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Have heart, Mr Taxman

T. C. A. Ramanujam says that the I-T Department's general distrust of charitable trusts is spilling over

FISCAL codes all over the world have always taken a charitable disposition towards non-profit organisations (NPOs) engaged in the noble task of uplift of the poor, medical relief, spreading of education and the like. These organisations are given a lot o f sops under the tax law. Several countries provide tax concessions to charitable donations. Contributions to social and educational organisations benefit the donors as also others, creating, according to the Shome Committee, "positive externality".

It is not always possible for governments to take up the type of works or activities NPOs render. The characteristics of the NPOs are that they act for public benefit and not for private gain and the surplus arising out of their activities will not be di stributed among the trustees. NPOs represent a response to government failure. They are granted exemption because they have no income or profit in the sense in which the term is used in tax laws. They must necessarily spend their profits for the purposes for which they were formed. Tax exemption serves to compensate NPOs for the difficulties that they have in raising capital.

The lenience shown to NPOs in the matter of tax treatment has often led to abuse of the provisions, creating distrust in the taxman of even genuine trusts. In two recent cases, the way well- known institutions were handled by the tax department would mak e even Shylock pale into insignificance.

The Tirumala Tirupathi Devasthanam case

This case (251 ITR 849 AP) concerned no less a personage than Lord Balaji himself. The Tirumala Tirupathi Devasthanam, of international fame, maintains 10 temples and 20 educational institutions and runs a poor home and a Bala Mandir. Its administration is governed by the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987. It provides free food, free accommodation, free hospital and transport to pilgrims irrespective of caste and community on the mere declaration of fait h in the Lord.

The Devasthanam was enjoying the benevolence of the powers that be for several decades until one fine day the Commissioner of Income-Tax (CIT) woke up to secular realities and ordered denial of exemption under Section 80 G of the I-T Act, 1961 on the gro und that the trust was doing religious activities also. The Devasthanam pleaded for relief under Section 80 G in respect of the Sri Venkateswara Nithya Laddu Dhana Endowment, the Sri Venkateswara Balaji Archana and the Sri Venkateswara Udayasthamana Sarv a Seva schemes.

The plea was rejected by the CIT in consultation with the Central Board of Direct Taxes (CBDT) on the ground that the trust was into religious activities too. The TTD approached the High Court with a writ petition.

The Andhra Pradesh High Court studied the scheme of Section 80 G and pointed out that the instrument under which the institution is constituted should not contain any provision for the transfer or application at any time of the whole or any part of the i ncome, assets, institutions or fund for any purpose other than a charitable purpose.

The Commissioner can refuse recognition under Section 80 G only in the event of finding that the claimed charitable purpose included any purpose the whole or substantially the whole of which is of a religious nature. It is imperative for the Commissioner , therefore, to refer to and consider the multifarious activities carried on by the TTD administration and to come to the proper conclusion. "Unfortunately", said the High Court, "the Commissioner does not seem to have applied his mind to the facts plead ed by the Devasthanam. At any rate, the order does not reflect either application of mind by the Commissioner or the factors or reasons that weighed with him in passing the impugned order."

The High Court considered it appropriate to remit the matter back to the Commissioner for a proper disposal of the application for exemption with a reasoned decision. It is a moot question why, in such a well-known case, the High Court deemed it necessar y to remit the matter back to the Department, instead of giving clear directions for recognition of the trust.

21st Society of Immaculate Conception

Here (118 Taxman 137 Madras), nuns working in a convent had taken a vow of poverty and rendered service. The society maintained them, by looking after their bare minimal needs. The salary the nuns earned for the services rendered as teachers in a school were made over to the society. The schools were, in part, funded by the State.

The I-T Department, under Section 11 of the Act, denied the benefit of exemption to the society on the ground that they were deriving benefits by way of maintenance. The Madras High Court heard the dispute. It pointed out that the monetary contribution b y the nuns to the society was obviously the difference between the amount of the salary and other payments, which they received for their work as teacher and the amount expended on them for their maintenance.

The ITO thought that Section 13 had been violated. This amount was available for use by the society for purposes other than their maintenance. Instead of each one of the sisters paying their bills separately, for purposes of convenience, the society was spending on their maintenance. The expenditure incurred by the society was not out of public donations but out of monies earned by the nuns and made over to the society.

