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Modernising Charitable Tax Incentives : Clause 354(1) of Income Tax Bill, 2025 Vs. Section 80G(5) of Income Tax Act, 1961 |
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Clause 354 Application for approval for purpose of section 133(1)(b)(ii). 1. IntroductionClause 354(1) of the Income Tax Bill, 2025, proposes a new regime for the approval of non-profit organisations and certain persons for the purpose of allowing deductions on donations u/s 133(1)(b)(ii). This clause is significant as it seeks to modernise and rationalise the framework under which charitable institutions and funds receive approval to enable their donors to claim tax deductions. Section 80G(5) of the Income-tax Act, 1961, is the existing statutory provision that governs similar approvals, laying down specific conditions for charitable institutions or funds to be eligible for donations to be deductible in the hands of the donor. Over the decades, Section 80G has been amended multiple times to address administrative challenges, prevent abuse, and align with evolving policy objectives. A careful analysis of Clause 354(1) vis-`a-vis Section 80G(5) is crucial to understanding the continuity, departures, and likely implications for stakeholders in the charitable sector and for tax administration. 2. Objective and PurposeLegislative Intent and Policy Considerations The core objective of both Clause 354(1) and Section 80G(5) is to ensure that tax incentives for charitable donations are only available where the recipient organisations are genuinely charitable, transparent, and accountable. The legislative intent is to:
The proposed Clause 354(1) reflects a policy shift towards greater procedural clarity, time-bound approvals, and enhanced compliance requirements, possibly in response to administrative experience and technological advancements. 3. Detailed Analysis of Clause 354(1) and Section 80G(5)3.1. Eligibility and Application ProcessClause 354(1):
Section 80G(5):
Analysis: Both provisions require a formal application process and approval by a senior tax authority. However, Clause 354(1) provides a more granular and time-bound framework for different scenarios (e.g., commencement of activities, provisional approval, renewal), which is set out in detail in sub-sections (2)/(4) and the accompanying table. This is a significant improvement over the sometimes ambiguous timelines under the previous regime. 3.2. Charitable Purpose and Exclusion of Sectarian BenefitClause 354(1)(a):
Section 80G(5)(iii):
Analysis: The principle of non-sectarian benefit is maintained in both regimes. The explicit inclusion of Explanation 1 in Section 80G(5) is an important clarification, and while Clause 354(1) does not restate this explanation, it is likely to be addressed in subordinate legislation or interpretive guidance. 3.3. Charitable Purpose and Religious ExpenditureClause 354(1)(b):
Section 80G(5B):
Analysis: Both provisions allow some tolerance for incidental religious expenditure (up to 5% of total income) while maintaining the primary charitable character of the institution. This reflects judicial and administrative recognition that some overlap with religious activities may occur without undermining the charitable purpose. The explicit 5% cap is an anti-abuse measure. 3.4. Instrument of Constitution and Asset TransferClause 354(1)(c):
Section 80G(5)(ii):
Analysis: There is a direct equivalence between the two provisions. This requirement ensures that upon dissolution or winding up, assets are not diverted to private or non-charitable purposes, thus safeguarding the public interest and the integrity of the charitable sector. 3.5. Maintenance of AccountsClause 354(1)(d):
Section 80G(5)(iv) (as amended):
Analysis: Both provisions stress the importance of proper record-keeping as a foundation for transparency and accountability. This is essential for effective regulatory oversight and for the verification of compliance with other statutory conditions. 3.6. Filing of Statements and Correction MechanismClause 354(1)(e)-(f):
Section 80G(5)(viii)-(ix):
Analysis: This reflects a shift towards digital compliance and real-time reporting. The correction mechanism is an important safeguard, allowing institutions to maintain accurate records and correct inadvertent errors, thus reducing the risk of penal consequences for minor procedural lapses. 3.7. Donor CertificatesClause 354(1)(g):
Section 80G(5)(ix):
Analysis: This requirement is designed to facilitate the donor's claim for deduction, enhance traceability, and curb fictitious or inflated claims. The prescribed particulars are likely to be standardised to facilitate digital matching of claims and reporting. 3.8. Timelines for Application and ApprovalClause 354(2) and Table: 1[*********] Section 80G(5) (Provisos): 1[*********] 3.9. Inquiry and Rejection MechanismClause 354(3): 1[*********] Section 80G(5) (Provisos): 1[*********] 3.10. Provisional ApprovalClause 354(4): 1[*********] Section 80G(5) (Provisos) 1[*********] 3.11. Renewal and ExpiryClause 354(2) (Table, Sl. No. 4 & 5): 1[*********] Section 80G(5) (Provisos): 1[*********] 4. Practical ImplicationsFor Charitable Institutions and Non-Profits:
For Donors:
For Tax Administration:
Potential Challenges:
5. Comparative Analysis: Clause 354(1) vs. Section 80G(5)
6. ConclusionClause 354(1) of the Income Tax Bill, 2025, represents a modernisation and rationalisation of the legal framework for approval of charitable organisations for the purpose of allowing tax deductions on donations. While the substantive conditions for approval remain broadly consistent with those u/s 80G(5) of the Income-tax Act, 1961, the new clause introduces enhanced procedural clarity, stricter timelines, and a more robust compliance and reporting regime. The move towards digital compliance, time-bound approvals, and explicit consideration of compliance with other laws reflects both administrative experience and the evolving policy landscape. For charitable institutions, the changes will require greater attention to compliance and record-keeping, but should also bring greater predictability and legitimacy to the sector. For donors and tax authorities, the new regime promises greater transparency and reduced scope for abuse. Potential areas for further reform may include specific guidance on the interpretation of "charitable purpose" versus "religious purpose," harmonisation with other regulatory regimes (e.g., FCRA), and capacity-building support for smaller entities to meet the enhanced compliance requirements.
Note :- 1. Irrelevant point deleted Full Text: Clause 354 Application for approval for purpose of section 133(1)(b)(ii).
Dated: 17-4-2025 Submit your Comments
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