8:48 am - Wednesday July 17, 2019

Taxation

Taxation of Trusts

Taxation of Trusts

A "trust" is an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declare and accepted by him, for the benefit of another, or of another and the owner.

  • Author of trust : the person who reposes or declares the confidence is called "author of the trust".

  • Trustee : The person who accepts the confidence is called the "trustee".

  • Beneficiaries : The person for whose benefits the confidence is accepted is called the "beneficiary".

  • Trust property : The subject matter of the trust is called the "trust property" or "trust money".

  • Instrument of trust : The instrument, if any, by which the trust is declared is called the "instrument of trust".

 

Public or Private Trusts

Public trust are generally formed for charitable or religious purposes, and are not intended to do commercial activities. A public charitable trust is one, which benefits the public at large, or some considerable portion of it. While, the income from private trusts is available to specified beneficiaries and not to the public at large.

A charitable trust is defined to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility. Promotion of sports and games is considered to be a charitable purpose.

The public or private trust, differ in the process of their creation. In creating a charitable or religious trust, a formal deed or any other writing is not necessary, even if it involves immovable property. It may be created by use of words, but what is necessary is that there should be divestment of property on the part of the author or the settlor of the trust and should vest in the trustee, a third person.

Private trusts are created and governed by the provisions of the Indian Trusts Act, 1882 , whereas charitable trusts are beyond this Act. The Act applies to whole of India except when specifically amended by any State Government.

Trusts, whether public or private are subjected to taxation under the Income Tax Act,1961. It is the umbrella Act for all the matters relating to income tax and empowers the Central Board of Direct Taxes (CBDT) to formulate rules (The Income Tax Rules,1962) for implementing the provisions of the Act. The CBDT is a part of Department of Revenue in the Ministry of Finance. It has been charged with all the matters relating to various direct taxes in India and is responsible for administration of direct tax laws through the Income Tax Department. The Income Tax Act is subjected to annual amendments by the Finance Act, which mentions the 'rates' of income tax and other taxes for the corresponding year.

 

Taxation of Public Trusts

To find out the taxable income of a charitable or religious trust :

  • Compute the income of a trust. Here, "income" includes voluntary contributions received by a trust/institution created wholly or partially for charitable or religious purposes. The income of a trust/institution is required to be computed as per the provisions of the Income Tax Act.

  • Find out the part of income exempt under section 11 or section 12 of the Act. Trusts/Institutions are required to register themselves under Section 12AA in order to avail the exemptions. This can be done by writing an application in Form 10A within a year from the date of setting of trust/institution. Broadly, the scheme of the provisions regarding the exemptions may be summarized as follows :

    • The creation of trust must be wholly for charitable purposes and the objectives of the trust should be for charitable purposes, as defined under the Act.

    • The trust should not be created for the benefit of any particular religious community or caste.

    • The trust should not be created for carrying on business for profit.

    • The properties settle upon the trust must be held in trust. It would not suffice if only the income is held in trust.

    • The trust deed must contain a provision that the income of the trust or the property held in trust would be utilized, for charitable purposes in India.

    • It should be ensured that income or property of the trust does not ensure for the benefit of the settlor/ author of the trust or his relatives.

Charitable or religious trusts, which may otherwise be eligible for tax exemption, are liable to forfeit this exemption under Section 13 of the Act. It is applicable in the following circumstances :

  • Where the trust is created after March 31, 1962, any part of the income of the trust ensures, under the terms of the trust deed, directly or indirectly, for the benefit of specified categories of persons such as, the author of the trust, trustee or manager of the trust, substantial contributor to the trust and any relative of such author, trustee, etc.

  • Any part of the income or any property of the trust is used or applied during the relevant year, directly or indirectly, for the benefit of specified categories of persons.

  • The trust funds(with certain exceptions) are invested in contravention of the investment pattern of such funds.

Where a charitable or religious trust forfeits tax exemption in the circumstances mentioned at (a) to (c) above, the trust shall be charged to tax at the maximum marginal rate. A trust will attract the maximum marginal rate of tax only on that part of income which has forfeited exemption under the above circumstances and not on the entire income of the trust.

Besides there are other provisions of the Act, which are relevant to the taxability of the income of charitable or religious trusts. These provisions are summarized as follows :

  • Filing of return of income [Under section 139(4A)] by trustees of charitable or religious trusts if the total income of trust exceeds the minimum amount which is chargeable to income-tax without giving effect to provisions of Section 11 and 12. Also, trusts/institutions whose income is exempted under Section 11 and Section 12 are also required to file a return as assessee's claim for exemption would be decided by the Income Tax Department only after it has received the relevant material from the assessee.

    The return of income has to be filed along with the audit report submitted by chartered accountants in Form 10B after auditing accounts of various trusts/institutions.

  • Liability of trustees as 'representative assessees' [Under section 161] wherein they are liable to tax in their representative capacity in respect of income of trust.

