Port trusts, chambers of commerce, and educational trusts?which are not engaged in charitable work?could lose some of their tax benefits. The government is considering a proposal to redefine and narrow the concept of ?charitable activity? to ensure that only deserving organisations that are actually carrying out humanitarian work are eligible for such benefits. If approved, the proposal is likely to find a place in Budget 2008-09.

Section 2 of the Income-Tax Act, 1961, defines ?charitable purpose? to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility. A finance ministry official said, ?Many port trusts, chambers of commerce and other organisations have registered as charitable trusts to avail of such benefits when, in reality, they do not carry out any charitable work.?

The finance ministry has been concerned for a quite some time that several business organisations register as charitable trusts only to take advantage of the tax benefits under Section 11 and 12 of the Income-Tax Act. The current proposal is aimed primarily at checking the misuse of these tax benefits by weeding out precisely such entities from the definition.

Commenting on the proposal, Rahul Garg, executive director, PricewaterhouseCoopers, said, ?Conceptually narrowing the definition of charitable work would be a good move to ensure that tax benefits are not misused. But at the same time, the government must not lose sight of the good work that is actually done by many charities.?

Echoing that sentiment, Gaurav Taneja, partner, Ernst & Young, agreed, saying, ?A more cohesive definition is certainly worth looking into, but the interests of genuine charities must be protected.?

The existence of grey areas in the definition has also led to mounting litigation by the income-tax department, which has contested the claim by several organisations that they are charitable trusts. The government feels that reviewing the definition of charitable activity would also help to prevent such cases from arising.

Redefining charitable institutions would be in consonance with the finance ministry?s recent policy of reviewing all tax sops and withdrawing those that are being misused. For instance, the finance ministry recently withdrew excise duty exemption to industrial units in Himachal Pradesh and Uttarakhand engaged only in ?peripheral activities.?