In this blog post, Varun Chauhan, an Associate at Dhir and Dhir Associates in the Project Finance Team, New Delhi with the Corporate Advisory and Loan Structuring Team who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about private trust in details and then goes on to elaborate on the annual compliance of a private trust in India.
Charitable organizations in India can be structured and incorporated as one of the following three forms:
- Non-Profit Company under Section 8, The Indian Companies Act, 2013 (erstwhile Section 25 Company under The Indian Companies Act, 1956)
This article will discuss the first form, i.e. ‘Trust’ and more specifically a Private Trust, in detail, its types, formation, requirements, objective and annual compliance.
Trust is defined under Section 3 of the Indian Trusts Act, 1882, as “An obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.”
A Trust is a kind of arrangement which originates from a settlement between the Settlor/Author (owner of the property) and the Trustee (the transferee) for the beneficial interest of a third person called Beneficiary. This arrangement relates to the administration of property which is known as Trust Property for the benefit and enjoyment of the Beneficiary of the Trust. This arrangement gives rise to the concept of split-ownership where the Trustee becomes the legal owner and the Beneficiary becomes the beneficial owner.
A Trust Property can be movable and immovable and the Settlor/Author of the Trust Property can create/declare a Trust during his lifetime (inter vivos declaration) or even after his death through a will.
An Author can be anyone who is not legally insane or of unsound mind. But in case of a minor, permission from the court is required for him to be an Author. On the other hand, a minor can’t become a Trustee as he is incapable of effecting contracts on behalf of the Beneficiary.
As already mentioned, a Trust is created for the beneficial interest of the Beneficiary. We can broadly classify trusts into two categories on this basis:
- Private Trusts
- Public Trusts
Where the Trust is created for the benefit of a specified person or class of persons, it is known as a Private Trust. On the contrary, where the Trust Property is administered for the benefit/enjoyment of general public or a fluctuating class of persons and not just limited to a selective group, it is known as a Public Trust. As such, a Private Trust need not be charitable or religious in nature as opposed to a Public Trust.
Private Trusts are governed by The Indian Trusts Act, 1882 and when it is created by a will, it shall be subject to the provisions of The India Succession Act, 1925.
In case of a movable Trust Property, there is no need to execute a written document between the Settlor/Author and the Trustee and mere transfer of such property, coupled with the declaration to that effect, denotes a valid Trust arrangement. Whereas a written Trust Deed needs to be executed on a non-judicial stamp paper of reasonable value (as per the State laws) and it should be signed by the Settlor/Author and the Trustee.
A Private Trust which is created or declared inter vivos needs to be registered under the provisions of the Registration Act, 1908, provided the trust property is immovable. There is no requirement under law to register a Private Trust created through the will of a deceased person. Also, unlike the Public Trusts, a Private Trust is not granted any exemptions under the Income Tax Act, 1961, though the trustee is liable to file annual tax return as per the provisions of the said Act.
In view of the discussion herein above, there are following requirements for creation of a valid Private Trust in India:
- Settlor/Author: A person who is the owner of a property and wants to create a Trust for benefit of a particular person or group of persons.
- Trustee: A person in whose favour the Trust Property is bequeathed upon by the Settlor/Author and a Trust is created by declaration inter vivos or by a will.
- Beneficiary: The person or class/group of specified persons for whose beneficial interest the Trust is created.
- Objective: Any Trust is created with a particular objective. Such objective should be stated clearly under the terms of a Trust Deed or verbally when there is no Trust Deed.
- Trust Property: There must be property (movable/immovable) which the Settlor wants to bequeath upon the Trustee for creation of a Trust.
- Trust Deed: A written document which is duly signed by the Settlor/Author and the Trustee, specifying the Objective and Beneficiary of the Trust so created.
Such Trust Deed is not required where:
- the Trust Property is movable and;
- the Trust is created through a will.
- PAN: For the Trustee to pay tax on behalf of the Beneficiary(ies), it is required to apply for a Permanent Account Number (PAN). The application should be made before the Assessing Officer, in duplicate, in Form No. 49A.
- TAN: If the Trust needs to deduct tax at source for its employees or other staff engaged to manage or administer Trust Property, then it needs to apply for Tax deduction Account Number (TAN) before the Assessing Officer, in duplicate, in Form No. 49B.
- FCRA Registration: Every Trust needs to apply for registration under Section 6(1), Foreign Contribution (Regulation) Act, 2010 (“FCRA”), if it is desirous of accepting donations from foreign sources.
- Separate account for Foreign Contributions (FC A/c): If the Trust wants to receive foreign donations and is registered under FCRA, it needs to open a separate account for this specific purpose.
- Separate set of records for foreign contributions: Every organisation/individual needs to maintain separate set of records exclusively for the receipt and utilization of foreign donations/contributions.
- Approval from RBI: In case where the beneficiary is a non resident, prior approval from RBI is required to that effect.
- TIN Registration: If a Private Trust deals with the trading and manufacturing of goods and services, even when the motive is not to earn profit, it needs to apply for Taxpayer Identification Number (TIN) before the Excise and Taxation Department of its respective State. Such TIN is used for filing VAT and Service Tax Return subsequently.
After formation of the Private Trust, it needs to comply with the following under various laws like The Indian Trusts Act,1882, The Income Tax Act, 1961, FCRA, Central Sales Tax Act, etc. and various State legislation:
Compulsory Audit of Accounts
When the total income of a Private Trust exceeds the limit given under the Income Tax Act, 1961 for non-taxable income (Rs. 1,50,000 for FY 2016-17), it should be compulsorily audited by a Chartered Accountant.
Annual Return of Income
After the accounts of the Trust are being audited by the Chartered Accountant, the audit report should be filed along with the Annual Return of income under Form ITR-7 on or before the due date.
Report of Foreign Contributions
Every Trust which receives foreign contributions needs to submit a report, duly certified by a Chartered Accountant and accompanied by an Income and Expenditure Statement, Receipts and Payments Account and Balance Sheet within 9 months of the closure of the financial year, to the Secretary, Ministry of Home Affairs, Government of India, New Delhi. A ‘Nil’ Report needs to be submitted if no such contribution is received during the last financial year.
Submission of Annual Account Statement of FC A/c
Duly certified copy of the Account Statement of FC A/c needs to be furnished within 9 months of the closure of financial year along with Report mentioned above in point 3.
Issue of Certificate of TDS
Where any Private Trust is deducting tax at source for payment of salaries to the staff or employees (kept for managing the Trust Property), it needs to furnish certificates of TDS to the persons on whose behalf TDS was being collected. It should be done within 1 month from the date of closure of the financial year.
Publication of Accounts in newspaper
Where annual income or receipts of the Trust (generated from the Trust Property) exceeds Rs. 1,00,00,000 (INR One Crore).
Filing VAT and Service Tax Return
If the gross turnover of a Private Trust exceeds Rs. 15,00,000 (INR 15 Lakhs) , it is liable to file VAT and Service Tax Return in the prescribed format. VAT is to be deposited in every three months. The procedure to file Service Tax and VAT Return can be accessed through link given in the footnote no. 3.
 Article titled ‘FEMA aspects of Private Trusts’, can be reached at: http://www.rashminsanghvi.com/downloads/foreign_exchange_law/FEMA/FEMA%20aspects%20of%20private%20trusts.htm , last viewed on May 15, 2016.
 Article titled ‘A brief on VAT’, can be reached at: http://ctax.kar.nic.in/what_vat/About%20vat%20nnew.pdf , last viewed on May 20, 2016.
 Procedure for filing VAT and Service Tax: http://www.svtuition.org/2013/01/procedure-of-filing-vat-return.html