Finance

Finance

Budget for Charitable Trusts

MAR 05

The moment we hear the word “budget,” we may experience an unpleasant feeling! Reason: We tend to see it as an external control, a force limiting our freedom to spend on the things we want . If this is our understanding of the budget, then certainly it will give rise to a negative feeling.  But, in reality, a budget is totally something else.  This article is an attempt not only to clear our misunderstandings on the budget, but also make us see the importance and the need for it in our life and in the life of our institutions.

What is a Budget?

To say it in simple words, a budget is nothing but making a plan to spend our money.  When we say, “making a plan,” we always use it in the context of making a plan to achieve a particular goal.  Likewise, in finance too, when we talk of making a plan, we mean making a plan to achieve a particular financial goal.  Thus, a budget is made not in the air; it is made in the context of achieving certain financial goals, i.e., our needs. In other words, a budget is nothing but creating a spending plan for our needs. And we cannot create a spending plan unless we have money to spend.  Hence, “budget” is understood as drawing up a spending plan for the resources we have. It allows us to determine in advance our future goal and the way to get there.  It helps us to manage our money wisely, so that we can have enough money to do the things we need to do or would like to do.  Depending on the circumstances, it may also mean cutting down on other things so that we can save enough money to do the things we need to do. It helps us to focus on the things that we need and prioritize our spending accordingly. It is to enable us to save money for our greater goals and in the light of it to spend only on our actual needs and not on all our wants.

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Fr Alex Gnanapragasam SJ

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Finance

GST FOR REGISTERED TRUSTS

Feb 01

The Goods and Services Tax (GST), as we know, is an indirect tax levied both by the Central and State Governments. It is applicable for any activity of “sale” or “transfer” of a “taxable” supply of goods or services for a “consideration” in the course of “furthering one’s business.” It may sound that GST is applicable only to the business entities and not to the Charitable Trusts, but in reality it is not so. To understand this, we need to understand what each of the above terms means. By “sale” or “transfer” we mean not only the actual selling of any concrete object (goods) or service for a price (e.g., selling religious articles, books, milk from the farm, computer maintenance service, security service, etc.,) but also giving a building or ground or land or space on rent (e.g., giving a hall or playground or hoarding space on rent, giving a plot of land for lease rent, etc.).  By “taxable” we mean all those goods and services which are brought under the category of taxable items.

Note that there are quite many items that are not brought under GST.  They are tax-free.  At the same time, there are quite many items which are taxable under GST at the rate fixed by the Government as 6%, 12%, 18% or 28%.  By “consideration” we mean any benefit given against any payment (e.g., an advertised sponsorship for an event).  Here, the donor or sponsor gets the benefit of his name being advertised.

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Fr Alex Gnanapragasam SJ

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Finance

TAX DEDUCTED AT SOURCE (TDS)

JAN 01

Tax deducted at source (TDS) is something that every trust will have to go through unavoidably every year.  In most cases, TDS is deducted on the income of the trust. But it is also equally applicable on its expenses.  Hence, it is very important to know what TDS is and how it affects the trusts.

The government has different ways of collecting tax from the public.  One is direct tax and the other is indirect tax.  Income tax, for example, is a direct tax collected by the government. So also, Goods and Services Tax (GST), for example, is an indirect tax collected by the government.  Normally the government collects the income tax directly from the taxable persons while they file the income tax returns. One of the mechanisms used to collect income tax directly is through TDS.

What is TDS?

TDS is a mechanism to collect income tax; it forces people and companies to disclose their income.  It is to be deducted by an employer or company on the payment made to the employee or contractor or customer.  It is based on the principle, “pay tax as you earn,” which is beneficial to the employer as well as the employee.  It is not a tax, but an amount adjustable against the tax payable or refundable if there are no tax dues.  An employer or company/trust deducts the applicable TDS while making a payment.  The TDS thus deducted has to be deposited in the income tax account of the government, quoting the deductor’s PAN and TAN as well as the deductee’s PAN.  All TDS deductions (from various sources) of a particular PAN get credited to the income tax account of the deductee, who, while filing his income tax returns, calculates the income tax payable by him and either claims refund if his income tax is overpaid or pay the shortfall in other cases.  Thus, TDS is the income tax paid by the individuals and organizations and it is adjustable against the tax payable or claimed as refundable.

What is PAN?

Every trust must have a Permanent Account Number (PAN), which needs to be quoted for all financial dealings and filing returns. PAN is a ten digit alpha numeric id, unique for every person/entity.  It is to be noted that the fourth character, which determines the percentage of TDS to be deducted, has to be noted.  The fourth character of the PAN may be one of the following:

“T” for Trust

“S” for Society

“P” for Individual

“C” for Companies

“F” for Firm/limited liability partnership

“A” for Association of persons

“H” for HUF (Hindu Undivided Family)

In every PAN, the fourth character is a letter which shows the status of the person or organization (as shown above) and the fifth character is a letter denoting the first letter of the name of the organization. For example, AAATJ0723H is the PAN for Jnana Deepa Vidyapeeth, a registered public trust.  Note that the fourth letter “T” denotes that the entity is a trust and the fifth character is “J”, standing for the first letter of the name of the trust.  Any individual or organization whose income crosses the basic exempt income (currently Rs 2.5 lakhs per annum), is supposed to apply for and get a PAN. Here it is to be noted that no individual person or entity may have more than one PAN.  Having multiple PAN is a crime.

