CHARITIES DESERVE CHARITABLE ROLL BACK
K.SHIVAKUMAR
B.Sc., F.C.A., F.I.C.W.A., D.M.A (ICA)
Chartered Accountant
Gandhigram – 624 302
“Government will have an important role to play in the promotion of Social business. They will need to give legal recognition to Social business and create regulating business to ensure that transparency, integrity and honesty are ensured in the social business sector. They can also provide tax incentives for investing in social business as well as for social business them”.
-Prof. Mahammed Yuans - Extracts form lecture delivered at the joint meeting of Members of Lokshaba and Rajaya Shaba.
Most of the countries in the in the world are planning to encourage social business and tax incentives were also given.
The World Bank has conducted study on the incentives given to charitable organizations and discusses two important tests, which should be taken into consideration for exempting lawful, economic, business or commercial activities World Wide. The first is the test of “principal purpose “which looks at whether the principal activities and the expenditure of the organization are for non – commercial purpose. The another test for “ Destination of incomes and if the surplus earned form the activity of trade/ business is committed for and actually utilized for the activities of the organization and not distributed to the founders or other members of the trust, the activities should be entitled to tax exemption.
The amendment was certainly a bolt from blue for genuine charitable institutions, which really worked in villages and which would like to earn income on self-sustaining basis and with self-respect. Take a case of a charitable institutions working for the physically challenged persons working in a rural area and also involving itself in manufacture of greeting cards in small way for part financing its activities and to help maintain the home. Another example would be to take the case of an organization distributing agricultural inputs to rural farmers and in turn collecting a very nominal fee for the same so that additional farmers can be benefited. Even capacity building programme conducted for rural women if registration fee is collected will be construed as business activity.
There is a very thin line demarcating between the charitable act and the service act and this will certainly cause problems in accounting and would affect the programmes. It is true that influential people and organizations should not misuse this tax shelter and evade taxes, thereby depriving the Government of its dues. At the same time, really deserving candidates should not be denied this benefit too. Though Government may be collecting some nominal revenue after the amendment, the blow that it has given to the fourth limb categories of organization will have more impact.
The charity organizations as a part of strategy for sustainability and also standing on their own legs have undertaken many income generating activities. Such income generating activities have been exempted irrespective of the objectives to strengthen the sustainability theory. But the exemption has been withdrawn and the IGP’s connected with the main objective have been emphasized more and unless there is specific connection between the main objective and the IGPs the associations are not likely to get the exemption.
The Central Board of Direct Taxes has issued on19th December 2008based on the assurance given by the Finance Minister during the budget debate that CBTD will be following the usual practice and issue explanatory circular containing guidelines for determining whether any entity is carrying on any activity in the nature of trade, commerce, or business or any activity rendering any service in relation to any trade, commerce or business. But on going through the circular one feels that it has gone beyond its power.
The circularjustified the amendments and confirmed about number of entities engaged in commercial activities and were also demanding exemption on the ground that such activities fall under the fourth limb of the charitable purpose definition. The Circular gave explanation that the amendment is not applicable to first three limbs of the definition and those who are engaged in the activities of i) Relief of poor ii) Education iii) Medical Relief and (subsequently two more added). The organization, which falls under the above three categories are eligible for exemption even if it is incidentally carrying on of commercial activities. The “Relief of the poor” under Income Tax encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or nearly.It will, therefore, includes within its ambit purpose such as relief to destitute, orphans, or the handicapped, disadvantaged women or children, small and marginal farmers, or senior citizens in need of aid. Though, the present circular broadly indicates the purpose, yet many associations involved in similar activities has to substitute their claims to the ITO and has to be in his mercy. The notification also confirms the association involved in education and Medical Relief would also confirm to be eligible for exemption as charitable institutions even if the,incidentally carrying on commercial activities.
The forth of limb of the definition of charitable purposecontained in the section 2 (15) that is about the advancement of any other object of the general public utility is dealt and made doublysure that any activity if carried on with commercial intentionthey will not be eligible for exemption under section 10 (23 C) of the Act.The circular confirms the object of the ‘general public utility’ will only a mask or a device to hide the true purpose which is trade,commerce or business or the rendering of any such service in relation to trade, commerce, or business. Though it is a uncharitable comment on many charitable organizations which are in the classification of the fourth limb, who has taken the route of trade, commerce, or business for providing employment opportunity for rural women or others and any method of sustainability for their charitable activities yet there are public and private sector undertaking even some and the governmental organizations which are wearing the mask as per the circular.
But the CBTD instead of protecting organization from the clutches of departmental officials as per the instruction of the legislatures issued a circular casting an aspirationthat the object of general public utility will be only a mask or device to hide the true purpose which is trade, commerce, or business. The circular against the observation in K.P. Vargheses’ case. The task of interpretation of a statutory enactment is not a mechanical task. It is an attempt to discover the intention of the legislatures”.
“National Policy on Voluntary Sector” indicates the government will also simplify and streamline the system of granting Income Tax exemption status to charitable projects under Income Tax Act.Though the finance Minister has extended liberal benefits to the corporate and individuals in the current budget proposed considered only a small relief by granting exemption to units involved in public utility activities in the nature of trade up to the Value of Rs.10 lakhs instead of full roll back as the sector explained.The Prime Minister, Finance Minister and others appreciated the speech of Prof. Mohamed Yuans about the social business. All of them were well aware of Gandhian trusteeship. They have announced the policy of national voluntary Sector. They are aware the trend in other countries. They should not blow hot and cold simultaneously and taking into consideration the world vide views and our own national policy, they should roll back the amendment made in 2008 and render justice to the charities by allowing them to enjoy the concessions they have been enjoying form timesimmemorial and also concessions enjoyed by their counterpart in other countries.