Small tax benefits restrict growth in philanthropy

India ranks 22nd in terms of tax treatment to individuals who want to donate $10,000 and have an income of $1 mn: Study

The announcement last week of two corporate honchos Nandan Nilekani (with his wife, Rohini) and Sunil Mittal pledging their family wealth to philanthropy has brought into focus the performance as well as the challenges that ultra-rich Indians face in donating.

India’s performance based on the 2016 report by Charities Aid Foundation (CAF) shows that the country is still far behind. Charitable giving by individuals constituted 0.34 per cent of our GDP, compared to the US, where it was 1.44 per cent of a much larger GDP. In simple terms the individual contribution to philanthropy in the US is more than 35 times that of India, so there is a lot of catching up to do. 

The reason, experts say, is the regulatory environment, which is not favourable to giving more. For instance, chartered accountant Sanjay Aggarwal, who works closely with rich Indians who donate, points out that the deductibility of donations to charities is capped at 10 per cent of the gross taxable income for the year, which is a major dampener for anyone to put in more money.

But compare it to the liberalised laws in the US or Singapore and the reason for them donating more money becomes clearer. “In the US the deductibility on donations is capped much higher at 50 per cent and it allows carry forward of the unclaimed deduction for five years. The deduction from income in India is 50 per cent of the amount donated (and it must not exceed 10 per cent of the taxable income) as compared to 100 per cent in the US,” says Aggarwal.

The unfriendliness of Indian law is seen in a study by CAF in 2016, which ranks India 22nd among 26 countries in terms of tax treatment to individuals who want to donate $10,000 and has an income of $1 million. The study is based on effective rates of relief on tax given in these countries for donors in the highest tax bracket. Singapore is on top of the list, followed by Japan, Germany, and China. India is just above Russia, Bangladesh, and Nigeria. 

The deduction from income in countries ranging from Australia, Canada, Japan, Vietnam, the Philippines, China, Egypt, Peru, Poland, and Turkey is at 100 per cent. India has the lowest deduction (50 per cent) in the CAF list after Bangladesh. 

More importantly, under a new rule, it is no longer an attractive proposition for individuals owning shares in companies to donate them to a trust. Radhika Jain, partner at Grant Thornton, points out that a recent amendment to Section 10(38) of the Income-Tax Act restricts exemption under the long-term capital gains tax in the case of shares acquired without paying the securities transaction tax (STT). Since transfers of shares to a trust cannot be done on the stock exchange (and hence no STT is paid), any subsequent sale of such shares by the trust will not enjoy exemption from the long-term capital gains tax. “As a way out many high net worth individuals are selling the pledged shares on the stock exchange, paying the STT (no long-term capital gains tax) and are donating the proceeds to the charitable trust.” 

However, unlike in India, pledging and transferring shares to the trust has been a common way through which large foundations like the Bill & Melinda Gates Foundation and the Ford Foundation have been built up. The trusts have not been subject to the restrictions imposed in India. 

However, the good news is that individual philanthropy is growing in the country. A Bain Philanthropy Report for 2017 says philanthropy funding by individuals in India has gone up sixfold from Rs 6,000 crore in 2011 to Rs 36,000 crore in 2016. And the share of ultra-high net worth individuals to the basket has gone up substantially.