Where applicable:

Here we try to spell out the instances where TDS is applicable to the trusts.  For Trusts, TDS is applicable on the following payments:

  1. Under Section 192B of the income tax act , TDS is deductible on salaries if the income of the individual is beyond the basic exempt level of Rs 2.5 lakhs. TDS in such a case is deducted on the average rate of tax payable for the financial year.
  2. Under Section 194C, TDS has to be deducted on the payments to the contractors or sub-contractors, if the single payment is beyond Rs 30,000 or the amount crosses Rs 1 lakh on multiple payments.

[This is the most important section applicable to the trusts.   TDS deduction depends on the fourth letter of the payee.  If the fourth letter is “P,” very common, it stands for the individual and TDS is deducted at 1%. If the fourth letter is “C” or “F”, then TDS is deductible at 2%.  If the payee does not have a PAN, then TDS is deducted at 20%.  Hence, we should find out before allotting the work if the person has a PAN or not.  If no PAN, no contract work can be given.]

  1. Under Section 194J, TDS of 10% is applicable on any fees paid for professional consultation or Professional or Technical fees, if the amount goes beyond Rs 30,000/annum. [This section is highly applicable to the trusts. Kindly note that, if the payee is a professional,  like an advocate, engineer, architect, doctor, auditor, etc., then, TDS is to be deducted at 10%.]
  2. Under Section 194A, TDS is deductible if the interest income is more than Rs

10,000/annum, at 10%.

  1. Under Section 194H, TDS is applicable on the commission or brokerage at

 the rate of 10% if the amount is above 5000.00.

  1. Under Section 194I(a), TDS is applicable at the rate of 1% on the purchase of an immovable property, if the value of the property crosses Rs 50,00,000 as lumpsum or in installment.
  2. Under Section 194I(b), TDS at the rate of 10% is deductible on the rent, if it is more than Rs 1,80,000/year (15,000/month). TDS is 5% if no audit is necessary for the payee.  TDS of 10% is deductible on land, building & furniture; on plant & machinery, 2% TDS is applicable.

If the deductee has no PAN, then TDS deductible is 20% u/s 206AA of the ITA, 1961. If no TDS is deducted, 30% of the amount on which TDS is deductible and not deducted, will be disallowed for the deductor as application of income u/s 40(a)(ia) (new explanation to Sec 11)

TDS has to be deducted from taxable salary and on every single contract bill exceeding Rs 30,000 or on multiple payments if the amount exceeds Rs 1,00,000 per annum.  It has to be deposited in the IT Account by the 7th of the next month. In addition, quarterly TDS returns are to be filed electronically within thirty days of every quarter end.

Besides PAN, a deductor should have a Tax deduction Account Number (TAN). Every trust should apply for TAN within one month from the end of the month in which tax is deducted. A trust having various branches and maintaining individual accounting should obtain a separate TAN for each branch other than that of the main trust.  Not having a TAN will attract a penalty of Rs 10,000/-

197 CERTIFICATE (for exemption from TDS deduction):

TDS is deducted on receipts such as interest on investments, rent, professional fees, commission, etc.  U/S 197, the trust can apply to the Assessing Officer of the TDS department for certificate authorizing the payer not to deduct TDS.

 

Penalties:

A penalty is applicable if TDS norms are not followed

  • There is an interest charged for the late payment of TDS [Sec 201 (1A)].
  1. a) If TDS was deducted and not paid: 1.5 % per month on the amount of such tax from the date on which tax was deducted to the date on which such tax is actually paid.
  2. b) If TDS was not deducted and not paid: Up to 100 % of the amount of TDS not paid.
  • Interest on interest (Sec 220): Any amount specified as payable in notice of demand u/s 156 shall be paid within 30 days of notice served or else the assessee shall be liable to pay simple interest @ 1% per month.
  • Penalty for late filing of TDS Returns (Sec 234E): Rs 200 per day or an amount equal to TDS amount in the quarter, whichever is lower.
  • Prosecution u/s 276B: if a person defaults, imprisonment from 3 months to 7 years.

Other Norms:

  • TDS certificate: The deductor gives the deductee the TDS certificate in (a) Form 16 for salaries and (b) Form 16A for income other than salary. The deductee files this TDS certificates along with the tax returns.
  • Forms 26Q and 27A: The deductor files quarterly returns with all details of the TDS deducted. Form 26Q is used for non-salary income. Quarterly returns in Form 27A is a control chart of quarterly TDS/TCS statements to be filed by deductors/collectors along with quarterly statements. It is a summary of TDS/TCS returns which contains control totals of ‘amount paid’ and ‘income tax deducted at source’. A separate Form No. 27A is to be filed for each TDS/TCS return.
  • Form 26AS: It is an annual tax credit statement. It indicates that the tax that has been deducted has been deposited with the Govt. Form 26AS contains details of tax deducted on behalf of the taxpayer (you) by deductors (employer, bank etc.). So, TDS deductions that are given in Form 16  or 16 A can be cross-checked using Form 26AS.

