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ICDS applicability limited to mercantile accounting; excludes cash-accounting and individuals/HUFs not subject to tax audit.
ICDS applies to persons following the mercantile system of accounting and does not apply to those following the cash system. For individuals and HUFs, ICDS is applicable only if they carry on business or profession and their books are required to be audited under the tax audit provisions; it does not apply where there is no business or professional income even if mercantile accounting is followed for other heads.
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A taxpayer switching from the composition scheme to the normal scheme may claim Input Tax Credit for inputs, inputs in goods held in stock, and capital goods held immediately before liability to pay tax, but credit for capital goods must be reduced by the prescribed periodic reduction measured from the invoice or receipt date, and no credit may be claimed for supplies after one year from the tax invoice date.
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Input Tax Credit denial: purchases from composition taxpayers are ineligible for ITC under the GST regime.
A composition scheme taxpayer is excluded from the input tax credit chain, cannot issue a tax invoice or collect tax, and must state that no credit is available. Consequently, a registered person purchasing from a composition dealer cannot claim Input Tax Credit because the supplier does not charge GST in a manner that would enable the recipient to treat the payment as tax paid for ITC purposes.
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Tax under GST must be paid not later than the return's due date. Monthly filers must file GSTR-3 and pay tax by the twentieth day of the month following the tax month. Composition taxpayers under the composition scheme file quarterly in GSTR-4 and must pay tax by the eighteenth day after the quarter ends.
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Composition levy on exempt supplies raises eligibility ambiguity due to turnover inclusion versus ineligibility for non leviable supplies.
The composition levy's tax base, as defined by turnover, expressly includes exempt supplies, indicating that composition tax is payable having regard to exempted goods; however, Section 10(2)(b) disqualifies persons making supplies "not leviable to tax," creating an ambiguity whether exempt supplies (which definitionally includes nil rated and wholly exempt supplies and non taxable supplies) render a person ineligible for composition. Commentators note this tension and call for clarification or amendment to reconcile the turnover inclusion with the eligibility restriction.
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Eligibility for composition scheme may be barred by prior inter state supplies, even if current turnover is below threshold.
A registered person who made inter state supplies during the previous year is ineligible to opt for the composition scheme in the current year, because eligibility under Section 10 is determined with reference to the preceding financial year; thus the absence of inter state supplies must be assessed for the previous year even if turnover remains below the threshold.
Act Rules GST
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Composition scheme eligibility: turnover in preceding financial year determines entitlement; aggregate turnover is all-India and fresh declaration required.
Eligibility for the composition scheme depends on aggregate turnover in the preceding financial year not exceeding the prescribed threshold; aggregate turnover is computed on an all India basis and includes taxable supplies (excluding inward reverse charge supplies), exempt supplies, exports and inter State supplies by the same PAN, while excluding GST and cess. Eligibility is reassessed each year; a fresh declaration is required to opt into the scheme after becoming eligible.
Act Rules GST
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Composition scheme validity continues while statutory conditions are met; annual intimation is not required for eligible taxpayers.
The composition levy remains valid so long as statutory eligibility conditions and applicable CGST Rules are complied with; no fresh annual intimation is required if those conditions continue to be met.
Act Rules GST
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Composition levy option must be elected before the financial year begins; prior electronic intimation required.
The option to pay tax under the composition levy must be exercised by giving electronic intimation in FORM GST CMP-02 prior to the commencement of the relevant financial year under the Central Goods and Services Tax Rules, 2017.
Act Rules GST
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Composition levy withdrawal: file FORM GST CMP-04 and submit FORM GST ITC-01 detailing stock within the prescribed period.
Withdrawal from the composition scheme is effected by filing a duly signed or verified application in FORM GST CMP-04, and the applicant must electronically furnish FORM GST ITC-01 detailing stock of inputs and inputs contained in semi-finished or finished goods held on the date of withdrawal within thirty days of withdrawal.
Act Rules GST
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Composition scheme: importers may remain in composition though IGST on imports may not yield input tax credit, service providers excluded.
Importers can opt for the composition scheme where otherwise eligible; there is no categorical bar on importers availing composition levy. IGST is payable on import and such tax may not yield input tax credit for a composition taxpayer. Pure service providers remain ineligible for composition, and importing services for business or captive consumption does not automatically make a person a service provider or disqualify composition eligibility.
Act Rules GST
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Composition scheme eligibility: exporters cannot use composition tax where their supplies are treated as inter State, barring such option.
Exports are treated as inter State supplies for GST purposes. The composition levy prohibits a taxpayer from making inter State outward supplies of goods while paying tax under the composition scheme. Therefore, an exporter whose transactions are classified as inter State supplies cannot opt to pay tax under the composition scheme in respect of those export supplies.
Act Rules GST
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Composition scheme: suppliers cannot make inter State outward supplies to SEZ while remaining in the scheme.
Supplies from the domestic tariff area to an SEZ are treated as inter State supplies, and Rule 5/Section 10 conditions for the composition levy prohibit a composition taxpayer from making inter State outward supplies; therefore a person paying tax under the composition scheme cannot make outward supplies of goods to an SEZ while remaining in the scheme.
Act Rules GST
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Composition scheme eligibility denied where stock on appointed day was purchased inter state, imported, or received from outside State.
Persons below the turnover threshold who hold stock on the appointed day cannot opt for the composition scheme if that stock was purchased inter state, imported, or received from an out of State branch, agent or principal; possession of such goods on the appointed day disqualifies a registered person from the composition levy.
Act Rules GST
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Composition scheme eligibility barred for casual and non-resident taxable persons; cannot claim composition as casual dealer.
A taxpayer acting as a casual taxable person or a non-resident taxable person is expressly excluded from the composition levy; therefore casual dealers and non-resident taxable persons cannot avail the composition scheme while operating in that capacity.
Act Rules GST
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Composition scheme ineligibility: manufacturers of ice cream, pan masala and tobacco and certain suppliers cannot opt.
Section 10(2) excludes five categories from the composition scheme: suppliers of services (except restaurant services), suppliers of non taxable goods, inter State suppliers, persons supplying through electronic commerce operators, and manufacturers of notified goods. Rule 5 adds further ineligible classes. A notification further specifies that manufacturers of ice cream, pan masala, and all tobacco and manufactured tobacco substitutes are not eligible for composition levy.
Act Rules GST
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Composition scheme lapse triggers transition to regular tax liability and requires issuing tax invoices and filing withdrawal notice promptly.
Crossing the aggregate turnover threshold causes the composition option to lapse from the day the threshold is exceeded; the person is liable to pay tax under section 9 from that day and must issue tax invoices for every taxable supply made thereafter. The person must also file an intimation for withdrawal from the scheme in FORM GST CMP-04 within seven days of the occurrence of such event.
Act Rules GST
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Composition scheme eligibility may be available for suppliers using e-commerce operators while TDS/TCS provisions remain inoperative.
Eligibility for the composition scheme is negated for suppliers making supplies through an electronic commerce operator required to collect tax at source; however, because the TDS/TCS provisions are not yet operative and ECOs are not required to collect tax, suppliers using ECOs may currently opt for the composition scheme until the collection provisions are brought into force, and an administrative clarification from the government is recommended to remove uncertainty.

