Mukesh Patel.in
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international tax expert / columnist / author / speaker

Tax Axe To Chop Charities Too!

Religion & Politics Sheltered As Taxman’s Holy Cow!

Complex Provisions To Perplex Charities

New Jargon – Fresh Norms

  •  Charitable trust to bear the new identity of ‘Non-Profit Organisation (NPO).’  
  • Charitable purpose replaced by the new phrase ‘permitted welfare activity (PWA).’ 
  • Fresh procedure for NPO registration to be undertaken by all charities. 
  • Different & elaborate norms for computing gross receipts and outgoings. 
  • Current benefits of accumulation of income, upto 15% for an indefinite period, and upto any amount for five years, not available under DTC. 
  • Deduction at specified rates (mostly 50%) to be allowed to donors of eligible NPOs. 

15% Tax on eligible NPOs – 30% Tax on other Charities

  • No more tax exemption for income of charities. Even current basic exemption upto Rs.1,60,000 not applicable under DTC. 
  • Taxable surplus of all eligible NPOs (fulfilling as many as 14 prescribed conditions) to be taxed at flat 15%.  
  • All other trusts, though doing charitable work, to attract flat 30% tax on their income as an AOP. 

Several Current Charities may not qualify as eligible NPOs

  • Specific community trusts and associations for benefit of their members, though currently eligible for exemptions as charities, not eligible to be registered as NPOs under DTC. 
  • Where any business (not incidental to PWA) is held under the charity, even though its business income is applied only for PWA.

        If you are associated with running a charity, get set to be acquainted with new jargon and enter an altogether different regime of fresh norms and procedures under the proposed Direct Tax Code (DTC).

 New Tax Regime for Charities 

           For purposes of the Code, the new nomenclature of a ‘charitable trust’ will be a ‘Non-Profit Organisation’ (NPO). The Code replaces the phrase ‘charitable purpose’ by ‘permitted welfare activity’ (PWA). PWA has been defined to mean any activity involving relief of the poor, advancement of education, provision of medical relief, preservation of environment, preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility.  

            However, advancement of any other object of general public utility will not include any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a fee or for any other consideration, irrespective of the nature of use, application or retention of the income from such activity.

           An organisation shall be treated as an NPO, if it is established for the benefit of general public only and not for the benefit of any particular caste or for the members of the organisation. It shall further actually carry on the permitted welfare activities during the relevant financial year and also ensure that the beneficiaries of the activities are ‘general public.’ The term ‘general public’ has been interpreted, quite queerly under the Code (which in its preamble claims the use of simple language), to mean ‘the body of unascertained persons sufficiently defined by some quality of public or impersonal nature.’

Taxability of NPO Income

         Gone will be the days of ‘zero tax’ for charities under DTC. The tax liability of an NPO has been prescribed at 15% of the amount of surplus generated from the permitted welfare activities, which is required to be computed under a whole new set of rules (on the basis of cash method of accounting) where ‘prescribed gross receipts’ will be reduced by ‘permitted outgoings.’ Moreover, the surplus arising on transfer of an investment asset being a financial asset will be taxed as per the provisions in regard to taxation of capital gains under DTC. Quite strangely, the term ‘financial asset’ has nowhere been defined under the Code.

             It has been further provided that an NPO will be liable to income-tax at the rate of 30% in respect of its net-worth, if it converts into any form of organization which does not qualify as an NPO, or it ceases to be an NPO in the relevant financial year and any two financial years out of four financial years immediately preceding the relevant financial year, or it fails to transfer upon its dissolution all its assets to any other NPO.

Even Exemplary Charities Not Spared!

            Most unfortunately, the new DTC regime has not spared even charities with an outstanding track record and engaged in rendering exemplary services to the society. Infact, several existing charitable trusts, going by the strict norms prescribed, may not even qualify to be an eligible NPO attracting 15% income-tax. All such trusts would straight attract the flat 30% tax bracket.  

Religion and Politics not in the Taxman’s Reach

             While charities have been trapped in the DTC tax-net, quite interestingly, religion and politics have been granted the status of a ‘holy cow.’ DTC provides that the income of any trust or institution recognised or registered under the religious endowment Acts of the Central or State Governments shall be fully exempt from income-tax. However, donations to such trusts or institutions will not enjoy any deduction in the hands of the donor.

            Political parties have been bestowed the double bounty of enjoying total exemption from income-tax, alongwith 100% deduction in the hands of all donors for contributions to such parties.

YOUR COMMENTS INVITED ON…

When political parties and religious trusts have been totally spared from the tax net, is it fair to tax the income of charities as proposed by DTC?

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