INDIA Law and Practice Contributed by: Rishabh Shroff, Kunal Savani and Chirag Shah, Cyril Amarchand Mangaldas
• public trusts (religious or charitable purpose). Further, under taxation laws and the ITA, trusts can be either irrevocable or revocable and discretionary or determinate. Trusts are not recognised as a separate taxable unit under the ITA. However, the ITA provides that, in the case of a trust, trustees would be taxed as a “repre- sentative assessee” of the beneficiaries – ie, the trus- tees would be taxed in the same manner in which the beneficiaries would have been taxed. The taxability of the trustee depends on whether or not the share of the beneficiaries in the trust is determinate or known – ie, whether the trust is a determinate trust or a discretionary trust. In the case of a determinate trust (ie, where the name and share or interest of the beneficiary is known or determinable), the tax officer has the option to either assess the beneficiaries, or alternatively, the trustees. Thus, the income of the trust may be assessed at the option of the tax officer, either in the hands of the beneficiary or in the hands of the trustee(s) as a representative of the beneficiar- ies. In the case of a discretionary trust (ie, where the share/interest of the beneficiaries is unknown or left to the discretion of the trustees), the trustee(s) would be liable as a representative of the beneficiaries, at the maximal marginal rate (MMR). Further, in the event a settlor transfers the property to a trust under such provisions that any part of the income or assets so transferred may be retransferred to the settlor, such a trust is treated as a revocable trust under the ITA. In the case of a revocable trust, the income of such trust may continue to be taxed in the hands of such settlor. Thus, if the settlor retains any powers over a trust, even if the terms of the trust deed consider such trust to be an irrevocable trust, it shall be considered a rev- ocable trust under the ITA. For instance, even if the settlor does not directly retain any unfettered powers over the trust property but has the right to exercise such powers subject to meeting certain contingencies (such as by obtaining consent of any named person), then such trust would be deemed to be a revocable
trust. Accordingly, it is critical to ensure that no such powers are directly or indirectly retained by the settlor. The ITA provides that all income of any person, received by virtue of a revocable transfer, shall be chargeable to tax as the income of the transferor. On the other hand, in the case of an irrevocable trust, since the settlor no longer maintains any control over the trust property, such settlor is not taxed on the income of the trust property. Despite this, revocable trusts remain a popular structuring choice amongst families in India for succession planning. This is because such a trust allows settlors to retain a certain amount of control and oversight over their assets in order to ensure that interests of their family members are protected. Settlors will often retain the power to add or remove beneficiaries and decide in what pro- portion distributions are made. The ITA provides for certain tax exemptions in the case of trusts registered for charitable purposes, wherein such charitable purposes included relief of the poor, education, medical relief, etc. There are many ways in which a person can undertake charity in India. All of the structures have more or less similar incentives and exemptions. The definition and governing law regarding the charities varies depend- ing on type of structure set up for charitable purposes. Income of charitable trusts and institutions, registered under the ITA, is exempt from tax, subject to certain conditions such as: • application of income for charitable purposes in India; • filing of timely income-tax returns; and • adhering to conditions set forth in the certificate of registration, etc. Only trusts or institutions incorporated in India are eli- gible for this exemption. Further, income of such trust or institution must be applied wholly for charitable or religious purposes within India. In order to encourage charitable giving, the donors making donations to charitable trusts or institutions registered under the ITA are allowed deductions for
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