Introduction: The 12A and 12AB registrations are essential for non-profit organizations and charitable trusts in India. These registrations help NGOs and other social entities claim income tax exemptions, which support their charitable activities. However, may organizations face challenges during the application process due to common mistakes. In this blog, we’ll highlight the most frequent errors to avoid when filing for 12A registration and 12AB registration to ensure smooth processing and compliance with Income Tax laws.
Misunderstanding the Difference Between 12A and 12AB Registration
One of the most common errors is confusing between section 12A and 12AB. Both the sections govern the procedure of granting exemption to NGOs under Income Tax laws. Section 12A is a pre-existing section in the Income Tax Act which allows exemption from income tax to a registered NGO.
According to Section 12A, the income of any trust or institution (NGO) shall remain exempted from income tax if such trust or institution is registered with appropriate income tax authority under section 12AA. Section 12AA of the Income Tax Act prescribes the procedure of registration. However, section 12AA has now made ineffective and a fresh section 12AB has been inserted in the law by the Government revising the entire procedure of registration.
Therefore, every new or existing NGO who wish to take benefit of tax exemption under section 12A of the Income Tax Act shall be required to follow the registration procedure prescribed in Section 12AB of the Act.
Failure to Choose correct Registration Form
Section 12AB deals with the procedure for registration of trusts (NGOs) on or after 01-04-2021. Charitable trusts or institutions are required to take registration to avail of the exemptions under the Income Tax Act. Section 12AB requires every new NGO to obtain provisional registration first in Form 10A online along with required registration documents. Provisional Registration is granted for 3 years. Later, such NGOs will be required to apply for permanent registration within 6 months of commencement of its activities or at least 6 months before the expiry of the provisional registration period, whichever is earlier. Application for permanent registration shall be made in Form 10AB. Permanent registration shall be effective for 5 years and shall be renewed for further 5 years.
When the new registration procedure under section 12AB was prescribed, the Government allowed the existing registered NGOs to migrate to new registration system under section 12AB. Such NGOs could get permanent registration directly in Form 10A for 5 years without need to apply for provisional registration. It is important to be cautious while choosing correct form for filing provisional/ permanent registration. It has been seen that many NGOs chose wrong forms leading to rejection of their registration application. The CBDT also allowed immunity to such NGOs by allowing them further chance to rectify their mistake and reapply for registration choosing the correct form applicable to them. But the time limit for such rectification is now over so every applicant (NGO) should now be careful before choosing the application form (10A/10AB).
Direct Permanent Registration based on the commencement of activities
The new registration scheme under section 12AB requires that the new NGOs shall first apply for provisional registration in Form 10A and then apply for permanent registration in Form 10AB within 6 months of commencement of activities. But it has been seen that many new NGOs commence activities even before applying for provisional registration. In such case, there is no logic of applying for provisional registration as they have already commenced their activities.
This anomaly was brought to the notice of CBDT. Accordingly, the CBDT made appropriate changes in the registration procedure effective from 01-10-2023. Now, any NGO which has already commenced its activities is not required to apply for provisional registration. They can directly apply for permanent registration in Form No. 10AB.
Incomplete Documentation or Misfiled Information
Another common mistake is submitting incomplete or incorrect documentation. When applying for 12AB registration, you will need several key registration documents, including:
- Trust Registration Deed or Memorandum of Association
- Society Registration Certificate issued by Registrar of Societies (in case of Society)
- PAN Card of NGO
- Bank Statements
- KYC of key members/ executive committee/ directors of NGO
- Audited Financial Statements of up to 3 years (in case of existing NGO)
Registration with Charity Commissioner
It is an evident fact that a trust or society needs to apply before Charity Commissioner to attain the status of public charitable trust or society. Recently, it has been observed that a large number of applications for 12AB registration has been rejected on the ground that such NGO is not a registered public trust. Therefore, it is advised to trusts or societies to first register with Charity Commissioner in their respective state. Once registered with Charity Commissioner, the application for registration under section 12AB should be made to avoid rejection of application. In the State of Rajasthan, the NGOs are required to make application with “Devsthan Vibhag”.
Failure to meet eligibility criteria for 12AB registration
12AB registration requires organizations to meet specific eligibility criteria. This includes:
- Being a registered charitable trust, society, or company
- Having a primary objective of serving the public, either for religious or charitable purposes
- Not engaged in activities aimed at private profit
Besides, the trust deed/ Memorandum should contain the following clauses
- The NGO shall not distribute surplus to any member of the trust or their relatives and such surplus shall be utilized only towards charitable activities of NGO in future.
- In case of dissolution, the NGO shall not distribute the assets rather the assets shall be transferred to other NGO with similar objectives.
It is advised to NGOs to first check 12AB eligibility criteria before making application for registration to the Income Tax Department.
Failure to update Registration timely
According to Section 12AB of the Income Tax Act, permanent registration of NGO under the section shall be renewed in every five years. Application for renewal should be made at least six months prior to expiry of the period of 5 years. This ensures continued compliance with tax exemptions, and failure to update or renew the registration leading to penalties in the form of tax under section 115TD and revocation of tax benefits under section 12A.
It is thus advised to stay informed about 12AB renewal deadlines and timely apply for 12A update to maintain your organization’s tax-exempt status
Not Responding to Queries or Notices from Tax Authorities
Once you submit your application for 12AB registration, the Income Tax Department may issue queries or request additional information. Ignoring these communications can lead to the rejection of your registration or a delay in processing.
It is thus advised to respond to any queries or notices promptly and provide the requested information to prevent unnecessary delays in your application process.
Poorly Defined Governance Structure
A well-documented governance structure is a crucial part of your 12AB registration process. Tax authorities require clarity on how your organization operates, its decision-making processes, and the roles of board members or trustees. It is advised that Trust Deed or Memorandum should define the organizational structure in a clear manner. This includes clear documentation of trustees and board members.
Not Consulting a Tax Professional or Legal Expert
Many organizations attempt to handle the 12AB registration process on their own, which can lead to errors. Consulting with a tax professional or legal advisor who specializes in non-profit organizations can help you navigate the complexities of the application process and avoid common mistakes.
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Conclusion:
Filing for 12A and 12AB registration is a critical step for charitable organizations in India to avail themselves of tax exemptions and continue their philanthropic activities. By avoiding the common mistakes discussed above, your organization can streamline the process, ensure compliance, and enjoy the benefits of tax exemption. Stay updated on CBDT circulars and other tax law changes to keep your registration status intact and avoid any legal complications.
