Govt redefines ‘charitable purpose’ to exclude organisations earning fees.
The income tax department has come out with a circular that redefines the term “charitable purpose”, that is likely to bring associations like CII or Ficci and Board of Control for Cricket in India (BCCI), one of the world’s richest sports bodies, outside the purview of exemptions.
The circular, which was published on December 19, now says any entity that does business or trade in exchange for a fee or income cannot claim exemption from paying income tax.
Many organisations avoid paying taxes by taking advantage of the definition under Section 2 (15) of the Income Tax Act, which defined “the advancement of any other object of general public utility” as a “charitable purpose”.
The government moved an amendment in March 2008 to plug this loophole by tightening the definition of what constitutes a charitable purpose. After nine months, the tax department has now come out with a definition that will exclude commercial activities undertaken by entities like BCCI and industry associations like Confederation of Indian Industry (CII), to name a few, from claiming exemption.
The tax rate will be 30 per cent plus cess and surcharges as applicable.
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The Central Board of Direct Taxes (CBDT) had, in fact, constituted a committee to examine the taxability of BCCI earlier this year.
BCCI, registered under Section 12 (A) of the Income Tax Act as a trust, was availing of an income-tax exemption under Section 11 by claiming to be a charitable organisation. It had said the promotion of cricket is a public utility.
BCCI, however, may find it difficult to continue as a tax-exempted entity, especially after it launched the money-spinning tournament Indian Premier League (IPL) this year. It may be asked to pay taxes on income from commercial activities like IPL, sale of television rights, tickets and advertisements from financial year 2008-09.
In 2007-08, BCCI earned a total income of Rs 1,000.41 crore and a surplus of Rs 303.15 crore. This fiscal, the board is likely to earn Rs 200-300 crore less because the Pakistan tour has been cancelled, said a BCCI official. Niranjan Shah, secretary of BCCI, declined to comment saying he needed to take a look at the circular.
Similarly, organisations like CII, Assocham and Indian Medical Association will have to pay taxes on income earned from rendering services to non-members. For example, if a hall belonging to an industry association is rented out to non-association members, this income would now attract tax.
However, the CBDT has provided some leeway to charitable entities that may be undertaking some incidental commercial activity to support public good like relief to the poor or medical relief.
In the event of a dispute, the tax department has retained the right to determine whether an activity is commercial in nature or not, based on facts, the circular said.