Following all the above procedures will require sufficient knowledge of the way TDS functions.


Fr Alex Gnanapragasam SJ

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Finance

Challenges Facing 12A Holders

Dec 01

This article explains the challenges that 12A holders face at present from the income tax point of view. Administrators needs to keep these legal points in mind.

Until a few years ago the focus of the Assessing Officers of the Income Tax Department was on the 85% application of the annual income, but now the demands go much broader. Earlier, the officers would just check if the concerned Trust has fulfilled its obligation of applying 85% of its annual income on the objects of the Society and, if this requirement was met, then the assessment would go through.  But now the situation is totally different. Now the Assessing Officers check many details, which are spelt out below:

TAXED INCOMES

  1. Capitation Fee or “Donation”:

It is the extra amount the institutions take for admission, besides the fees shown in the prospectus. Recently, the Income Tax Appellate Tribunal has ruled that, since the capitation fee or “donation” cannot be considered voluntary in nature, the same cannot be allowed exemption under sections 11 and 12 of the Income Tax Act.  It should be noted that only voluntary donations to registered charitable societies are exempt from income tax.  So the Assessing Officer takes the amount collected as capitation fee as income from other sources and taxes the same at the usual 30%.  Refer to the judgment of the Income Tax Appellate Tribunal, ITA Nos 1492 & 1493/Bang/2010 for AYs2006-07 & 2007-08 and ITA No. 675/Bang/2014 for Ay 2010-11.  In its judgment on May 2nd, 2016, the Supreme Court of India has termed Capitation Fee as “Illegal.”

  1. Anonymous Donations:

Any amount of voluntary donations to registered charitable societies are exempt from income tax in the hands of the receiver. However, sometimes there are anonymous donations too.  Sometimes we find credits in our bank accounts, whose source we do not know. The Income Tax Act has set an upper limit for such anonymous donations.  It cannot exceed 5% of the total annual income or Rs one lakh, whichever is higher.  As per the provisions of section 115BBC of the Income Tax Act, anonymous donations too shall be  taxed at 30%.  It is to be noted that this provision is not applicable to religious trusts.

  1. Religious Expenses of a charitable society:

The benefits of a charitable society, by its very nature, are open to all, irrespective of class, creed, culture, sex or religion.  When a charitable trust spends its money for the function of a particular religion, it loses its charitable nature.  Secondly, religious expenses are not one of the approved expenses for a charitable society.  Hence, if a charitable society were to spend more than 5% of its total annual income for a religious purpose, then the same shall be disallowed as application of income.  Reference can be made to the judgment of the Hon’ble Rajasthan High Court on the Umaid Charitable Trust vs The Union of India (UoI) And Ors. on 2 May, 2008.

  1. Business Income:

The next important thing to consider is the income a charitable society gets from its business-like activities.  Some of them, such as, canteen, bus service, bookstore, pharmacy, etc., may be incidental to attainment of the main objects of the charitable society.  They are there to support the main activities of the society.  The income tax department has no problems regarding such activities.  But the department has a great reservation when it comes to other business-like activities, though we may be using the entire income for the objects of the charitable society.   These income-generating activities are not related to the objects of the society.  They are there purely to generate income.  Activities such as farming, animal husbandry, dairy, poultry, handcrafts/ handicrafts, sale of religious articles and other media-related materials, sale of books, rental activities for commercial purposes (shopping complex, hoarding, playground, etc.) come under this type. The income tax laws are clear that only those activities mentioned under section 2(15) of the Income Tax Act are considered charitable in nature. The relevant paragraph of definition of Charitable purpose can be read as follows: “Charitable purpose includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity”.  Thus the amended income tax law under section 2(15) clearly says that, irrespective of the purpose for which the income is used, any commercial or business activity for a fee or charge or any other consideration cannot be considered as charitable and hence is taxable, if the income from such activities go beyond 20% of the total income of the society.  Thus, the earlier limit of Rs 25 lakhs from such business-like activities has been replaced by 20% of the total income.  Hence, societies running such activities are asked to maintain a separate books of accounts.

PURELY CHARITABLE ACTIVITIES

I foresee in the coming years only the so-called purely charitable activities may qualify for tax exemption.  We have to be prepared for it. This calls for a shift in the activities of our charitable societies, a shift from the well-established institutions to the more demanding needs at present, such as:

  • Non-formal education in the tribal areas.
  • Education and eradication of leprosy.
  • Immunization against common diseases.
  • Reconstructive surgery for leprosy and polio-affected children.
  • Cataract surgery for the elderly.
  • Farming: Activities to promote self-sufficiency in agriculture, growing vegetables and fruits, dairy milk, kitchen garden, etc.
  • Hospice care for children and mothers affected by AIDS.
  • Vocational training for disabled, disadvantaged, deprived and rural children.
  • Non-formal education.
  • Safe delivery kits and first aid kits in rural areas.
  • Savings and credit scheme for the rural population.
  • Reforestation by tree plantation and alternative crop seeds.
  • Education of girls to reduce infant mortality rates.
  • New Hope Charity Activities India has been involved in rural women’s rights and development.
  • Eradication of poverty and exploitation through education
  • Cataract surgery for the afflicted poor in the rural areas.
  • Mentally and physically handicapped Children.
  • Caring for the orphans and street children.
  • Food, shelter and sponsorship for children living, working, begging and surviving on railway station platforms.
  • Children of leprosy patients.
  • HIV/AIDS hospice.
  • Vocational training for the jobless.
  • Old age homes for those who have nobody to care for them
  • Working for the welfare of the sex workers
  • Working for the welfare of the slum dwellers
  • Education and vocational training for the slum children and rural children
  • Working for the child labour and unorganized labour.
  • Education for the deprived class of society.