The assessing officer (AO) had misunderstood the form in which this has been done. "The very sacrifice made by the nuns has been held against them as beneficiaries of their own donations. Seen in the proper perspective, the donation which they made was w hat was available for purposes other than their maintenance. That amount was not in excess of any provision of the law, which would come in the way of denial of exemptions to the society. No part of the amount so ascertained was spent on their maintenanc e. Even in matters of taxation, the form is not always conclusive.

"There are cases where the substance must be looked at in order to ascertain the real nature of the transaction. Even while it is permissible to pierce the corporate veil in certain circumstances, while dealing with charities, it is necessary to similarl y ascertain the substance of the transaction rather than merely look at the form for the purpose of withholding from a charity the exemptions which have been provided under the law."

The Madras High Court ruled that the Society was entitled to exemption under Section 11. The Department could have been generous at least in genuine cases of charity. The Parthasarathy Shome committee had something to say in this regard.

The Shome committee

The committee points out that there is considerable overlapping of the provisions of Sections 11 to 13 and 10(23C)(iv-via). NPOs covered under the latter provisions are also eligible for exemption under the former without subjecting themselves to the gui delines of the distribution/accumulation constraint or the compliance burden of having to file annual tax returns. Therefore, the existence of two separate sets of exemption provisions for the same organisation is inequitable. Clearly, there is a case fo r uniformity in the designing of the two provisions.

Revenue loss under Section 80G, which allows deduction for charitable donations to pre-specified organisations, for the financial year 1996-97 (assessment year 1997-98), directly available from the All India Income Tax Statistic, is estimated to be Rs 71 5 crore, that is, about 2 per cent of direct tax collection. An indirect estimate has also been made to work out the revenue-foregone as a result of the exempt income of charitable trusts/institutions.

By applying the direct tax to non-exempt GDP ratio of 4.29 per cent in the economy as a whole to the GDP from health, education and religious activities during 1996-97, the revenue foregone is estimated to be Rs 2,216 crore. Thus, the total revenue foreg one on these two accounts is almost Rs 3,000 crore, which is 8.15 per cent of total direct tax revenue, and 0.23 per cent of aggregate GDP. Applying this proportion on the GDP for 1999-2000, total revenue foregone is estimated to be Rs 4,417 crore, of wh ich, roughly Rs 1,100 crore (2 per cent of direct tax revenue) could be attributed to Section 80G and the balance Rs 3,317 crore on account of exemption to NPOs. The revenue foregone in 2000-01 could be as high as Rs 5,750 crore.

The current system, under which donations are deducted from gross income, has empirically been found to be efficient because the revenue loss is likely to be less than the exemption-induced total donation. However, since price elasticity varies across in come groups, the provisions are iniquitous. The existing provisions produce tax subsidies that increase with income. Therefore, the simplest alternative is to provide for a tax credit, which reduces the income-tax liability of the donor by a designated p roportion of his contributions. This could be set by the legislature at the minimum marginal rate of tax of 10 per cent on equity considerations.

There is also no compelling reason to set a quantitative limit either in absolute terms or as a fraction of the gross income, as is currently set under Section 80G.Given the current scheme of tax exemption for NPOs under the I-T Act, both donative and co mmercial NPOs can, and do, avail themselves of the benefit even though there is no justification in the case of commercial NPOs. The law should, therefore, be amended to provide the tax exemption only to donative NPOs.

Further, to avoid any controversy on the definition of a donative NPO, it is recommended that the same may be defined as one where 90 per cent of the annual receipts is through donations (including lumpsum aid unrelated to any specific activity/ project) . The corpus donations should be treated as receipts in the year in which it is received. Consequently, it would not be necessary to impose any further conditions on the nature and purpose of their business activity. Further, all provisions should be bro ught under one section with explicit non-distributional constraint and uniform compliance requirements.

These are wholesome recommendations and, if implemented, will bring in simplicity and harmony in the tax code insofar as assessments of charitable trusts are concerned. But the big question is: Who will help the AO to develop a charitable disposition tow ards well known public institutions such as the TTD and the 21st Society of Immaculate Conception? No amount of law and rules will be of avail if the tax department does not have a heart to help institutions serving the cause of the poor and the needy.

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