The Income Tax Bill, 2025, has consolidated tax laws governing non-profit organisations (NPOs), streamlining provisions that were previously scattered across multiple sections of the Income Tax Act, 1961. While this move enhances clarity and reduces compliance burdens, tax experts are calling for more details on the criteria for NPOs to qualify for tax concessions.
Clarity Needed on 'Permissible Commercial Activities'
One of the key provisions of the new Bill is the definition of 'permissible commercial activities' for registered NPOs - an aspect missing in the current law. The Bill seeks to provide greater certainty to NPOs engaging in commercial activities and reduce litigation risks. However, tax experts emphasize the need for detailed FAQs and rules on what constitutes 'permissible' and 'non-permissible' activities to help NPOs align with legal requirements effectively.
Under the Bill, registered NPOs can only engage in commercial activities if they are incidental to their objectives. The definition of 'commercial activity' includes any trade, commerce, or business conducted in exchange for a cess, fee, or other consideration. Experts believe that while a similar provision exists under the current law, the ambiguity around what qualifies as a 'business' could lead to interpretational challenges and potential disputes with tax authorities.
Investment Restrictions & Regulatory Flexibility
The Investment modes for NPOs are listed under Schedule XVI of the Bill, which closely mirrors the existing framework under the IT Act, 1961. However, tax practitioners suggest that the government should have the flexibility to modify these investment modes via notification, rather than requiring a legislative amendment each time a change is necessary.
Challenges in Tax Officer Assessments & Need for Social Audits
A major concern is the two-front test that charitable institutions must pass to qualify for tax exemptions:
- The institution must operate not-for-profit.
- The activities should be for the advancement of an object of general public utility.
While the first criterion is straightforward, the second remains subjective, as tax officers often lack the expertise to objectively assess the nature of an NPO's activities. This ambiguity frequently leads to litigation, experts argue. To mitigate this, tax experts suggest introducing objective criteria, such as mandatory social audits, to assist tax officers in making well-informed assessments.
Clarifications Needed on Charitable Purpose and Related Party Transactions
The Bill retains the definition of 'charitable purpose', covering areas such as relief of the poor, education, yoga, and medical relief. However, experts recommend issuing FAQs for better clarity on these terms to ensure consistent interpretation.
Additionally, restrictions exist on the benefits provided to related persons by NPOs. Experts call for clearer guidelines on the nature of such benefits (direct or indirect), mechanisms for computation, and applicable compliance rules to prevent unintended violations.
Simplification of Provisions for NPOs
The CBDT's FAQs, released earlier this month, highlight that provisions related to NPOs were previously scattered across Sections 11, 12, 12A, 12AA, 12AB, 13, and 115BBC of the Income Tax Act, 1961. The new Bill consolidates these provisions into Part B of Chapter XVII, streamlining compliance requirements for NPOs.
As the Income Tax Bill, 2025 moves forward, stakeholders anticipate further clarifications from the government and CBDT to ensure a smooth transition for NPOs and tax authorities alike.
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