An Introduction for Accreted Tax (Exit Tax) U/S 115TD :-
Before the introduction of section 115TD,no provision in the Income Tax Act ensured that the corpus and asset base of the trust over some time is used for charitable purposes with a promise to be used for charitable purposes and is not used for any other purpose.
The Finance Act 2016 has introduced a new chapter after Chapter XII-EB of the Income Tax Act with effect from the 1st day of June 2016 namely “Special provisions relating to tax on earned income of certain trusts and institutions” and introduced a section 115TD. This chapter has been introduced to ensure that the profits given over the years by way of exemptions claimed by charitable trusts are not misused by converting them into non-charitable organizations.
It is a levy like an exit tax. This tax is in addition to the income tax chargeable in the hands of the entity and is leviable at the maximum marginal rate on the income earned. No deduction under any other provision of this Act shall be allowed to the trust or institution or any other person in respect of income which has been taxed or charged thereon.
We will discuss the Following issues in our Further discussion:-
Section 115TD Earned income of trust or institution is taxable in the following circumstances after finance act 2022 if a specified person has :
2) Trust is merged with an entity that does not have similar objectives and is not registered under section 12AA or Section 12AB or Approved under clause (vi) or Sub clause (via) of clause (23c) of Section 10. 3) The trust has failed to transfer all its assets to any other trust or institution registered under section 12AA or or Section 12AB or Approved under clause (vi) or Sub clause (via) of clause (23c) of Section 10 within twelve months from the end of the month in which it is dissolved.
Total FMV of total assets and liabilities of trust/institutions as on specified date
Less: The total liability of such trust is computed by the prescribed method of assessment (Rule 17CB inserted by the Income-tax (Eighth Amendment) Rules, 2017, determining the method of valuation, w.e.f. 1-6-2016.)
Following items to be excluded while calculating accreted income:
Exclusion of such assets shall be allowed only if the Trust or Institution has not been allowed any benefit of Section 11 and 12 During the Said Period.
3. The assets and liabilities, if any, relating to such assets which have been registered within the specified period to any other trust or entity are excluded while computing the income registered within the specified period.
. Tax on accreted income is to be paid at ‘Maximum Marginal Rate’ (MMR). This levy is chargeable to additional income tax in the hands of the trust. This tax will be imposed even if the Trust or institution does not have any other income chargeable to tax in the relevant pervious year .
Further there is no credit can be taken for such accreted income.
Meaning of MMR
Maximum marginal rate is defined the rate of income tax applicable in relation to highest slab of income in case of Individual, AOP or BOI. MMR for AY 2023-24 will be 42.744%
The method of calculation of accreted tax is as follows:
This levy is chargeable to additional income tax in the hands of the entity and is calculated as: Accreted Tax = Accreted Income * Maximum Marginal Rate
What is due date of payment of exit tax u/s 115TD?
The trust or institution shall be liable to pay tax on the income earned to the credit of the Central Government within fourteen days from the date specified in section 115TD(5).
Tax and Interest payable Timeline
|SCENARIO||DATE OF PAYMENT|
|Cancellation of Registration- No appeal filed||14 days shall be counted from the date of Expiry of time allowed under section 253 Appeal filed.|
|Appeal is filed but cancellation of registration is confirmed in the appellate proceeding||14 days from the date of receipt of the appellate order. (To be counted from the date of order cancellation of registration by the Commissioner)|
|Adoption or modification of goods and not applying for new registration||End of last year|
|Adoption or modification of items and not applied for registration but application rejected||No appeal filed – Expiry of time allowed under section 253 Appeal filed – Date of receipt of order by Trust|
|Merger||Date of Merger|
|Dissolution||Date of expiry of 12 months|
Before we understand the How the value derived for the Assets and Liablities we have to understand which items shall be included while computing :-
PART A – ASSETS:
For the purpose of section 115TD, the total FMV of the total assets of the trust or institution shall be the sum of the FMV of all the assets in the balance sheet, as reduced by—
PART B- LIABLITIES
The total liabilities of the trust or institution shall be the book value of the liabilities in the balance sheet as on the *specified date, but shall not include the following amounts, namely:-
* The Specified date shall be the Following :-
FMV of assets
NOTE: If no trading of such shares and security takes place on the valuation date, the average of the lowest and prices immediately preceding the valuation date when such shares and security are traded on the stock exchange highest.
A = Book value of all assets (other than those included in B) except TDS, income tax refund claimed plus advance tax and deferred expenditure shown on asset side
B= FMV of bullion, jewellery, precious stones, artistic works, shares, securities and immovable property determined in the manner provided in this rule
L= Book value of liabilities, but not including the following amounts, namely:-
PE = Total amount of paid up equity share capital as shown in the balance sheet
PV = The paid up value of such equity shares
Whichever is higher
As per section 115TE, if the principal officer or trustee or institution and trust fails to pay the whole or any part of the tax on the earned income referred in section 115TD (1) within the time allowed under section 115TD (5), such Simple interest shall be payable at the rate of 1% for every month or part thereof on the amount of tax.
The period of interest shall be calculated commencing from the date immediately following the last date on which such tax was payable and ending with the date on which the tax was actually paid.
Any assets created out of this income and again charge the accreted tax on the same will be Double taxation on such organisation.
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