Some of these activities may be incorporated in our existing institutional set up or freshly initiated so that they become truly charitable.

PROPOSALS:

Based on the legal requirements explained above, I want to make the following proposals:

1)     Bifurcate the Charitable and Religious Activities:  It may be better to start a religious trust, which is also tax-exempt, for purely religious activities.

2)     Bifurcate the Charitable and the Business Activities: It is advisable to delink the business activities from the charitable societies.  These business activities can be run by the AOPs (Association of Persons) and  income tax can be paid for such income.

3)     Bring all accounts of the institution, without any exception, into the accounts of the society and get the same audited.

4)     Keep the members of the society/trustees and donors, who have contributed Rs 50,000 and more to the charitable society away from taking direct benefits of the activities of the society.

5)     Avoid situations where certain expenses will be disallowed, such as, cash expenses of more than Rs 10,000, non-compliance of TDS deductions, etc.

6)     Take up only those activities which are in line with the objects of the society.

The time has perhaps come for us to review our activities and do the needful to safeguard the tax-exempt status of our societies and trusts.  It will also be an occasion for us to do real charitable activities worth the name.


Fr Alex Gnanapragasam SJ

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Finance

OUR INSTITUTIONS AND THE POOR

NOV 03

This article shows how service of the poor should be at the heart of any organization that claims to be a charitable trust. If not, we should have another look at the very purpose of these institutions.

The mere word ‘charitable’ denotes service of the poor and the mere fact that we have chosen to form a charitable society or trust shows that we have opted to serve the poor through such a charitable society or trust.  If we have opted to serve the poor, then all the properties and funds that we hold  are also meant for the same purpose.  Thus service of the poor becomes the reason and purpose of the very existence of any charitable society or trust. Understood thus, the statement that all that the Church owns is the property of our Lord Jesus Christ and the patrimony of His poor makes sense.

Need of Radical Questioning

Our charitable societies and trusts are involved in very many activities, like running parishes, schools, colleges, hospitals, social service centres, youth animation centres, community centres, research centres, rural training programmes, etc. All the institutions that run such activities also hold properties and funds meant to support these activities.  If all these institutions with their properties, funds and various activities are meant for the poor, then definitely they should have made some impact on the lives of the poor. By impact, we mean effecting a positive change in their lives. Thus, we can say that all our institutions exist to bring about a positive change in the lives of the poor around us.  If not, we should relook at the purpose of the existence of these entities.

Any positive change in the lives of the poor is possible to the extent that the poor  have access to our institutions and their programmes.  Giving such an access would mean having a preferential option for the poor.  Here are some of the ways in which we can concretely show our preferential option for the poor:

Twelve Steps that Benefit the Poor

  1. When our charitable trust was begun, it was begun with the specific purpose of serving the poor. But over the years it is possible that the trust has lost this original purpose due to the pressure of maintaining a standard in order to compete with the fast-changing environment.  Hence, we can now re-examine the priorities and activities of our institutions and re-focus our attention in providing sufficient opportunities for the poor to get the benefit of our charitable activities.
  2. One of the concrete ways in which we can show our commitment to the poor is to choose those activities that would directly benefit the poor. Thus the choice of the activity matters a lot, but that is not enough. Even the choice of the place for such activities matters.  Thus a school of a medium standard near the rural or slum dwellers will benefit them a lot more than a high-fi school well established in a posh area of the city.
  3. Having decided on the choice and place of the activities the next important step would be to allocate a budget, for, if there are no funds, nothing much can be done for the benefit of the poor. There may be many willing to serve the poor, but due to lack of funds they are not able to do anything in this regard.  Here is where the allotment of funds matters.
  4. Serving the poor does not mean much if we try to look for the poor in some far away location. We have heard the saying that charity begins at home. Hence, it would make much sense if we first attend to the poor within the campus, namely our own employees, students of the school or patients of the hospital.  This makes it an obligation for us to pay decent salaries to our employees, salaries that would be reasonably sufficient to take care of the members of their families and their basic needs, such as, education, health, food, shelter, etc.  Concern for the poor can also be concretely expressed through our concern for the employees in times of need for some salary advance, loan, etc.
  5. Similarly it makes us to be on the lookout for the poor in our institutions and help them with scholarships or fee concessions in their school, college or hospital fees.
  6. Option for the poor would also mean having preferential option for the poor in admissions, in employment and in the choice of the beneficiaries of all our activities. It would mean giving job opportunities to the poor on a priority basis. Here we should seriously consider the jobless and the poor for the contract works, like maintenance, gardening, other labour work, etc.
  7. The other area through which we can express our option for the poor, unlike the rest of the world, is to narrow the gap between the rich and poor of our institutions. This can be shown by raising the salary of those attached to the lower grades of the pay scale, which can be done by paying them all uniform allowances across the grades of the pay scale system.
  8. Having a reservation policy for the poor can be another concrete way of showing our preferential option for the poor so that they also become beneficiaries of our charitable activities.
  9. The other area of concern for the poor can be in our marketing. Every institution has to do a lot of marketing for its daily provisions and other needs. If the poor are our concern, then we would certainly do the purchases from shops run by the poor, be it vegetables, groceries, stationery, clothing, construction materials,
  • Our option for the poor should also mean that we lead a life of the poor, both in our personal and community life. It would also mean opting for simplicity that will have an apostolic witness value in our institutions.
  • Our option for the poor would also mean making the facilities of our institutions, like the playground, hall, classroom, etc., available to the poor and the underprivileged. It would also mean organizing some programmes for them like games, sports, cultural programmes, camps, seminars, etc., which would be educative and motivating.
  • Another concrete way of reaching out the poor is by adoption for a long term. It can be adopting a village or a school in a remote area or a backward village that may need our intervention or at least some poor families which may need our support for education or health. The institution as a whole may opt to reach out to the selected group through their periodic visits, regular activities like coaching, financial support for the education of the children, financial help to repair the houses or the community centre, school building, etc.

