How and why the revenue dept is tightening its grip on charitable bodies

It is all about giving, say charities. But they do not seem to practise it when it comes to the revenue department. Not for much longer, though.

Officials of the revenue department, under the finance ministry housed in the North Block, the cream and red sandstone structure at New Delhi’s Raisina Hill, always had the inkling that the exchequer was suffering losses due to the accounting processes of several charitable trusts and institutions. Yet, they were in for a shock when the Comptroller and Auditor General (CAG), the national auditor, flashed the numbers.
 

The CAG, in a 2022 report, estimated the loss of potential revenue from charitable bodies at Rs 18,800 crore between the assessment years 2014-15 and 2017-18. During this period, said the report tabled in Parliament in August 2022, no less than 21,000 “unregistered” charitable trusts took tax breaks.
 

The findings not just raised questions about the accounting but also hinted at an implicit quid pro quo, prompting the direct 

tax administration to tighten its control over charities.
 

“Audit findings were extensively discussed. An internal study has also been conducted to assess the current tax laws around tax exemption claims and the potential loopholes,” says a government official privy to the matter.
 

Many charitable trusts, he says, were not only getting away with paying zero tax but also operating as businesses, generating profits and using the funds to create more profitable streams. Many of them were not even registered.
 

This needed to change.
 

The CAG report became the bedrock of a slew of measures the finance ministry initiated to plug the loopholes.
 

In this year’s Union Budget, the government made filing of income-tax returns stricter by expanding the scope of exit tax, radically changed the disclosure norms, and laid down a framework for the usage of funds. If a charitable organisation donated to another charity, only 85 per cent of the donation made to the other trust would now qualify for the tax exemption, instead of the earlier 100 per cent. The was to curb misuse by certain trusts that had been using inter-donation/chain donation 

for tax benefits.
 

In a separate matter, Central Board of Direct Taxes (CBDT) has issued thousand of notices to donors who have made huge contributions to trusts over the years. The authorities have even tightened the disclosure norms if the amount of donation is Rs 2 lakh and above in a day. A probe is underway against such donors, said the officials cited above.
 

It was never easy for the revenue department to ensure that trade, commerce and businesses were not carried out in the garb of charity.
 

“An old Supreme Court ruling stood in the way. The apex court had ruled that profits from activity ‘incidental’ to a charitable organisation’s activities would be eligible for exemption from tax,” says a tax official. As a result, the authorities could not go all out to reform the sector. If they did, charitable organisations would approach the courts to strike down the case.
 

Then the revenue department caught a break. The Supreme Court, in October 2022, overturned its earlier ruling, reversing several high courts’ decisions in similar matters. The landmark ruling against tax exemption for profit-oriented private trusts, organisations or associations on limiting the scope of exemption for profit-oriented trusts has not just brought certainty to existing litigation but also strengthened further the applicability of the tighter regulations. Some of these rules 

will come into effect from October 1.
 

Akhilesh Ranjan, former member, CBDT, now an advisor to PwC India on tax policies, says the instances and amount of revenue involved had increased in the last few years, which required immediate attention.
 

“Although it is the responsibility of the tax authorities to ensure that deserving institutions receive exemptions, they must also prevent the abuse of beneficial provisions. Certain provisions are prone to interpretations leading to complexities and misuse. There is the issue of the non-profits’ objective in obtaining tax benefits; building up corpus, and using it for purposes other than charitable ones,” says Ranjan.
 

A North Block official, talking about the recent measures (see: KNOTS AND CROSSES), recalls a decade-old audit findings on “tax-exempt status” that had started it all. The CAG in 2013 had hauled up the tax department for allowing “irregular tax exemption” to 137,000 trusts and non-profit organisations, including prominent ones such as Tata Trusts, Breach Candy Hospital, and cricket associations. In the report, the audit body said the Jamsetji Tata Trust and Navajbai Ratan Tata Trust had invested Rs 3,139 crore in “prohibited modes of investment”.
 

The findings triggered a four-year probe by the I-T department that went against six Tata trusts, cancelling their registration in October 2019. The Tata trusts said they voluntarily surrendered their tax registration in 2015 itself. The matter is currently with the Bombay High Court after the Income Tax Appellate Tribunal favoured the Trusts’ voluntary action.
 

The Ministry of Home Affairs, in the meantime, has been suspending Foreign Contribution Regulation Act (FCRA) licences of non-government and non-profit organisations. The licences allow them to receive foreign contributions. The law dealing 

with FCRA was amended in 2020 to enhance accountability and transparency.
 

The original FCRA law was changed in 2010, during the United Progressive Alliance government, to keep a check on foreign money. 
 

It even banned non-governmental organisations of a political nature from accepting foreign funds.
 

The incumbent government of the National Democratic Alliance amended the FCRA in 2020 to make Aadhaar details mandatory for all office-bearers, directors, and key functionaries of non-profits that receive foreign contributions.

In a separate move, the government recently modified the rules under the anti-money laundering laws to require financial institutions, banks, or reporting entities to collect information on the monetary transactions of non-profits under the Prevention of Money Laundering Act.
 

However, regulations are never fool-proof, says Ranjan. Effective monitoring is required, which might be achieved by routinely checking the genuineness of trusts’ activities.The charities, meanwhile, can consider giving more to the revenue department.