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TMI BlogReforming the Exit Tax Regime for non-profit organizations (NPOs) or charitable institutions : Clause 352 of the Income Tax Bill, 2025 Vs. Section 115TD of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... charitable assets, accumulated over time with the benefit of tax exemptions, are not diverted to non-charitable purposes upon the cessation of charitable status or other key events. The regime imposes an "exit tax" at the maximum marginal rate on the accreted income, defined as the net assets of the entity, thereby disincentivizing misuse of tax-exempt status. This commentary will analyze Clause 352(1) to (6) in detail, compare each provision with the corresponding parts of Section 115TD and Rule 17CB, and discuss their practical implications. 2. Objective and Purpose The legislative intent behind both Section 115TD and Clause 352 is to protect the integrity of the charitable sector and the public revenue. The core policy concern is that assets accumulated by NPOs under tax-exempt status should continue to be used for charitable purposes, and not be appropriated for private or non-charitable interests if the organization ceases to be eligible for exemption. The "tax on accreted income" acts as a safeguard, ensuring that any benefit derived from the exemption is recaptured if the organization exits the charitable sector without proper transfer of assets to another eligible entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in Section 115TD, though principles of natural justice would apply. - Both provisions are similar in mandating computation as of a "specified date," but the Bill's Table (in sub-section 5) provides greater procedural clarity on what this date is for each scenario. Implications: - The explicit hearing requirement strengthens procedural fairness and may reduce litigation on grounds of violation of natural justice. - The detailed Table clarifies the timeline and sequence of events, aiding compliance and enforcement. Clause 352(3): Formula for Computation of Accreted Income Text: Accreted income = Aggregate fair market value of assets (B) - Total liabilities (C), as on the specified date, computed as per prescribed valuation methods. Comparison with Section 115TD(2): The formula and concept are identical: accreted income is the net asset value, with both assets and liabilities valued as per prescribed methods. Rule 17CB: Provides the detailed methodology for valuation of assets and liabilities, including special rules for shares, securities, immovable property, business undertakings, and other assets. Key Points of Analysis: - The Bill maintains the same basic formula a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of tax within 14 days from the relevant event (appeal expiry, order received, end of year, etc.), but does not use a tabular format. Key Points of Analysis: - The Bill's Table is a major structural improvement, offering clarity and precision for each scenario, including appeals and procedural nuances. - The Table covers more nuanced scenarios, such as failure to apply for registration under specific clauses, and details the relevant dates for computation and payment. - This approach reduces ambiguity about when the tax is triggered and when it is due, which has been a source of confusion under the current law. Implications: - The Table format improves administrative efficiency and taxpayer understanding. - The inclusion of appeals processes and deadlines ensures that the tax is triggered only after due process is exhausted or waived. Clause 352(6): Finality of Tax Payment Text: Payment of tax on accreted income is deemed final; no further credit or deduction is allowed for such tax under any other provision. Comparison with Section 115TD(6) & (7): - Section 115TD(6) and (7) similarly provide that the tax is final and no deduction or credit is allowed for the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he narrative style of Section 115TD. - The explicit procedural safeguard of a hearing in Clause 352(2) is a welcome addition, ensuring due process. 5.2 Method of Valuation (Rule 17CB) - Rule 17CB prescribes detailed methods for determining FMV of various asset classes and for identifying excluded liabilities. - The Bill's reference to "prescribed" methods indicates that similar or identical rules will be adopted under the new regime. - The valuation rules ensure that the tax is levied on the true economic accretion, not on book values or arbitrary estimates. 5.3 Scope and Breadth of Triggers - Both the Bill and Section 115TD cover a wide range of events, including cancellation, merger, conversion, modification of objects, and failure to apply for registration. - The Bill's expanded and clarified triggers (especially around appeals and timelines) address several practical scenarios that have arisen under the current law. 5.4 Procedural and Substantive Safeguards - The requirement of a hearing, clear computation formula, and exclusion of certain assets/liabilities demonstrate a balance between revenue protection and taxpayer fairness. - The finality of the tax payme ..... 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