The last can be a very important and concrete way of getting our institution and all its people like the staff, students, management, etc., involved on a regular basis. This is a direct approach and it will certainly bring about a positive change in the lives of those people.  Such an institutional approach will have not only a long term impact on the beneficiaries but also on the donors, i.e., the institution as a whole.  Here, our Lord’s saying “whatever you do unto the least, you do unto me” will become very real, concrete and perceptible.

 

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Fr Alex Gnanapragasam SJ

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Finance

Income Tax: What About Tax-Exempt Trusts?

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This article explains the special situation of charitable entities with the “12A” tag. What is this exemption? What are its requirements?

As charitable entities with 12A, all our societies, trusts and companies enjoy the exemption from income tax.  However, this exemption is available only on the fulfilment of certain requirements as mentioned here:

Requirements for income tax exemption:

Here are the basic requirements to make a trust eligible for exemption from income tax.

The trust:

(1) should have been registered under 12A;

(2) should have all its income coming from the property owned by the trust or from donations raised by the trust;

(3) should have spent in India at least 85% of its annual income on the objects of the trust;

(4) keep its services open to all people, irrespective of caste, creed, religion, etc.;

(5) should have got its accounts audited;

(6) should have filed its income tax returns in time (by 30th September);

(7) should comply with section 11(2) in case of accumulation (Remember that the purpose for which accumulation is done has to be submitted and it cannot be changed later and no donation can be given out of the accumulated amount);

(8) should have invested all its funds as per section 11(5) [(a) Investment in Government Saving Certificates, (b) Deposits with Post Offices Saving Banks, (c) Deposits with scheduled banks or Co-operative Banks, (d) Investments in units of the Unit Trust of India, (e) Investments in Central or State Government Securities & others, (f) Investments in units issued under any scheme of mutual fund referred to in sec 10 (23D);

(9) should not have allowed the benefits of the trusts activities to any of its members directly or indirectly, and

(10) should not have more than 20% of its annual income from its business-like activities.

Recent changes in the income tax:

Here are some of the serious recent changes which will affect the trusts with 12A and which have come in to effect:

(1) No cash transaction beyond Rs 10,000 is allowed.

(2) Corpus donations from trust to trust are banned. Any amount donated by one trust to another as corpus cannot be claimed as application of its income.  This means: We cannot claim that amount as part of the 85% required to be utilized.  Still, if a trust wants, it can give a corpus donation to another trust from its own funds or corpus, without claiming any utilization for that amount.

(3) No 80G benefit  can be claimed by the donor for a cash donation of more than Rs 2000 to a charitable trust.  This means that for any amount beyond Rs 2000, only donations through bank transactions can be allowed this benefit.

(4) If TDS not deducted, 30% of the bill (30% of the amount of expenditure on which TDS is not deducted) will be disallowed u/s 40(a)(i).

(5) Every trust should apply for Tax deduction Account Number (TAN) within one month from the end of the month in which tax is deducted. A trust having various branches and maintaining individual accounting should obtain a separate TAN other than that of the main trust.  Not having a TAN will attract a penalty of Rs 10,000/-

(6) Failure to file income tax returns before 30th September will attract a fine or other penalties, including withdrawal of 12A.

(7) As per section 115BBC, anonymous donations shall be taxed at 30%, if it exceeds 5% of the total donations received, or Rs 1 lakh, whichever is higher.  However, this clause is not applicable to religious trusts.

(8) Any trust with the object of advancement of general public utility and having business activities that are incidental to the attainment of the objectives of the trust should maintain separate books of account related to such business and from AY 2016-17 onwards, the benefit of tax exemption may be lost if such income exceeds 20% of the total receipts (earlier it was Rs 2,50,000).  However, this restriction does not apply to a trust having object other than the object of advancement of general public utility.

