiab) Education, (iiiac) Hospital. Where Gross receipts from such activity is below 1 crore, it is exempt u/ss.(iiiad) Education, (iiiae) Hospital.. Where Gross receipt is above 1 crore, the approval from CCIT is required in prescribed form (Rule 2CA, Form 56D) to avail exemption, exempt u/ss.(vi) Education, (via) Hospital. The application of Income criteria of 85% would not be applicable where no approval is required. Where approval is required, application of Income criteria is to be followed. Accumulation permissible. 96/5/2012Kishore M Deshpande

10 Registration u/s.12A Where the activity does not involve pure education or medical activity or has other charitable objects, the NPO should register as charitable Institution u/s.12A of IT Act. 12A Registration should be applied within one year of formation of NPO before CIT. (if delayed, file condonation application). Form No.10A (Rule 17A) with enclosures to be filed.[(sec.12A(1)] Documents required with Form: Original/Certified copy of Registration Certificate of Society/Co/Trust, Memorandum, bye laws, list of Trustees, manager, GB members, founders, audited accounts. See form for number of copies and other instructions. Form need stamp to affix. Covering letter and letter for condonation of delay with genuine reasons for delays. 106/5/2012Kishore M Deshpande

11 Registration procedure-12AA What is primarily seen for registration: Genuineness of Activity of NPO, objects are charitable and if activity is already carried on, the they are charitable or not, beneficiaries are not for particular community or caste. Applicable date of Regn: date of formation if applied within year, or 1 st day of FY in which application is made. Opportunity of being heard is given. He may call original documents & information. Order by CIT is to be passed in writing within 6 months from date of application.[12AA(b). He may refuse also. Registration may be cancelled u/s.12AA(3), if activities are not found to be within objects, or not genuine. Registration is one time & permanent in nature. 116/5/2012Kishore M Deshpande

12 Scheme of Taxation-Section 11 The Income of NPO would not be taxable [Sec.11],if:- Application of Income for charitable objects is more than 85% of Income. [Sec.11(1)(a)),(b)] Income in form of Voluntary contribution made with specific direction that they shall form corpus of the trust. [Sec. 11(1)(d)] Where Application of Income is less than 85%, there is option to accumulate excess Income by passing resolution & filing Form No.10, with return.[Sec.11(2)] The amounts must be deposited in Fixed deposits or mode specified u/s.11(5).(See Explanation to Sec.11(1)) Consideration on transfer of capital assets held under trust would not be taxable if the whole amount is applied for acquiring other capital asset. [Sec.11(1A)] Where accumulated funds u/s.11(2) are not applied for specified purposes, ceases to be invested, or not used within specified period, will be deemed to be income in next financial year of eventuality.[Sec.11(3)]. 126/5/2012Kishore M Deshpande

13 Accumulation u/s.11(2) Form No.10 is to be filed with copy of resolution for accumulation of Income for specified purposes and for specified time (not exceeding 5 years). This could be filed with Return.[sec.11(2)] The accumulated funds must be invested in FDR or investment u/s.11(5) within 6 months of accounting year. (if not used by that time for such purpose). The deposits made during the year could be earmarked for accumulation made. Accumulated funds cannot be used by transfer of moneys to other institutions as contribution or otherwise. It must be used by the Institution. The accumulated funds if ceases to be invested, or not applied for specified purposes or is used for other purposes would be Income in the year of eventuality.[Sec.11(3)] If due to circumstances beyond control, such funds cannot be used for specified purposes, application can be made to AO for other objects. [Sec.11(3A)]. AO cannot extend specified time. If accumulation is not made or accepted, tax will be on Income(-) actual application at rates applicable to Individuals. 136/5/2012Kishore M Deshpande

14 Mode of Investment- Sec.11(5) The mode of specified investments for Sec.11(2) are: Deposit account with scheduled Banks or co-op. banks, PO Saving Bank, (most common) Govt. saving certificates, state central Govt. securities Debenture of Co. or corp. where principal & interest guaranteed by Central/state Govt. Deposit in public sector Company, Bonds of specified financial corporation, Co Investment in Immovable property Other specified: (Mutual Funds & deposits) Always check investment offers for coverage) 146/5/2012Kishore M Deshpande

15 Income of Trust- Sec.12 The income from property held under Trust includes:- Voluntary contributions (other than corpus) [Sec.12(1)] Deemed income for providing services to interested persons of education & medical without or at concessional cost. [Sec.12(2)] 156/5/2012Kishore M Deshpande

