Financial Daily from THE HINDU group of publications
Saturday, Nov 30, 2002
Kelkar report: Uncharitable counsel on trusts
IN CIVIL society, there are three important players the state and its agencies, corporates, and charitable and non-profit organisations. Charitable and development-oriented non-profit organisations have a definite role to play in society, both in furthering government-initiated economic activities and also in independently undertaking certain activities, especially in the areas of education and health. Often, they take up activities that the government is unable to carry out for various reasons. Thus, the government has to extend its support to trusts and NGOs, including offering them concessions under the Income-Tax Act.
There are arguments and counters about the benefits extended to charitable organisations under the Income-Tax Act. Those who argue that the special treatment and exemption given should be withdrawn normally quote the examples of educational institutions, many of which collect high capitation fees, and `five-star' hospitals, which take shelter under the `charitable' description. But these are only a minority, if the government makes a careful assessment, and no doubt it must take action again them. There is also the strong feeling that big business houses and others use the `charitable' route to reduce their tax liability.
The Parthasarathy Shome Committee came down heavily on such institutions and indicated radical recommendations, including bringing the sector into the tax net. But the discussion paper presented by Dr Vijay Kelkar, heading the Task Force on Direct and Indirect Taxes, has generated further negative reactions.
Though the panel has indicated that "the Task Force undertook sustained interactions with various stakeholders intending to elicit `customer' feedback, etc.", it appears not to have given due consideration to the viewpoints presented, and has, thus, been rather uncharitable towards charitable trusts. The panel is aware that the "complex tax policy leads to even more complex tax legislation which inevitably results in cumbersome administration through a cascading effect on filings, compliance procedures, and enforcement measures".
The Task Force has recommended that the tax benefit to donations must take the form of a tax rebate at the minimum marginal rate of 20 per cent, without any quantitative ceiling, either in absolute terms or as a fraction of the gross income, as is presently provided under Section 80(G). The argument put forward is that the present method benefits higher-income earners rather than the lower-income earners. The panel argues that the alternative of deduction from tax is recommended for equity reasons. But the suggestion will be counter-productive and the will for donation will wane. Dr Raja Chelliah indicated, on the recommendation of Shome Committee: "I think that the present provisions governing donations under 80G, etc, are quite sufficient, being based on the balance of relevance consideration, and that, therefore, the recommendation of the advisory group in this regard should be rejected".
Charitable organisations are already under stress, since even good activities are not getting support by way of public donations, even with the current concessions in place. If the recommendation is accepted, associations will be at a disadvantage, as there will be a further fall in donations due to changes in the concession pattern. The Task Force has taken the issue of benefit of exemption under Section 10.
The Task Force has indicated that it has received a large number of grievances, particularly relating to delays in the issue of exemption notification under Section 10, and that such delays are inherent in the very procedure for issuing any statutory notification.
Paradoxically, instead of suggesting a way to avoid delays and improve the system, the panel has recommended that the exemption under Sections 10(21), 10(23B) and that 10(23C) (iiiab) to (via), 10(29A) be merged with Sections 11 to 13A of the Act. The recommendation will take away the benefits enjoyed by hospitals run on charities reducing the burden of the state. The Task Force has argued that consequent to the merger of all the provisions above, no statutory requirement notification will need to be issued by the CBDT and, thus, the Board may be able to devote more time to designing a tax enforcement strategy rather than becoming preoccupied with individual cases of exemptions.
But it seems to have overlooked the fact that though there will be a nominal reduction in the time spent by the Board in issuing notifications, if the Sections are merged, and if it is accepted that "all charitable trusts and institutions will be required to file tax returns", it will only increase the transaction costs in the Department, as the number of new assesses (without any income to the Government) will increase. The Committee has, however, included two good suggestions, the first being that the returns be identified for scrutiny/audit only though a computerised risk assessment system. This will eliminate the personal prejudices of the assessing officers, and the system will be impartial.
The other recommendation is "where the assessing officer is of the opinion that the activities of the trust are not charitable in nature, such a case will be referred to a rating agency from among the panel drawn by the Comptroller and Auditor General.
An "A+"rating for the trust will mean that it is, indeed, carrying out charitable activities.
An "A" rating will mean it will enjoy exemption during the current year but will subjected to review again the following year.
A "B" rating will disqualify it from any tax exemption.
This recommendation reflects a new approach and will make for a more transparent system. Charitable organisations have been discussing the suggestion on ratings. Though the idea may be good, the panel drawn up by the CAG may not be competent to do the job. The Planning Commission has already initiated the process of rating NGOs. The rating body should be independent, with representatives of charitable organisations and other experts.
The Task Force may reconsider its recommendation about the CAG, and may consult the Planning Commission and charitable organisations network to arrive at a method of putting in place a dependable rating institution. The process requires planning and discussions, and it will be too early if the `rating' scheme is implemented without considering the above points. The policy-makers should take note of the views of development and charitable organisations, the trends in other countries, and also judicial pronouncements. The emphasis on second-generation reforms should also include legal restructuring and eliminating old and dysfunctional laws. There is a feeling that, even in the earlier round of reforms, the laws relating to trusts were not touched, and cumbersome procedures were allowed to continue. The Kelkar panel has disappointed the charitable organisations as Dr Chelliah's view, voiced at the time the Shome Committee submitted its report, still holds good.
"Given the pressing need for services in social development and welfare areas, which the state a unable to meet in ample measure, and the need to encourage and support non-profit organisations promoting cultural activities as well those organisations defending civil liberties, promoting the welfare of women and children, etc., the state should spare such organisations from tax as long as it does not result in private benefit to any individual. The acceptance of the recommendations of the advisory group would do grave damage to the work of voluntary agencies, which are one of the heart-warming and bright aspects of our society".
The above views are true, even for the recommendations of the Kelkar Committee. It is encouraging to note that the Deputy Prime Minister, Mr L. K.Advani, has said that the Kelkar Task Force recommendations on tax reforms are only a consultation paper to elicit public opinion and not yet a government decision.
Charitable organisations have already reacted and submitted representations to the Finance Minister and others, clearly bringing out the disadvantages of the recommendations.
But if the Government is still tempted to accept the group's recommendations by withdrawing the concessions extended and merging the Sections, brushing aside the feelings of charitable organisations and the opinions of experts, it will only be ringing the death knell for the philanthropic and developmental efforts that are part and parcel of the Indian heritage.
(The author is a Gandhigram-based chartered accountant.)
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