Cancellation of 12A: Registration of a trust under 12A may be withdrawn if: (a) the activities of the trust or institution are not  genuine; (b) the activities are not being carried out in accordance with the objects of the trust; (c) investment of the trust’s funds are in contravention of section 11(5); (d) fresh registration u/s 12A for modification in the objects of trusts within a period of 30 days from the date of such modifications of objects in prescribed form and manner.

Other regulations to be noted by charitable trusts:

Please note the following well-known practices:

(1) For any donation between trusts, both the donor and the recipient should be registered under 12A and there has to be similarity of objects in both the trusts.

(2) There should be no mutual donations between the donor and recipient trusts.

(3) All FC regulations are to be followed.

(4) TDS has to be deducted wherever applicable and returns of the same have to be filed as per requirements

(5) GST registration has be done and its norms have to be followed, wherever applicable

(6) All donations should be accompanied with a donation letter, in which the name, address and pan number of the donor is mentioned.

(7) No cash donations of more than Rs 10,000 may be received by a trust.

(8) Any corpus donation should be accompanied with a corpus donation letter, in which the word “corpus” has to be mentioned by the donor.

(9) All funds have to be utilized for the purpose for which they were generated.  Attention has to be given that the object (purpose) of any donation cannot be changed without the explicit written consent of the donor.

(10) It is also important that we observe everything related to legal matters such as the filing the required documents regularly before the Registrar/Charity Commissioner and all applicable taxes are paid to the appropriate legal bodies.

Some Tips:

Besides the required regulations mentioned above, it is important that we pay attention to the following:

(1) We must use secular terms in our books of accounts and annual returns, because it is important that the income tax officials are able to understand our terms.

(2) All our charitable activities have to be highlighted in the returns so that the income tax officials can easily take note of them and recognize the fact that we are charitable organizations.

(3) Sufficient care must be taken for any big donations with regard to getting the required request letter or project, verifying if the objects of the donor and recipient are similar and if the recipient trust also has 12A, passing the necessary resolution by the donor trust in its board, etc.

(4) The trust should not get into any activity which is not in line with its objects as given in its constitution.

(5) All major decisions should be taken following the procedures, preceded by the required resolutions from the board (decisions such as buying or selling properties, starting or closing down something, making a new policy decision, any expense involving a big amount of money, major administrative acts like construction, legal action on employees, etc.).

(6) FC funds, FC bank accounts and their accounts have to be kept separately and not mixed up with the local funds.

(7) It is better to keep the business account separately.

(8) Similarly attention may be given that we keep the TDS records, IT returns, FC returns, GST returns, PF and PT records in their respective files

(9) We should periodically monitor the expenses against the income to ensure 85% utilization by the end of the financial year.

As we know from experience, it is a great blessing to have 12A. We have to take all steps necessary to preserve it, for, if we do not have or lose the 12A exemption, we will end up paying income tax like any business entity on all the income of the trust.  That would be a huge loss, indeed.

 

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Finance

BALANCE SHEETS OF CHARITABLE TRUSTS

Sep 05

What is specific to the balance sheet of a charitable trust with 12A?

In the previous issue we discussed the different kinds of financial statements and the various components of the balance sheet.  Now let’s see what is specific to a charitable trust with 12A.

A business company exists to make profit, but a charitable trust exists for charitable activities. Hence, what we call as “Profit and Loss Account” in the balance sheet of a business company, we call it “Income and Expenditure Account” in a charitable trust. What we call as “Profit” and “Loss” there, we call it “Surplus” or “Deficit” here. Thus, it is clear that charity, not profit,  is the focus of a charitable trust.  The balance sheet of a charitable trust is to be studied from this point of view.

What to Look For

What should we look for in such a balance sheet?

