Large educational trusts at risk of losing tax exemption | The Financial Express

Large educational trusts at risk of losing tax exemption

The apex court has held that the money charged by these institutions should either be on a cost-to-cost basis or with a nominal mark-up.

Large educational trusts at risk of losing tax exemption
In a ruling on October 19, the SC held that educational institutions or trusts can claim benefits of tax exemptions only if they ‘solely’ engage in education and not in any other activity of profit. (IE)

Several high net worth charities and trusts run the risk of losing their tax-exempt status, owing to two recent Supreme Court (SC) rulings, unless they undertake suitable internal restructuring, tax experts said. However, since the rulings are prospective in operation, these entities won’t need to pay higher amounts as taxes, for this reason, for past periods.

In a ruling on October 19, the SC held that educational institutions or trusts can claim benefits of tax exemptions only if they ‘solely’ engage in education and not in any other activity of profit. For this, they cannot even have objects unrelated to education, the apex court ruled, adding that if the objective of an institution appeared to be profit-oriented, such institutions could not get approval under Section 10(23C) of the Income Tax Act.

Also read: 5 reasons why you must consider both mental and physical health cover

In another ruling on October 20, the SC said that a ‘general public utility (GPU)’ cannot engage in any trade or commercial activity if it wants to claim income tax exemptions available to organisations doing charitable work.

The first judgment has overruled two of the apex court’s earlier rulings, as per which incidental commercial activities will not result in denial of exemption, so long as their main object is education, Sheetal Shah, associate partner, EY India, said. “Considering that the ruling will have an unsettling effect on the well-established principles laid down by earlier rulings, the SC made the ruling effective prospectively, which means pending proceedings and previous orders are not affected,” Shah said.

According to Maneesh Bawa, executive director, Nangia Andersen LLP, “Many private institutions may run the risk of losing their tax-exempt status unless they make appropriate changes to their object clause, fee structure and style of functioning to align it with the dictum of the SC.”

Even though the judgment passed is intended at curtailing tax exemption availed by institutions engaging in profitable businesses in the field of education, it is expected to impact genuine not-for-profit education institutions as well, S Sriram, partner at Lakshmikumaran and Sridharan Attorneys, said. Practically, many schools subsidise fees charged from students, by augmenting revenue from auxiliary activities — like letting the infrastructure (classrooms, playgrounds, etc) to private enterprises (for conducting coaching classes, private sports events, etc) during non-school hours or school holidays. “Such activities would, going forward, result in denial of tax exemption to the institution as a whole,” Sriram said.

Also read: New Noida to emerge as an industrial & corporate hub

As for the October 20 ruling concerning GPUs, the SC stated that if a high markup is charged on the cost of such services, it shall lose the character of ‘charitable purpose’ and the institution would lose tax exemption and be subject to tax accordingly. The apex court has held that the money charged by these institutions should either be on a cost-to-cost basis or with a nominal mark-up.

In absence of any guidance on what would qualify as “nominal mark-up”, it is again a subjective exercise and is prone to the whims and fancies of the tax officer, Vishwas Panjiar, partner, Nangia Andersen LLP, opined.

“The judgement has the potential to push the NPO (non-profit organisation) sector in India towards the donation model as opposed to a self-sustaining model. The legislative framework should be made to deal more effectively with the actual menace of promoters extracting profits fraudulently while working under the garb of a charitable institution, rather than putting an onerous obligation on all the charitable institutions to justify their motive and cause each year to the tax officer,” Panjiar said.

“This would require institutions to review their service and pricing models and make requisite amendments in line with the directions of the court,” Shah said.

With this ruling on GPU, the SC has put an end to hundreds of very high-value tax litigations across the country, Sriram said. “The clarity and guidelines provided by the Court in the 150-page judgment will guide taxmen and taxpayers for a very long time to come,” Sriram added.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

First published on: 29-10-2022 at 00:30 IST