  • Under section 80G, deduction (special exemptions) in respect of donations to certain funds, charitable institutions, etc is granted. In order to be eligible under this section, the charitable trusts/institutions need to obtain a valid certificate by making an application to them in Form 10G. The form should be accompanied by following documents :

    • Copy of registration granted under Section 12A

    • Notes on activities of institutions/fund/trusts since the time of its inception or during last three years,whichever is less and

    • Copies of accounts of trust/institution since the time of its inception or during last three years,whichever is less.

  • Wealth tax is also not charged on properties held under trust, or other legal obligation, for public purposes of a religious or charitable nature under Section 5(i) of Wealth Tax Act. In certain cases, however, Section 21A of the Wealth Tax Act lays down that wealth of trust is chargeable to tax as if the property is held by an individual who is a citizen of india and resident in India for the purpose of Act.

  • Donors are given relief from income tax in respect of donations made to institutions established in India for charitable purpose.

  • There are specific provisions relating to public charitable/religious trusts under section 10 of the act. The incomes of these trusts do not form part of total income or the income of such trusts are exempt from income tax.

  • The trustees of a charitable or religious trust are required to make an application to the prescribed authority for allotment of a Permanent Account Number (PAN) under the provisions of Section 139A of the Income Tax Act.

In certain cases, income of a charitable/religious trust, which is not subject to exemption under section 11 or section 12, may be chargeable to tax as if it is the income of an association of persons(AOP) :

  • Income from property held under trust wholly for charitable or religious purposes

  • Voluntary contributions without any direction that they shall form part of corpus of trust or

  • Income of trust or institution being profits and gains of business which is incidental to the attainment of the objectives of trust and separate books of account are maintained.

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Taxation of Private Trusts

When the shares of the individual beneficiaries are determinate :

  • The shares falling to each of the beneficiaries are liable to be assessed, either in the hands of the trustee(s) as a representative assessee or directly in the hands of the beneficiary entitled to the income. Such assessment is made at the rate applicable to the total income of each beneficiary.

  • Where the income of the trust consists of or includes profits and gains of business, income tax shall be charged in the hands of trustee(s) on the whole of the income at the maximum marginal rate. This provision is not applicable, in the case of a trust which has been declared by any person exclusively for the benefit of any relative dependent on him and also such trust is the only trust so declared by him.

When the individual shares of the beneficiaries are indeterminate or unknown [under section 164] :

  • Trustee(s) is liable to tax as a representative assesses.

  • Where the income consists of, or includes, profits and gains of business, the entire income of the trust is charged at the maximum marginal rate of tax, except in cases of the a trust which has been declared by any person exclusively for the benefit of any relative dependent on him and also such trust is the only trust so declared by him.

  • Where the income does not consist or include profits and gains of business, income is chargeable at the maximum marginal tax rate.

However, the maximum marginal rate of tax is not applicable in the following cases, and the income will be chargeable to tax as if it were income of an association of persons(AOP) :

  1. Where none of the beneficiaries has any other income chargeable to tax under the Income Tax Act and none of the beneficiaries is a beneficiary under any other trust or

  2. Where the relevant income or part of relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him or

  3. Where the trust is a non-testamentary trust created before March 1, 1970 for the exclusive benefit of relatives of the settlor mainly dependent on him for their supporter maintenance or, where settlor is a Hindu undivided family, for the exclusive benefit of its members so dependent upon it or

  4. Where the trust is created on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession.

In cases of (a), (b) and (c) supra, the relevant income is taxable in the hands of trustees as if it were the total income of an association of persons, while income falling under (d) supra is exempt from tax.

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Other Categories

Taxation
Taxation of Individuals
Who is liable to pay income tax
Sources of Income
Income from Salaries
Income from Capital Gains
Income from House property
Income from Profits & gains of business or profession
Income from other sources
Taxation of Partnerships
Customs Duties (Import Duty and Export Tax)
Wealth Tax
Taxation of Corporates
Taxation of Agents
Excise Duty
Permanent Account Number (PAN)
Taxation of other forms of business entities
Taxation of Trusts
Taxation of Small Scale Industries
Joint Venture Companies
Cooperative Societies
Taxation of Representative offices
Service Tax
TDS,TCS,TAN
Value Added Tax (VAT)


Introduction

India has a well developed tax structure. The power to levy taxes and duties is distributed among the three
tiers of Government, in accordance with the provisions of the Indian Constitution. The main taxes/duties that
the Union Government is empowered to levy are:- Income Tax (except tax on agricultural income,
which the State Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax. The principal taxes levied by the State Governments are:- Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions & Callings. The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.

In the wake of economic reforms, the tax system in India has under gone a radical change, in line with the
liberal policy. Some of the changes include:- rationalization of tax structure; progressive reduction in peak
rates of customs duty; reduction in corporate tax rate; customs duties to be aligned with ASEAN levels;
introduction of value added tax; widening of the tax base; tax laws have been simplified to ensure better compliance. Tax policy in India provides tax holidays in the form of concessions for various types of investments. These include incentives to priority sectors and to industries located in special area/ regions. Tax incentives are available also for those engaged in development of infrastructure.