  1. Find out the current year’s surplus or deficit. This can be found at the end of the Income and Expenditure Account as “excess of income over expenditure” or “excess of expenditure over income.”  The former is surplus and the latter, deficit.  Let’s remember that this is the surplus or deficit for the current year alone, after taking into consideration the annual income and expenditure. But what about the past years?  Hence, surplus or deficit of the current year alone does not mean much.
  1. Find out the accumulated or net surplus or deficit until the present. The figure shown at the end of the Balance Sheet as “Income and Expenditure Account” is the accumulated or net surplus or deficit until the present.  This is the net of the balances carried forward over the years from the start of the balance sheet of the trust.  If the figure appears on the liabilities side, it is net surplus; if it appears on the assets side, it is net deficit. A net deficit here should open our eyes to examine the past years and learn the necessary lessons.
  1. Find out the rate of interest on the investments of the trust. To get this data, we have to find out the total interest income of the trust for the year. This can be found on the “Income and Expenditure Account” page.  Then let us turn to the “Balance Sheet” and find out the total volume of the investments under the “Assets” side. Now calculate the rate of interest using the formula “interest/total investments*100.”  If the result is at par with or better than the prevailing bank interest, then it is good. If less, then we have to understand that something has gone wrong somewhere.   A lesser rate of interest would mean that we have large funds lying in the savings account, or one or more matured fixed deposits are not renewed or the interest cheques have not been received or what was received has not been deposited in the bank, etc. Thus we try to spot the mistakes and take corrective measures.
  1. Check the total volume of the funds of the trust. Here we have to compare the present volume of the funds with that of the past and see if the total volume has increased or decreased. If it has decreased, why? While doing this, sufficient focus has to be given to check the volume of the corpus fund too. The corpus fund is the backbone of a trust and hence it is strongly recommended that every trust has its own corpus. Having sufficient corpus ensures the longevity of the trust and its activities. It is worth recalling here that all corpus donations (e.g., the endowment fund)  form part of the capital of the trust and they are fully tax exempt too!
  1. Are the investments well diversified? The next point one has to consider is if the funds of the trust are spread out reasonably well. It is common sense that we do not invest the whole amount of money in the same bank or company or bond or mutual fund, lest we lose the entire capital due to some misfortune of the bank or company.
  1. How is the cash flow of the trust? It is possible that a trust has a large volume of funds, but the whole lot is locked up in the fixed deposits or other illiquid investments. Once again, it is common sense that knowing the on-going needs of the trust, we have to set aside sufficient money in the savings account. But care is to be taken that we do not park more than what is needed in the savings account as it would lead to loss of a sizeable amount of interest.
  1. Are the loans to be repaid and the recoverable loan within reasonable limits? Here we have to see if the loans to be repaid, which can be found under the liability side of the balance sheet and the loans to be recovered, which can be found under the asset side of the balance sheet, are within reasonable limits. A trust cannot overburden itself with a loan beyond its repaying capacity or with too many loans given out to its employees.  Since going overboard on either of these will affect the activities of the trust, we have to monitor both these elements regularly.
  1. Proper attention to the above factors will mean that there is some financial planning in the trust. But is that all? The most important factor is to monitor regularly the obligation of the trust under section 11(2) of the income tax act, which stipulates that at least a total of 85% of the annual  income has to be utilized for the objectives of the trust. It is possible that in some years there is a shortfall to this target.  The shortfall can be due to factors such as a big donation is received towards the end of the year or  the trust got a large income in during the year or expenses are controlled and funds are saved for the purpose of a new building or property. Whatever be the reason, the income tax act gives a special provision for charitable trusts.  It gives a provision to set aside such excess or shortfall of the 85% to be used within the next five years. This is done with the resolution of the Body of Trustees (Board or Governing Body), giving the particular purpose(s) for which the funds are accumulated.

Attention may be needed here to see that no donation can be given out of the funds accumulated under section 11(2).   The beauty here is that with such an accumulation done, it is deemed that the trust has fulfilled its obligation of having to spend 85% of its annual income!   Here it is also to be noted that when this shortfall which is set aside under section 11(2) is utilized within the next five years, the trust cannot claim utilization again!

 

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Finance

Financial Statements

AUGUST 3

There are three kinds of financial statements: 1) Income and Expenditure Account, 2) Receipt and Payment Account and 3) Balance Sheet proper.  All the three put together make up the audited statement of accounts called the “Balance Sheet.”

  1. Income and Expenditure Account:

We earn for our living and spend for our needs.  This is what money is meant for.  In the process, the money that comes in is known as “income” and the money that goes out, “expense.”

Income and expenses are to do  with the revenue items only and not capital.  Revenue items are those that deal with the daily operations and have  only a short term effect, whereas capital items are those that deal with upgrading or acquiring fixed assets that will have lasting effect on the life of the organization. The total of the income and the total of the expenses will affect the net result, ending up with surplus or deficit.  Salary received, rent received, fees received, interest received, etc., are examples of revenue income, while salary paid, rent paid, fees paid, travel expense, telephone expense, etc. are examples of revenue expenditure.

The Income and Expenditure account gives the total of all income received and expenses incurred during the term of the whole financial year (like a running video from the beginning to the end of the year), listed according to the account heads…

 

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Finance

BUDGET

JULY 05

The word “budget” often creates an unpleasant feeling, especially in religious circles.  Why so?  Because it is understood in a negative sense—as an external control over us. This is totally wrong. We need to understand it properly.

Two Kinds of Budget

A budget can be of two kinds—an activity-oriented budget and a goal-oriented budget. Many institutions make an activity-oriented budget. It is nothing but a budget for the normal running of the institution, taking into account the salaries, maintenance, office cost, etc. So, normally people prepare a budget by adding 5 or 10% to the current expenses. Some of them do not even consider the income side.  Any budget has to start with the income. Based on the resources available on hand, a budget is made for various expenses. This is the minimum one can do. In this sense, a budget can be understood as a plan to allocate the available resources for all the expenses involved in the normal running of the institution. There is no place for any financial planning at all here.

The other kind, which I am trying to deal with here, is the goal-oriented budget. All of us have our goals in life, be it in the area of our family life, profession, business, sports or even in our personal life. Experience shows us that our goals become the purpose of our life. Similarly, in the area of finance, too. We have many financial goals, such as, saving money to buy a motor vehicle or a new house.  These financial goals become the catalyst for our financial planning. If the goals are clearly spelt out, then the budget becomes a good means to achieve these goals. Thus, a budget becomes meaningful only in the context of a financial goal. There can be no budget without a financial goal—and vice versa.

