Income tax amendments make it more difficult for charities to function
“Two things strike the student of Indian income-tax law with trepidation and amazement — the precipitate and chronic tinkering with the law by bureaucrats who are the unacknowledged legislators of India, and the anaesthetised patience of the Indian public. The poor of India endure inhuman conditions which would lead to a bloody revolution in any other country. The rich endure foolish laws and unending amendments which benefit none except the legal and accountancy professions, and instinctively prefer to circumvent the law than to fight for its repeal.”
- Nani Palkhivala
The amendments made to the Income Tax Act in respect of charities are a fine example of what the late Nani Palkhivala had to say about changes in the Act and how these will benefit none except the legal and accountancy professions. While there have been several reforms in the income tax process, nothing has changed for charities, indeed certain changes put the sector in a very disadvantageous position.
Several court judgements, in both old and new cases, served as the immediate provocation for the changes. The Gujarat High Court’s judgement in the CIT vs Gujarat Maritime Board (2007) 289 ITR 139 is one such case — in this case, it was ruled that the ports, though earning profits from their activities, could be registered as charitable trusts under Section 12A of the Income Tax Act. To plug this loophole which involved only government/quasi-government bodies, the government decided to modify the Act itself.
Section 2(15) has been amended to say “the advancement of any other object of general public utility shall not be a charitable purpose if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of any service in relation to any trade, commerce or business for a fee or cess or any other consideration, irrespective of the nature of use or application of the income from such activity or the retention of such income by the concerned entity”.
This is a bolt from the blue for genuine charitable institutions who work in villages — who, to ensure they’re able to finance themselves, do other work as well. Take the example of a charitable institution working with physically-challenged persons in a rural area, but which also produces greeting cards to help part-finance its activities. Under the amended Income Tax Act, this will construed to be business activity, and therefore something that cannot enjoy a tax exemption. Even capacity-building programmes conducted for rural women will be construed to be business activity if a registration fee is charged!
There is a very thin line demarcating a charitable act and a service act and this will cause problems in accounting and will affect charitable work. It is true that influential people and organisations misuse this tax shelter and evade taxes, but deserving candidates should not be denied the benefit of tax exemptions. Though government may collect some more taxes as a result of this amendment, it has dealt a big blow to charitable institutions and the work they do.
The World Bank has studied various incentives given in other countries and discusses two important tests which should be taken into consideration while deciding whether a particular set of activities is charitable in nature or not. The first is the test of ‘principal purposes’ which looks at whether the principal activities and the expenditure of the organisation are for non-commercial purposes. The other is the test for ‘destination of incomes’ — if the surplus earned from the activity of trade/business is committed for and actually utilised for the activities of the organisation, it should be entitled to the advantages of tax exemption. The amended section is not in line with this.
The much-awaited circular from the Central Board of Direct Taxes (CBDT) was issued in December last year, and has little to protect genuine charitable work. Though the circular suggests that those providing ‘relief of the poor’ will be eligible for tax exemptions, many associations involved in such activities remain at the mercy of the income tax officer.
The circular also indicates that each case will be decided on its own facts and no generalisation is possible. Those who can read between the lines can interpret this in their own way. The CBDT has not interpreted the intention of the legislature — to quote the finance minister, “I once again assure the house that genuine charitable organisations will not in any way be affected”. The intention of the legislation is clearly to project the interest of genuine organisations. Even if some surplus is generated from their functioning, their charitable nature should be protected. But the CBDT, instead of protecting such organisations from the clutches of departmental officials, issued a circular which speaks of the object of a general public utility being only a mask or a device to hide the true purpose which is trade, commerce, or business.
It is unfortunate that there is no strong network or lobby to argue the case for charitable organisations. The government blows hot and cold simultaneously — on the one hand, it announces a national policy of tax incentives for industry and, at the other hand, it withdraws the concessions enjoyed by charities. The affected genuine organisations will have to endure the injustice and remain in the dock.