16 Section 13 (Section 11 not to apply in certain cases) Benefit of scheme of taxation of NPO will not apply if; Income of Private religious purposes, not enure for public benefit.[Sec.13(1)(a)] Income of charitable institution for benefit of any particular religious community or caste. [Sec.13(1)(b)] Charitable or religious institution, for direct or indirect benefit of any person referred to in Sec.13(3). [Sec.13(1)(c)] Amounts are not invested in modes specified u/s.11(5) [Sec.13(1)(d)] 166/5/2012Kishore M Deshpande

17 Specified persons –Sec.13(3) Author of Trust Founder of institution/society Persons substantially contributing to trust or institutions (above Rs.50,000/-) Where above are HUF any members of family Any relative of above persons Concerns where such persons have substantial interest (above 5%) Relatives are same as specified u/s.56 (The provisions are similar to that covered in Related party, 40A(2)(b) etc.) 176/5/2012Kishore M Deshpande

18 Deemed benefits- Sec.13(2) Persons specified u/s13(3) cannot be given benefit of; Income or property lent without security or interest or both [Ss.(a)] Land, building or other property made available for use without/adequate rent or compensation [Ss.(b)] Salary, allowances or otherwise for services rendered to NPO which is in excess of reasonably paid for such services. [Ss.(c)] Services of NPO made available to such persons without adequate remuneration or compensation. [Ss.(d)] Share, security or property purchased from such persons by NPO which is more than adequate. [Ss.(e)] Share, security or property sold by NPO to such persons which is less than adequate. [Ss.(f)] Income or property diverted to such persons. [Ss.(g)] (please note than Audit report in Form 10B contains affirmations to above aspects) 186/5/2012Kishore M Deshpande

19 How to compute Income of NPO The Income tax return should be filed regularly and on time to avail benefits. IT Return form is ITR 7 and is still to be filed in paper form with enclosures like audited statements, Reports, list of founders, substantial contributors, Managing body list, TDS certificates, Form 10 etc. The Income is normally computed as under:- Normally it would be “Income from other sources” under which a. Bank/Interest Income b. Voluntary contributions c. Other Income (fees, charges etc. of institutions) d. Less: Expenses on administration or u/s.57 e. Income from property held under trust (a+b+c-d) Less: Application of Income: a Expenses On objects b Capital expenditure (uncovered) Less: Amount set apart u/s.11(1)(a) 15% of (e). Less: Accumulation u/s.11(2), (where 85% is not applied) Taxable Income 196/5/2012Kishore M Deshpande

20 Some issues under IT Act Even if the above institutions are covered under exemption u/s.10(23C), it is better to obtain registration u/s.12A. It act as safeguard in case some of activity is not accepted to be linked to that pure activity. Any general public utility activity/rendering of services in nature of trade, commerce or business or like should not be undertaken as referred u/s.2(15) of IT Act (limit 25 lacs, if at all necessary or incidental to attainment of objects, separate books of account are required to be maintained) Unanimous donations (identity, name & address) should not be received or else it would be of such donations minus 5% of (total donation, or Rs.1 lac whichever is less) u/s.115BBC of IT Act, in case of Educational Institution or Hospitals not wholly financed by Govt. 206/5/2012Kishore M Deshpande

21 Some issues under IT Act-2 The Income included Voluntary contributions, Interest & other income in form of fees, charges etc.. The expenses on administration and expenses not connected with objects is to be reduced from income. The application of Income on objects could be of capital nature like Buildings, Equipments, Movables, Scholarship loans, Refund of bank loan. (When the application is reduced in year of taking bank loan). Depreciation on assets should be charged in accounts, but depreciation on assets used for objects may not be claimed, as capital expenditure on specified objects is allowed. 216/5/2012Kishore M Deshpande

22 Tax deduction at Source NPO like other entities are also responsible for deducting TDS. Mostly the TDS would arise on Contracts (for construction or repairs, AMC, Security guard, tent house etc) and Professional fees (CA, Architects, Technical AMC) & Salary etc. The tax authorities looks deeply into these aspects in assessments. The Banks and interest payers are responsible for deducting TDS on Interest Income of charity. Obtaining no deduction certificate by application in Form No.13 is appropriate. Form No.15G is not applicable, although some Banks do accept same. 226/5/2012Kishore M Deshpande

23 Accounts of Charities The accounts of Charity is quite different than any commercial accounts. The accounts must be properly supported with documents for receipts and expenses as the Managing body is answerable to General body & auditor. The Head of expenses are quite different than commercial concerns due to it’s nature. The accounting is some times based on objective and not as per natural heads. Like particular Program expenses may include Mike, Tent, food, Hall rent etc. If natural head are used they may not reflect program expenses, which is desirable to establish expenses on objects. Where more than one activity is carried on, it is better to separate natural head expenses. Like Salary to school staff, Hostel staff, Administrative staff etc. In Tally sub group can be made to classify expenses as per object and as per natural heads. Relevant accounting standards must be followed. The accounts can be either on cash or mercantile basis. 236/5/2012Kishore M Deshpande