Goals must be “SMART”

Any financial goal has to be “SMART”—which is an acronym for “specific, measurable, achievable, realistic and time-bound.” It is not enough to have a goal, but it should have all the above five elements. If our goal is vague, then it will only remain a dream. For an institution, it is not enough to say, “We want to increase our savings.” We have to clearly spell it out as: “We want to save twenty lakhs…

 

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Finance

Financial Accountability

JUNE 18

Personal Accountability

Accountability comes in when we work for someone else or when something is entrusted to us.  In our religious context, all priests and religious are working for the Church, through our dioceses or religious congregations.  In secular terms, we work for a registered charitable trust or society.  Thus, in both cases, we are working for someone else. Whatever we administer, we administer it on behalf of the Church and the registered trust or society.   This calls for accountability for whatever we do or/and spend, either on ourselves or on the apostolic works. In our religious context, we are accountable to our superiors; in secular terms, we are accountable to the Trust/Income Tax official, who has allowed us the “income tax exemption” status.  Therefore, according to Canon 1284 §1,  all administrators are to “perform their duties with the diligence of a good householder.”

Usually we take a sum of money as advance, from the Minister/Treasurer, for our expenditure.  Going by the understanding spelt out above, it is only natural that we are accountable for it.  This would mean submitting the financial account for the sum of money we have received and spent, whether on personal needs or on the needs of the apostolic works.  It does not stop there.  We are also accountable for the amount of money we receive personally as a gift, donation or remuneration. Thus, it is clear that we are held accountable for the sum of money received for our use from our friends and relatives, the sum of money we received as remuneration for our services, as well as the amount we take from the Minister/Treasurer for our needs or the needs of the apostolic works.

Some of us still do not know how to prepare the accounts.   Normally it is done as shown below:

                                                                Date: __________
Account for personal expenses:
Particulars Expenditure (Rs) Income (Rs)
Amount received from the Minister/Treasurer 5000
Received as remuneration/gift 500
Travel with food and auto/taxi fare 2250
Clothes 850
Medicine 1200
Stationery 300
Toiletries 450
Total Expenditure 5050  
Balance returned 450
Grand Total 5500 5500
____________
Signature

The account shown here is the master account for personal expenses, prepared and signed, with date, by the person concerned.   Similarly, if the account is for an apostolic purpose, it is mentioned on the top as “school office account,” “staff welfare programme account,” “farm account,” etc.   Below this master account, all supporting bills and vouchers are grouped and attached in the same order as given in the master account so that auditing becomes easier.

From the income tax point of view, it is necessary that we submit the original (pacca) tax paid bills, as much as possible, at least for amounts exceeding Rs 300.  It is always preferable that we pay a little extra and get a tax paid bill than buying from the roadside without any bill, just because it is cheaper.   For travel, we are expected to submit the train or bus ticket and, if it is a flight ticket, the boarding pass as well, all in original. For food during journey and auto or taxi fare, we can write a separate voucher, sign with date and attach the same.  It is much better that we submit our account with all supports immediately after we have spent the money, so that we/our trust does not get in to unnecessary problems with the income tax officials later. As registered public charitable trusts, we have to be accountable for all the income and expenditure we incur on ourselves or on the apostolic works.

Accountability of a Society/Trust

In the case of a Society or Trust, too, we are held accountable. Normally, the Treasurer of the Society or Trust, on behalf of the Governing Body, presents the financial report of the Society to the members of the General Body.  This is how it has to be.  But in many Trusts or Societies, this practice is either not there or even if it is there, it is done as a routine procedure without much seriousness.   As members of the Governing Body, each one has to realize that they are all entrusted with the responsibility of running the Society/Trust and thus take his/her role seriously and be involved in the process of financial accountability.

Normally, the financial report contains the following information: the annual income and expenditure, liabilities and recoverables, new assets purchased, extra-ordinary income (e.g., donations), extraordinary expenditure (e.g., major renovation or construction works), volume of increase in the funds of the Society or Trust, investment income earned and the final surplus or deficit data.  On presenting these data, the members are free to ask for any clarification or give suggestions.

Accountability of an Institution

When an institution raises funds for a particular purpose, we are accountable to all those who contributed for the cause. Normally a thanksgiving function is organized in their honour and their contributions are acknowledged in public.  A report of the activity and its financial report are presented to them in common or are sent to them all by post.  Here too it is clearly shown whether the whole amount is utilized or there is any balance left.

Accountability in a Parish

Accountability plays a vital role in a parish too.  The Parish Priest, together with his Parish Council, is accountable to the parishioners. Be it the Sunday collections or any other collections, the parishioners are informed of all the total collections, expenses incurred and the balance in the account.

Project Accountability

Project Liability is another area in which we all have to be accountable.  Here we are accountable to the donor agency. The accounts are given in the way the agency desires. Some may ask for the financial and activity report together, others may ask for all accounts and at least the copy of all bills and supports. A few others may ask for the audit report or utilization certificate from a chartered accountant.  It is better that we present the financial report against the budget we had proposed to the donor when we submitted the project, so that they can easily follow the report against the budget they had approved.  The future support of the donors depends on the way we are accountable to them now.

The next issue will deal with the budget.


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