In this article, Khadija Ashfaaq Khalil pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses Annual Compliance of a Private Trust in India.
What is a Trust
Trust is defined in section 3 of the Trust 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.”[1] In simple words, it is a transfer of property by the owner to another for the benefit of a third person along with or without himself or a declaration by the owner, to hold the property not for himself but for another.[2]
Under the Indian trust law, a trust is an arrangement or a contract. As the name suggests, it is a contract of trust which the settlor reposes in the trustee for the benefit of the beneficiary. A trust creates “split ownership”. A trustee is a “legal owner” and beneficiary is a “beneficial owner”. This means that where one is the owner in the eyes of the law, the other is the owner of the benefits arising from the trust property. This is one of the unique features of a trust.[3] The settlor/author is the person who is creating the trust and declares the confidence. The trustee is the person who accepts such confidence. The beneficiary is the person for whose benefit the confidence is reposed and the trust is created. Therefore, when Mr. X gives certain movable and immovable properties to his son-in-law to hold in trust for his daughter and to give certain amount monthly to his daughter, then Mr. X is the author/settlor of the trust while his son-in-law is the trustee and his daughter is the beneficiary.
A trust is created when the person creating the trust, termed the author of the trust indicates with reasonable certainty by any words[4] or acts on the following: the intention on his part to create trust; the purpose of the trust; the beneficiary; the trust property and there must be a divesting of the ownership by the settlor in favour of the trustee.[5]
What is a Private Trust
A Private Trust is constituted for the benefit of one or more individuals who are, or within a given time may be, definitely ascertained. The private trust caters to the needs of specific individuals and not the world at large. It is in personam and not in rem unlike the public trust. Private Trusts are governed by the Indian Trusts Act 1882. Public trusts are governed by the Religious Endowments Act, 1863, the Societies Registration Act, 1860, the Charitable and Religious Trusts Act, 1920, and the Charitable Endowments Act, 1890. In Maharashtra, public trusts are governed by the Maharashtra Public Trusts Act, 1950. A Private Trust can be created inter vivos or by will. If a trust in created by will it shall be subject to the provisions of Indian Succession Act, 1925.[6]
Registration of a Private Trust [7]
To register as a private trust in India, the following steps have to be complied with,
- A Trust Deed must be prepared on stamp paper of the requisite value [8]. The Trust Deed must contain the name of the trust, its address, the object of the trust (whether charitable or religious), the settlor, two trustees of the trust as well as the property in question, i.e., either movable or immovable property.
- Under the Indian Trusts Act, 1882, private trusts which wish to be registered are required to submit the following with the Local Registrar:
- Trust Deed on stamp paper of requisite value (as stated above).
- One passport size photograph & copy of the proof of identity of the settlor, each of the two trustees and each of the two witnesses individually.
- Signature of the settlor on all the pages of the Trust Deed.
- Two persons must be called in as witnesses to sign on the Trust Deed.
- The Trust Deed must be submitted to the Local Registrar along with one photocopy for registration. The photocopy should also contain the signature of the settlor on all the pages. At the time of the actual registration, the settlor and the two witnesses are required to be personally present, along with their original identity proof.
- The Registrar will retain the photocopy & return the original registered copy of the Trust Deed to the concerned parties.
At this point in time, it will be imperative to mention that private trusts which have the subject matter as movable property only need not be registered under the Registration Act, 1908.
Annual Compliance
e private trusts need to comply with the provisions under the Indian Trusts Act, 1882, the Income Tax Act, its Rules and Regulations and other relevant legislations. As far as annual compliances go, the general compliances for all private trusts are as follows:
1. Auditing of Accounts
When the total income of a Private Trust exceeds Rs. 1, 50,000(for FY 2016-17) which is the limit that has been given under the Income Tax Act, 1961 for non-taxable income, then the private trust must be audited compulsorily by a Chartered Accountant. [9]
2. Filing the Annual Returns
After the accounts of the Trust are audited by a CA, the audit report must be made. The report of audit of accounts must be in Form No. 10B.[10] The report must be filed along with the Annual Return of Income under Form ITR-7.