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Comparison of section 354 "Application for approval for purpose of section 133(1)(b)(ii)." between the Income-Tax Act, 2025 (as passed) and the Income-Tax Bill, 2025 (as originally introduced)

12 September, 2025

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Section 354 Application for approval for purpose of section 133(1)(b)(ii).

Income-tax Act, 2025

At a Glance

Clause 354 of the Income Tax Bill, 2025 - Old Version sets out the statutory scheme for applications by registered non-profit organisations or specified persons for approval u/s 133(1)(b)(ii) (approval relevant to receipt of donations). It matters to charitable organisations, donors and tax authorities because approval enables donor deduction treatment under the linked provision. The Bill sets eligibility conditions, timelines for application and orders, procedural safeguards and validity periods for approvals. Effective date or commencement is Not stated in the document.

Background & Scope

Statutory hook: Clause 354 is drafted for the purpose of obtaining approval for application of section 133(1)(b)(ii) (as referenced in the heading). The provision governs who may apply (a registered non-profit organisation or a person referred to in Schedule III (Table: Sl. No. 1)), the conditions for eligibility, procedural stages for the Principal Commissioner or Commissioner, timelines for applications and orders, and the period of validity of approvals. The text contains no defined terms other than references to "tax year," "registered non-profit organisation," and the referenced Schedule III; definitions of those terms are Not stated in the document. The Bill prescribes that forms, manner, statements, verifications, certificates to donors and correction statements shall be "prescribed" but the prescriptive instruments themselves are Not stated in the document.

