Tax department steps up scrutiny of charitable trusts over disclosure mismatches

New Delhi: The Income Tax Department has intensified scrutiny of charitable trusts and non-profit organisations, seeking granular details on utilisation of funds, governance practices and charitable activities after detecting discrepancies in declarations to different regulators.

The department has sent queries to hundreds of trusts seeking renewal of registration and continuation of tax exemptions, said people familiar with the development.

The majority of queries have been directed at trusts receiving foreign contributions to ensure funds have been used exclusively for approved charitable purposes, for which tax exemption is claimed.

The queries include project-wise utilisation of donations, reconciliation of receipts with audited financial statements, utilisation certificates, trustee approvals, payments to related parties and documentary evidence demonstrating that the income has been used only for approved charitable purposes.

The move is part of a data-driven exercise, under which queries were sent after the trusts were found to have furnished different information in their filings with other regulators than in their income tax returns.

"Queries are raised only in cases where the system flags any inconsistency and there are variations in tax filing and filings with different regulators," a senior official told ET on condition of anonymity. "Also, we are monitoring trusts which are receiving funds but there is not much activity."

The exercise comes as the home ministry has tightened the compliance framework under the Foreign Contribution (Regulation) Rules, which require entities receiving foreign contributions to furnish more detailed disclosures and adhere to stricter timelines.

While the FCRA amendments do not alter the Income-tax Act, they will significantly enhance the data trail available with tax authorities over time to detect any deviation from the existing compliance under tax law and in claiming exemptions, said officials.

"The FCRA amendments do not create any new tax liability or adverse FCRA development does not automatically result in denial of tax exemption but additional disclosure under FCRA will certainly improve the quality of information available for tax assessment and can serve as trigger for deeper examination," said another official.

Once institutions make detailed declarations before different regulators, mismatches become easier to identify, according to the official.