Trusts may lose tax sop

Exemptions for firms in backward areas also under lens.

Income-tax exemptions like those available to charitable or educational institutions may be curtailed in the Direct Tax Laws (Amendment) Bill to be introduced in the second half of the Budget session of Parliament.

Officials told Business Standard that the finance ministry was reviewing income-tax exemptions to identify those being misused or those that had created scope for evasion.

Finance Minister P Chidambaram, in his interaction with chief commissioners of income tax earlier this week, is understood to have asked them to analyse the exemptions available to industrial units in backward states and districts to examine if they were being misused.

"Often a company sets up a front office in a backward state or district to avail of the tax benefits and carries out the actual manufacturing in another state. The profit earned by the front office is always shown to be lower," an official pointed out.

Officials said there was also the need to review exemption available to charitable organisations and educational institutions as the finance ministry had received several representations from such institutions, claiming tax benefits but imposing a user charge for extending their services.

The advisory group on tax policy and tax administration for the Tenth Plan, headed by Parthasarathi Shome, adviser to the finance minister, had also recommended doing away with tax exemptions for charitable and religious trusts and educational institutions.

According to Rahul Garg, executive director of PricewaterhouseCoopers, the government needs to tighten the implementation norms for these concessions to check against misuse.

"Withdrawl of these concessions is not the best option since they do provide a common good," he said.

At present, Section 10 (23C) (iv) (v) of the Income Tax Act provides exemptions to incomes received by any notified charitable fund or institution and notified public religious or charitable trust or institution (subject to fulfilment of investment norms and ploughing back of funds back into the institution).

Similarly, 10 (23) (vi) extends concession on income of any university or educational institution existing solely for educational purposes. Section 11 extends concession on income from property held for charitable or religious purposes (subject to certain conditions).

Section 80 I B deals with the concessions extended to units which are set up in backward states or districts.

No escaping

• The finance ministry is reviewing tax breaks to identify those being misused or those creating scope for evasion
• The finance minister is believed to have asked tax officials to analyse sops given to industrial units in backward states
• The advisory group on tax policy for the Tenth Plan has also favoured doing away with exemptions for trusts and educational institutions