Statutory Provision Mode

Text & Scope

Coverage: Clause 354 permits a registered non-profit organisation or a person listed in Schedule III (Table: Sl. No. 1) to apply to the Principal Commissioner or Commissioner for approval for the purpose of section 133(1)(b)(ii). The authority for application, the form and manner are to be as prescribed. The clause sets out seven express conditions (clauses (a) to (g)) that the applicant must satisfy or comply with:

  • (a) the organisation's activities are not expressed to benefit any particular religious community or caste;
  • (b) it is established in India for a charitable purpose and "does not incur any expenditure of an amount being 5% or more of its total income during a tax year which is of a religious nature";
  • (c) no instrument or rules allow transfer of whole or part of assets for any purpose other than a charitable purpose;
  • (d) it maintains regular accounts of receipts and expenditure;
  • (e) it prepares and delivers a prescribed statement for prescribed periods, in prescribed form and verified manner, within prescribed time, to the prescribed income-tax authority or an authorised person;
  • (f) it delivers correction statements for rectification or updating of the statement required under (e), in prescribed form and verified manner;
  • (g) it furnishes a certificate to the donor specifying the donation amount within a prescribed period from date of receipt, containing requisite particulars in the prescribed manner.

Timelines and validity: Sub-section (2) contains a five-row Table specifying application time limits, time for the Principal Commissioner or Commissioner to pass orders, and the validity period of approval, distinguishing cases where activities have commenced, where activities have not commenced, provisional approvals, and expiry/renewal situations. The Table prescribes: provisional approvals for new applicants (three tax years), approvals for applicants with commenced activities (five tax years), and specific application windows and order timelines (one month for the month-end case; six months from end of quarter in other cases).

Interpretation

Legislative intent indicated by the text: The structure indicates an intent to balance facilitation of charitable funding (by providing a route to obtain approval relevant for donor deduction) with safeguards to ensure charitable character and compliance with other laws. The enumerated conditions focus on: non-discrimination by religion/caste; confinement of assets to charitable purposes; limits on religious expenditure; maintenance and submission of accurate accounts and statements; and donor-level certification. The procedural timeframe table suggests an intent to provide predictability in administrative processing. The text does not contain an express legislative statement of purpose or policy rationale beyond these provisions.

Exceptions/Provisos

No separate provisos or exceptions beyond the specified conditions and the Table are included in Clause 354. There are no express carve-outs for particular categories of organisations, acute exigencies, or definitions of "religious nature" expenditure. Any exceptions or further qualifying language is Not stated in the document.

Illustrations

  • Example 1: A registered non-profit which has not commenced activities applies during the tax year from which it seeks approval; the authority must pass an order within "One months from the end of the month in which application is made" and, if provisional approval is granted, the approval is valid for "Three tax years commencing from the tax year in which such application is made." (This example follows the Table text.)
  • Example 2: A registered non-profit whose activities have commenced applies at any time during the tax year from which approval is sought; the authority has six months from the end of the quarter in which application is made to pass an order; if approved the validity is five tax years commencing from that tax year. (Derived directly from the Table.)
  • Example 3: An organisation incurs religious-nature expenditure equal to 5% of total income in a tax year. Under clause (b) its status is affected because clause (b) provides it "does not incur any expenditure of an amount being 5% or more..."-therefore, an organisation with exactly 5% religious expenditure would be ineligible. (The document does not provide a worked example; this is a textual reading of clause (b).)

Interplay

The clause refers to section 133(1)(b)(ii) as the substantive hook for approval but does not reproduce that section or explain the precise consequence of approval under that section. The clause references compliance "of such requirements of any other law in force" but does not specify which laws or how conflicts are to be resolved. The clause requires prescribed forms, statements and donor certificates but the relevant Rules or Notifications prescribing them are Not stated in the document. Interaction with income-tax assessment procedures, charitable trust law, the applicable Schedules (Schedule III), or other regulatory regimes is not elaborated in the text.

