MUMBAI: The Budget proposes a slew of modifications that would cost a charitable trust dearly for even the slightest slip-- such as a few days delay in submitting a renewal application.

Tax exemption could be lost if there is a delay in filing the I-T return.Tightening of controls will make an already tough presence for trusts much more difficult, state experts.Owing to some propositions, the sword of exit tax hangs on charitable trusts.

According to Gautam Nayak, tax partner at CNK - & Associates, The most bothersome change is the one where if a trust does not obtain renewal of its registration in time, it ends up being accountable to be taxed at the optimum limited rate on the fair market price of its possessions.

This will totally destroy trusts that dedicate even the smallest error in filing such renewal applications simply a few days late.

Charitable trusts that had actually not requested registration in spite of being in existence for years, so far were not rejected exemption in pending assessments of earlier years.

This advantage is being nabbed.

Old trusts that now wish to look for registration would risk suffering tax for as numerous as ten previous years, adds Nayak.Currently, charitable trusts are liable to pay additional earnings tax (exit tax) on their accreted income, which is: reasonable market value (FMV) of properties less FMV of liabilities, upon infraction of proposed conditions, such as conversion into non-charity or moving assets to any non-charitable entity.

The Budget proposals broaden the scope of exit tax.

Any hold-up in submitting an application for registration/re-registration for availing tax exemption will be deemed as if the charitable trust had actually converted into a non-charitable one and exit tax will get triggered.

This tax is levied at the maximum minimal tax rate of 34.94%, said Sheetal Shah, associate partner EY-India.

Another modification that will severely handicap charitable trusts, which collect donations and after that disperse to trusts engaged in grassroots charity, is that just 85% of the donations made to other trusts will now get approved for the exemption, instead of the existing 100%.

This amendment is to plug a so-called loophole, where chain contributions could be made from one trust to another, each rely on the chain declaring 15% exemption.

Sadly, on the premises of misuse by a few, a large number of real trusts would suffer, and inter-trust contributions are likely to dry up, explains Nayak.

If charitable trusts submit income tax return beyond the due date of filing of initial or belated tax returns, they will lose exemption.

There is no reward for such entities to file an upgraded tax return (by using more earnings to tax upon payment of enhanced tax) given that they would not be qualified for exemption, explains Shah.