TAXATION ON WINDING UP/ CONVERSION OF CHARITABLE TRUST

The existing provisions of Section 11, 12 & 13 provides for taxation of income derived from an asset or voluntary contribution of a Charitable Trust, exemption of income if the same is applied for charitable purpose, accumulation and investment in prescribed modes for claiming exemption, etc. However, there are no provisions in relation to exit of charitable organization or transfer of assets by charitable organization to non-charitable organizations on its dissolution. This can be misused for the Trusts by transferring the assets acquired from the exempted income over the years to a non charitable institution without payment of tax.

Finance Bill, 2016 proposes to introduce a new Chapter to provide for levy of additional income-tax in case of conversion of charitable institutions into, or merger with, non-charitable organisation or on transfer of assets.

The new regime provides for taxation of accreted income in the following circumstances:

– Conversion of trust or institution into a form not eligible for registration under Section 12 AA

– Merger of charitable trust or institution with an entity other not having similar objects and registered under Section 12 AA

– Non distribution of assets on dissolution to any charitable institution registered under Section 12AA or approved under Section 10 (23C) within a period of 12 months from dissolution

– Accreted income shall be taxed at maximum marginal rate of 30%

– Accreted income = Total assets less Total liabilities (excluding the assets and liabilities transferred by trusts to other charitable organisations within 12 months of dissolution).

The intent of the proposed levy is laudable however the following practical concerns may need to be addressed:

• Many state laws provide for takeover of charitable trusts ceasing to be charitable.
• Taxing assets at fair value could lead to serious cash outs and consequential litigations

The above mentioned amendments shall be effective from 1^st June 2016