Differences between the two provisions and practical impact

  • Reference to Schedule: Document 1 (Section 354, Income-tax Act, 2025) refers to "Schedule VII (Table: Sl. No. 1)"; Document 2 (Clause 354, Income Tax Bill, 2025 - Old Version) refers to "Schedule III (Table: Sl. No. 1)".
    • Practical impact: This change alters which classes of persons fall within the eligibility reference. The precise practical effect depends on the contents of the respective Schedules; those listed in Schedule III will differ from those in Schedule VII, so an entity's eligibility to apply may be expanded or narrowed depending on which Schedule applies. The document does not state the contents of either Schedule.
  • Religious-expenditure threshold wording: Document 1 states the applicant "does not incur any expenditure of an amount exceeding 5% of its total income during a tax year which is of a religious nature." Document 2 states the applicant "does not incur any expenditure of an amount being 5% or more of its total income during a tax year which is of a religious nature."
    • Practical impact: The two phrasings create different inclusive/exclusive thresholds. Document 1 prohibits expenditure that exceeds 5% (i.e., expenditure >5% is prohibited; expenditure equal to 5% appears permissible). Document 2 prohibits expenditure that is "5% or more" (i.e., expenditure >=5% is prohibited). This is a material drafting difference: under Document 2 an organisation whose religious-nature expenditure equals exactly 5% of total income would be ineligible; under Document 1 that organisation would appear eligible. The documents do not provide further clarifying definitions or examples.
  • Minor drafting differences in procedural wording: The order and phrasing in sub-section (3) differ slightly. Document 2 frames the inquiries as being "in order to satisfy himself as to the compliance of such requirements of any other law in force, as are material for the purpose of achieving its objects, and the genuineness of activities," with an explicit conjunctive linking; Document 1 lists genuineness and compliance first then continues.
    • Practical impact: These are drafting variations that change emphasis but, on their face, not the substantive standard-the authority must be satisfied as to genuineness and compliance. Absent further context or definitions, the operational test remains similar. The document does not state any interpretive guidance about how these differences should be resolved.
  • Other variations: Minor differences (for example "as prescribed" versus "as may be prescribed") are present.
    • Practical impact: These appear stylistic and do not, by themselves in the provided text, change substantive rights or obligations. The document does not state any consequential administrative guidance.

Practical Implications

  • Eligibility screening: Applicants must ensure they satisfy the seven listed conditions. In particular, the religious-expenditure metric ("5% or more") is a hard threshold in the text and can render otherwise qualifying organisations ineligible if religious spending equals or exceeds that proportion. Organisations should carefully compute and document the nature of expenditures to demonstrate compliance with clause (b). The document does not provide a methodology for such calculation.
  • Record-keeping and reporting: Clauses (d), (e) and (f) require maintenance of regular accounts and submission (and correction) of prescribed statements. This creates clear record-keeping obligations; the precise contents, form, timing and verification procedures are to be prescribed and are Not stated in the document. The requirement to furnish donor certificates (clause (g)) imposes an administrative obligation on the recipient organisation.
  • Timelines for administrative action: The Table sets finite time windows for applicants to file and for the Principal Commissioner/Commissioner to decide; applicants should plan filings to avoid missed windows, especially on expiry/renewal scenarios where advance filings (at least six months) are mandated.
  • Risk of rejection/cancellation: Sub-section (3) allows the authority to call for documents and make inquiries; if not satisfied, it may reject an application (and in some cases cancel approval). The clause provides procedural fairness by requiring a reasonable opportunity of being heard before rejection, but the operational scope of inquiries and what constitutes satisfaction is Not stated in the document.

Key Takeaways

  • Clause 354 provides a statutory route for registered non-profits or specified persons to obtain approval relevant to donations u/s 133(1)(b)(ii).
  • Seven express eligibility and compliance conditions cover non-discrimination, charitable purpose, restrictions on asset transfer, accounts, prescribed statements, correction mechanisms and donor certificates.
  • The provision sets distinct application windows, decision timeframes and validity periods (three or five tax years, depending on circumstances) in a five-row Table.
  • Clause (b) contains a strict threshold on "religious-nature" expenditure-"5% or more" of total income-which can render organisations ineligible even if expenditure equals exactly 5%.
  • The Principal Commissioner/Commissioner has inquiry powers and may approve, reject or (where applicable) cancel approvals, but must afford a reasonable opportunity of being heard before rejection.
  • Many operational details (definitions, prescribed forms, calculation rules, content of Schedules, and applicable other laws) are left to prescription or are Not stated in the document.

Full Text:

Section 354 Application for approval for purpose of section 133(1)(b)(ii).

Topics

Acts Income Tax