Section 12AB of the Income Tax Act, 1961, was introduced by the Finance Act, 2020, and it governs the registration and functioning of a newly created class of entities called “registered charitable organizations.” This section brings several changes to the registration and operation of charitable trusts and institutions. In this blog, we will take a closer look at section 12AB of the Income Tax Act and understand its provisions in detail.
Introduction
Section 12AB of the Income Tax Act, 1961, applies to all trusts and institutions that seek registration under the Act after 1st June 2020. The section mandates that all entities applying for registration under sections 11 and 12 of the Income Tax Act, which relate to exemptions for income from property held for charitable or religious purposes, need to apply under this section.
Procedure for Registration
The process for registration under section 12AB is different from the earlier provisions of the Income Tax Act. The key steps involved in the registration process are as follows:
- Application for Registration: The entity must apply for registration in Form 10A. The application must be accompanied by documents such as PAN, address proof, trust deed, and other documents as prescribed.
- Provisional Registration: Once the application is received, the assessing officer will grant provisional registration for a period of three years. During this period, the entity must comply with all the conditions and requirements specified under the Act.
- Final Registration: After the completion of three years, the entity must apply for final registration in Form 10AB. The assessing officer will examine the application and may grant registration for a further period of five years.
Conditions for Registration
Section 12AB specifies several conditions that an entity must comply with to obtain registration. Some of the key conditions are as follows:
- Activities of the Entity: The entity must carry out charitable activities that are specified under section 2(15) of the Income Tax Act.
- Compliance with Section 11 and 12: The entity must comply with the provisions of sections 11 and 12 of the Income Tax Act, which relate to income from property held for charitable or religious purposes.
- No Profit Motive: The entity must not engage in any activity that has a profit motive.
- Use of Funds: The entity must use its funds and assets only for charitable purposes.
- Maintenance of Books of Accounts: The entity must maintain books of accounts and other documents as prescribed under the Act.
- Annual Return: The entity must file an annual return in Form 10D.
- Approval from Income Tax Authorities: Any modification in the activities or the provisions of the trust deed must be approved by the income tax authorities.
Revocation of Registration
The income tax authorities have the power to revoke the registration of an entity under section 12AB if they find that the entity has violated any of the conditions specified under the Act. The assessing officer must provide an opportunity of being heard to the entity before revoking the registration.
Impact of Section 12AB on Charitable Organizations
The introduction of section 12AB has had a significant impact on charitable organizations seeking registration under the Income Tax Act. With the new provisions, the registration process has become more time-consuming and cumbersome. Entities must comply with a variety of conditions and maintain meticulous records to retain their registration.
However, the section has also brought more clarity and transparency to the registration process. Charitable organizations must demonstrate their commitment to genuine charitable activities and comply with regulations to receive tax benefits. This has led to a reduction in the number of fraudulent entities claiming tax exemptions under the guise of charitable activities.
Benefits of Registration under Section 12AB
Obtaining registration under section 12AB brings several benefits to charitable organizations. Some of the key benefits are as follows:
- Tax Exemption: Registered entities are eligible for tax exemption under sections 11 and 12 of the Income Tax Act.
- Donations: Registered entities can receive donations from individuals and companies under the Income Tax Act.
- Credibility: Registration under section 12AB increases the credibility of the charitable organization as it demonstrates the commitment to genuine charitable activities.
- Recognition: Registered entities can receive recognition from the government and other institutions for their charitable work.
Impact on Existing Charitable Organizations
Section 12AB applies to all trusts and institutions seeking registration after 1st June 2020. However, existing charitable organizations that were registered under the earlier provisions of the Income Tax Act will also be impacted by the new section. These organizations must apply for re-registration under section 12AB to retain their tax exemption status.
The re-registration process is similar to the registration process, and entities must comply with the conditions specified under the new section. This has led to some confusion and delays in the re-registration process, and many organizations are struggling to meet the requirements.
The government has provided some relief to existing organizations by extending the deadline for re-registration to 30th June 2021. However, entities must ensure that they apply for re-registration and comply with the conditions to retain their tax exemption status.
Impact on Donors
The introduction of section 12AB has also impacted donors who contribute to charitable organizations. Donors can only claim tax benefits for donations made to registered entities under the Income Tax Act. With the new provisions, donors must ensure that the organizations they contribute to are registered under section 12AB to claim tax benefits.
This has led to some confusion and reluctance among donors, as they are not sure about the status of the organizations they contribute to. However, the government has provided a solution by introducing a new portal called “Darpan” that provides information about registered charitable organizations.
Conclusion
Section 12AB of the Income Tax Act, 1961, brings several changes to the registration and operation of charitable trusts and institutions. The section aims to ensure that only genuine and deserving charitable organizations receive tax benefits under the Act. The registration process under section 12AB is more stringent than the earlier provisions, and entities must comply with several conditions to obtain and maintain registration.
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Frequently Asked Questions (FAQ’s)
- What is section 12AB of the Income Tax Act?
Section 12AB of the Income Tax Act, 1961, is a provision that regulates the registration and operation of charitable organizations in India.
2. Who is eligible for registration under section 12AB?
Trusts and institutions that engage in genuine charitable activities and comply with the conditions specified under the section are eligible for registration under section 12AB.
3. What are the conditions for registration under section 12AB?
Entities seeking registration under section 12AB must maintain proper accounts and records, ensure that their activities are genuine charitable activities, and not involve any commercial activities or profit-making.
4. What are the benefits of registration under section 12AB?
Registered entities are eligible for tax exemption under sections 11 and 12 of the Income Tax Act, receive donations from individuals and companies under the Income Tax Act, increase their credibility, and receive recognition for their charitable work.
5. When did section 12AB come into effect?
Section 12AB came into effect on 1st June 2020.
6. What is the difference between section 12AA and section 12AB?
Section 12AA regulates the initial registration of charitable organizations, while section 12AB regulates the re-registration and operation of existing organizations.
7. Do existing charitable organizations need to apply for re-registration under section 12AB?
Yes, existing charitable organizations that were registered under the earlier provisions of the Income Tax Act must apply for re-registration under section 12AB to retain their tax exemption status.
8. What is the deadline for re-registration under section 12AB?
The deadline for re-registration under section 12AB was 31st December 2020, which has been extended to 30th June 2021.
9. Can donors claim tax benefits for donations made to unregistered entities?
No, donors can only claim tax benefits for donations made to registered entities under the Income Tax Act.
10. How can donors verify the registration status of charitable organizations?
Donors can verify the registration status of charitable organizations by checking the Darpan portal launched by the government. The portal provides information about registered entities under section 12AB.