3. Foreign Contributions Report
Every Trust needs to submit a Foreign Contributions Report. There are two kinds of trusts, one which receives foreign contributions and one which does not. When a trust receives foreign contribution, it needs to submit a report to the Secretary, Ministry of Home Affairs, Government of India, New Delhi. The report must be duly certified by a CA and accompanied by the Income and Expenditure Statement, the Receipts and Payments Account and the Balance Sheet within 9 months of the closure of the financial year. If no such contribution is received during the last financial year then a ‘Nil’ Report needs to be submitted. [11]
4. Furnishing Certificates of TDS if required
When a Private Trust is deducting tax at source for payment of salaries to the employees who have been kept for managing the Trust Property and other such allied purposes, it needs to furnish certificates of TDS to the persons on whose behalf TDS had been collected. This must be done within a month from the date of closure of the financial year.[12]
5. Publication of Accounts
Publication of Accounts in newspaper if the annual income or the receipts of the trust which have been generated from the trust property exceed Rupees One Crore. [13]
6. Filing of Value Added Tax and Service Tax Returns if required
If the gross turnover of a Private Trust exceeds Rupees 15 Lakhs[14], then it is liable to file VAT and Service Tax Return in the format prescribed by the government. VAT is to be deposited in every three months.[15]
Taxation of a Private Trust
A private trust is a separate entity in the eyes of the law. Thus, it is taxed separately. The income of a private trust is received by the beneficiaries, i.e., it is for the beneficiaries. There can be two different structures of a private trust, one where the beneficiaries are ascertained and the individual shares of the beneficiaries are known and the other is where the beneficiaries and their shares are unascertained and the income of the trust is determined by the trustees. The former is called as a specific trust while the latter is called as a discretionary trust. [16]
The income is taxed in the hand of the respective beneficiary when the individual shares of income in a private trust are identifiable. The Income Tax act imposes a liability upon the trustee to pay tax in respect of any income which he has received or is entitled to receive on behalf of the beneficiary. Thus, the tax can be levied and recovered from a representative assessee who is a trustee.[17] Because the share of income is not defined in a discretionary trust and the trustees decide the distribution of the income among the beneficiaries, the income of such trust is assessed in the hand of the trustees only and not at the hand of the representative assessee eats the maximum marginal rate.[18]
This rule on taxation of private trusts is applicable only when the income of the trust is sourced from the assets alone. For example: if the trust has immovable property in hand and decides to lease it, then the income generated from such immovable property is said to be derived from the assets of the trust. However, if the trust undertakes a business activity to gain income then this rule does not apply. The income from such a business will, in due course, of course be used to further the objects of the trust. In such a case, however, the income earned from the business shall belong to the trust and not to the author of the trust or trustees. Such income, arising from the business will be taxed at maximum marginal rate on the whole income. However, even so, there arise exceptions to the rule applicable to private trusts for which the taxation will be at the individual tax rate. Thus, the income will be charged at the same rate and in term a manner as it would be taxed in the hands of the beneficiary when the private trust is [19]:
- Created by a will for the benefit of the relatives, or;
- Created exclusively for the benefit of any relative dependent on the support and maintenance, or;
- Created exclusively by the settlor, i.e., the only trust declared by him.
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Endnotes
[1] The Indian Trusts Act, 1882; http://agritech.tnau.ac.in/ngo_shg/pdf/indian_trusts_act_1882.pdf
[2]Article titled ‘Trusts and its Types’ at: http://www.complianceindia.co.in/trusts-its-types/
[3] Article titled ‘FEMA Aspects of Private Trusts’ at: http://www.rashminsanghvi.com/downloads/foreign_exchange_law/FEMA/FEMA%20aspects%20of%20private%20trusts.htm
[4]http://www.advocatekhoj.com/library/lawareas/trust/private.php?Title=Trust&STitle=Private,%20Public%20and%20Religious%20Trusts
[5]Article titled ‘Formation and Taxation of a Charitable Trust’ at: http://taxguru.in/income-tax/formation-taxation-of-charitable-trust.html
[6]Article titled ‘Trust-An Overview’ at: http://www.rna-cs.com/trust-an-overview-2/
[7]Article titled ‘Procedure for Registration of Trust under the Indian Trusts Act, 1882’ at: http://indiamicrofinance.com/procedure-registration-trust-indian-trusts-act-1882.html
[8]Refer the Bombay Stamp Act, 1958 Schedule 1, Article 61
[9] Article titled ‘Annual Compliance of a Private Trust in India’ at: http://blog.ipleaders.in/annual-compliance-private-trust-india/
[10] Income Tax Rules, Rule 17-B
[11] Article titled ‘Annual Compliance of a Private Trust in India’ at: http://blog.ipleaders.in/annual-compliance-private-trust-india/
[12] Supra
[13] Ibid fn. 11
[14] Article titled ‘A brief on VAT’, at: http://ctax.kar.nic.in/what_vat/About%20vat%20nnew.pdf
[15] Ibid fn. 11
[16] Article titled ‘Taxation of a discretionary trust’ at: http://www.thehindubusinessline.com/iw/2000/08/20/stories/0720g201.htm
[17]Article titled ‘Taxation of a Private Trust’ at: http://www.fpgindia.org/2014/06/taxation-of-a-private-trust.html
[18] Supra.
[19] Ibid fn. 17
IN above article, Author has confused private specefic trust with charitable trust which may be corrected.