24 Audit of accounts of charity The audit of accounts is to be got done where Gross receipt is above taxable limits for individuals. (now 1.80 lacs). The audit process is normally same, but understanding of desired objectives of presentation is quite different. The Financial statements are normally:- 1. Receipts and Payment account (Opening cash & Bank + Receipts = Payments + closing cash & bank balances) 2. Income & Expenditure account (Revenue items) 3. Balance sheet. The Excess of Assets over Liabilities is called `General Fund’/Trust Fund’ in Balance sheet. Check that applicable accounting standards are followed. The audit report is prescribed under IT Act and is in Form No.10B. The annexure to form contains particulars of Income, application, accumulation, lapses in accumulation, benefits to Managing body given if any. (take care) 246/5/2012Kishore M Deshpande

25 Application u/s.80G Application is required to be filed before CCIT in form 10G (Rule 11AA) so that Doners can enjoy deduction u/s.80G. The form contains instructions for copies, attachments etc. Can be applied by charitable Institutions only. Must have 12A registration or is covered by exemption u/s.10(23C) Details of Income & applications, Investments, Activity report, non cash donation details are required extra. Rest details are as required for 12A application. Now it is one time till revoked. 256/5/2012Kishore M Deshpande

26 Wealth Tax on Charities Where the Charities are not registered u/s.12A or validly exempt u/s.10(23C) for relevant year, the Wealth tax may be attracted as any normal Individual on specified assets listed under Wealth Tax. Care must therefore be taken to obtain registration u/s.12A timely. Care must be taken for education or Hospital institutions where income is exempt as receipts were below 1 crore, and it is likely to exceed the amount in relevant year. 266/5/2012Kishore M Deshpande

27 Service tax on Charities Please go through the Amendments in Service tax Act. Due to negative listing some of the services rendered by Charities may attract service tax. Obtain expert advise when in doubt. (In first session you must have learned) Normal services are letting of premises for functions & program, commercial training, coaching, Health check up of business entity employees which were covered. In negative list, any services by way of education of pre-school or up to Hr. sec., curriculum for obtaining a qualification recognised by Law and as part of approved vocational education course is only exempt. (if educational activity is not recognised by law, it may be taxable services) What about Services of Hospital? (not covered in negative list) 276/5/2012Kishore M Deshpande

28 Direct Tax code-Charities The Proposed direct Code has proposed certain changes in provisions related to Charitable/NPO entities. Most of them are in line, but the application of Income for capital purposes and other stricter provisions of investments of unused funds may give rise to taxes being paid. Exemptions as provided u/s.10(23C) would be withdrawn and present benefits available to Education/Medical will be replaced by one system like 12A regd. Tax would be 15% flat of Income above Rs.1 lac. Income. This one should keep in mind while planning of new NPO and it’s future economics. 286/5/2012Kishore M Deshpande

29 FCRA-Foreign Contribution Regulations Act, 2010 Those who get Foreign contributions or propose to get should not salient changes in FCRA The registration is to be renewed for every five year. The application must be made before for next 5 years renewal. Activity report must be prepared for funds used. New bank account number due to core banking is duly intimated to MHA. Proper classification of expenses is required for administrative expenses which should not exceed 50% of utilization. (Non activity related) The new return form FC6 (in place of FC3) is required to be sent to MHA with Bank statement copy duly signed by Bank manager & Audited accounts. Contributions to other societies/ FC account holders, must be intimated to MHA in required form. Inform Bank your FCRA number and get it noted under your FCRA account. Maintain a register of FC received and utilised since beginning. Transfer of funds to General/other account for utilization is not permitted. 296/5/2012Kishore M Deshpande

30 Is it a tool for tax planning?-NO. Merely a society is to be formed for running of a school etc. does not mean that exemption is automatic under IT. You have to follow the code of Section 11 to 13. Any kind of benefit enjoyed by founder, author, substantially contributor or managing body or their relatives may take away all advantages. Any lacuna in observing provisions of Section will entail heavy taxation at maximum marginal rate, as application of Income would not be available as outgo from Income. 306/5/2012Kishore M Deshpande

31 Open forum You may add, supplement or contradict any views expressed. You may ask any question on the topic today. 316/5/2012Kishore M Deshpande

32 THANKS FOR PATIENT LISTENING That’s all for today! You may contact me any time. Kishore M. Deshpande, M (open to all, useful for Act, Rules Forms latest updates of our use) 326/5/2012Kishore M Deshpande

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