Tax laws

The new tax laws for nonprofit organizations will put them in a constant state of anxiety.

Some of the changes made through Budget 2022, which have profound and serious implications for the nonprofit sector, have gone largely unnoticed. If the part of the economy that receives foreign funding has been squeezed by regulation in recent years, now is the time for domestic groups to feel the heat as well. Some of the changes adopted, such as the obligation to keep books of accounts and have them audited, are so fundamental that it is hard to believe that they have not been officially applied for so long. Other adjustments, on the other hand, will keep organizations in a constant state of shock. At first glance, each of these adjustments seems right, even vital. However, as the layers are removed, you begin to notice the hidden effects.

However, consider a situation like April 2020, when the entire nation found itself in an unplanned lockdown and people were left to fend for themselves. As governments struggled to pull themselves together, it was NGOs that were in place to provide essential services (what the public, as well as donors, expect from the nonprofit sector). Under the new regime, such intervention could lead to the loss of the organization’s tax registration.

Take, for example, the amendment to Section 12AB of the Income Tax Act which specifies the offenses which may lead to the cancellation of the registration of the institution. These include expenditures of income other than for “objects of the trust or institution”. Objections to this may be dismissed as frivolous. After all, if a charitable trust gets a tax exemption because it claims to want to engage in certain activities, it should stick to those limits.

Other conditions that may lead to deregistration may include the receipt of income from businesses that are not incidental to the object of the institution, or the granting of a benefit to “persons determined” or to related parties, in vague terms. Again, one could probably justify such a restriction. But what about rental income from a property that an organization owns. Is it “incidental” to its main objectives? Will arm’s length transactions with a related party be permitted?

What seems even more sinister is the procedure should any breaches be discovered. The amendment to section 143(3) states that if the assessment officer finds a violation, a reference must be sent to the principal commissioner or the commissioner for him to make a decision on the withdrawal of accreditation or of recording. The Chief Commissioner/Commissioner will have to make a decision within six months. During this time, the evaluation procedure will be suspended.

What is important to remember is that these violations, insofar as they concern only a small part of the organization’s income or expenses, can be dealt with by more reasonable measures, such as withdrawal of the tax exemption for these amounts. . This would provide operational flexibility to organisations, while ensuring that tax benefits are not taken against the purpose for which they were obtained. (To be clear, in addition to the threat of cancellation, under the new amendments these amounts will also be taxed at 30% as well as an invitation penalty of 100% at first instance and 200% thereafter) .

In practice, this will have the effect of giving organizations a six-month grace period (interestingly, the same provisions apply to news agencies which also benefit from income tax exemptions – surprising then that this has gone completely under the radar) to get online . Another surprising new amendment is found in Section 12AB, where an organization can be selected in accordance with a Board-formulated risk management strategy to investigate violations. There are fears that it is being used to arbitrarily conduct itinerant investigations into the affairs of organizations that the government wishes to target.

Needless to say, some will say NGOs need to be kept under control. This argument also has a lot of merit. However, this is over-regulation and arbitrary powers with the government. Take related party transactions in the for-profit sector. Although despised, they are regulated by requiring disclosure and subjecting them to the test of arm’s length reasonableness.

More importantly, while unlike corporations which are accountable to shareholders, NGOs have a more public accountability, the government has no place to assume the role of authoritarian parent, that too with arbitrary powers that can be used to close them. Organizations are accountable to their donors and subject to the laws that apply to each of their activities. Again, reasonable regulation is welcome. But the current changes will only mean that their leaderships will constantly live with the metaphorical sword of Damocles hanging over their heads.

Summary of news:

  • The new tax laws for nonprofit organizations will put them in a constant state of anxiety.
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