The Advisory Group on Tax Policy and Tax Administration for the Tenth Plan, chaired by Dr Parthasarathy Shome, in its report to the Planning Commission has recommended a drastic amendment of the present income tax concessions for charitable trusts ostensibly on the ground that the exemptions are being misused to generate profits for institutions/individuals. The answer is to plug the loophole and punish offenders, not the withdrawal of a legitimate exemption.
These exemptions are provided only if they satisfy various stipulations set out by the charity commissioner and income tax authorities. This ensures that the income of charitable trusts is not diverted. There are exacting restrictions on the instruments in which the trusts can invest their corpus. The Shome group wants to change all this and reorder the exemption in a manner that would strangle the charitable trusts. It has recommended that income tax exemptions should be provided only to donative non-profit organisations and has defined a donative NPO as one where 90 per cent of the annual receipts are through donations including lump-sum aid. Dr Raja J Chelliah, the eminence grise of public finance in India, and himself a strong advocate of minimising tax exemptions, has come out strongly against the Shome group recommendations in his article in the Economic and Political Weekly of December 29, 2001 January 4, 2002. This article should be mandatory reading for all tax policy makers dealing with this matter.
Dr Chelliah argues that the rationale for the present exemption is that the income of these bodies is not distributed to anyone who controls the trust or a trustee and there are specific clauses to ensure that the income is used solely for philanthropic purposes and not for purposes of profit. He argues that one of the basic reasons why the income of charitable trusts or NPOs should not be taxed is that such income does not accrue to an individual or benefit those who run the NPOs. If the income of an NPO is exempted from tax, it is usually stipulated that no part of its income should be distributed to the members, directors or trustees. Dr Chelliah goes on to say that most charitable trusts are dependent on donations and on income from investment of the corpus built up out of capital donations (and income permitted to be retained). Some institutions also augment their income by charging fees to cover part of the costs of services provided which are related to the objects of the trust.
If the Shome groups recommendations are accepted, most charitable and educational institutions will be subject to income tax and there will be a deleterious impact on their activities. Dr Chelliah argues that it would be unreasonable to expect these institutions to survive on annual donations. The main source of income for most trusts is investment of the corpus. Large donations are received only occasionally and there simply cannot be an even flow of these donations year after year. Dr Chelliah believes that the Shome groups recommendations would do grave damage and he urges the government to reject its recommendation on charitable trusts.
The Shome group has also recommended that the 80G deduction of income for donations should be replaced with a tax rebate of 10 per cent as that is the lowest tax tax slab. It would only be expected that donations would be made largely by the upper income groups and the recommendation of a 10 per cent rebate would cut the very source of donations. Thus, in one clean sweep the Shome group would virtually strangle the charitable trust. This recommendation should be also rejected. The Shome groups recommendation would also do irreparable damage to universities and other institutions of education and training.
The group, in its zeal to plug the loopholes in the income tax system, has found a fall guy in the form of charitable trusts and educational institutions. If the group was serious about plugging glaring loopholes, it should have looked into the issue of the exemption, without any limit, on dividends received by individuals. This exemption has been provided on the principle of avoiding double taxation, once by the corporate and then again by the individual receiving the dividend. Moreover, the 10 per cent dividend tax is hardly a substitute for inclusion of dividend income in taxable income. If it is argued that the 10 per cent dividend tax is more efficient then it would be more appropriate to have a dividend tax of 30 per cent with a system of tax credits so that those without a taxable income or lower tax slabs could get a tax refund. But such a system would clearly be anathema to the powerful lobbies as witnessed by the quick roll back of the 20 per cent dividend tax to 10 per cent.
The plutocracy has got away with a major tax break and it would use its awesome power to prevent dividends being brought back within the fold of taxable income. So what better way than to divert attention by raising the bogey of exemptions for the hapless charitable and educational trusts. Mr Sinha would do well to listen to the sagacious advice of Dr Chelliah and toss out the Shome Groups recommendation on income tax exemptions for charitable and educational trusts. As Dean Acheson, a former US secretary of state said, It is worse than immoral, its a mistake. Mr Sinha, please show compassion for the deprived and dispossessed.