Draft Tax Code: hardly charitable to charities
- DTC: Hardly charitable to charities
31 Oct 2009, 0342 hrs IST, V RAGHUNATHAN,
The draft Direct Tax Code (DTC) Bill, 2009 - now open to public for
reactions if enacted, will be law, effective April 1, 2011. The key
of the Bill is ostensibly to simplify direct taxation. But for the social
sector, far from effecting such simplification, the draft is bound to impact
the social sector most adversely.
For example, change in the term 'charitable purpose' to 'permitted welfare
activities' in section 88 (1) of chapter IV is pregnant with serious
consequences. The new term is unduly restrictive and will give rise to
needless nitpicking and another avenue for corrupt babus to harass honest
Suppose a charitable trust, society or a section 25 company normally works
in the field of poverty alleviation, which is the 'permitted charitable
activity'. Moved by unprecedented floods in a state, it decides to undertake
some flood relief measures - not a 'permitted welfare activity', but a
charitable activity surely. Why should the government deny tax exemption to
such an organization?
Another issue of major concern is the proposed introduction of tax on
not-for-profit organizations (NPOs). The leakages in the government's
welfare departments are such that what finally reaches the intended
beneficiaries in any welfare scheme is rather small, as is widely known and
The changes suggested in the draft code pertaining to charitable trusts are
such that at a time when a large number of corporate CSR bodies or NPOs are
engaged in exemplary social work and adding significant value to the overall
social objective of the nation, they are bound to shrink the funds available
to the social sector.
There may be some who misuse the not-for-profit status but that can hardly
be the reason to throw the baby with the bath water. There is no reason why
such organizations cannot be held accountable for their actions on a
Another issue concerns the tax computation based on cash system of
accounting in the proposed code. Many countries in the world including
India, are on the way to adopting International Financial Reporting
Standards so that accounts are understood uniformly across the globe.
There is no reason why an NPO, like any other organization, will not have
receivables and payables at the end of the financial period. In such a
scenario, the proposed system appears to be retrograde.
The draft code calls for spending 100% of donation receipts in the same
year. This appears to be completely unreasonable. Current regulation
(section 11 of the Income Tax Act, 1961) permits the charitable
organizations to accumulate 15% of current year's donations for spending in
the following year and any excessive amount can be accumulated with the
consent of assessing officer.
This facility is very logical and reasonable considering that a lot of
donations are typically received at the fag end of the financial year. In
fact, even the government of India's funding itself often comes at the end
of a financial year. What is more, the funding could well be for
Under the circumstances, the clause for 100% spending in the same year in
which the funds are obtained is not only infeasible, but ignores the reality
of donors and the spenders in equal measure. Further, in the draft code,
advance payment is not treated as current expenditure, while advance receipt
is treated as current income! Consider this. 'Outgoings' u/s 90(f) includes
"any amount, other than any loan or advance, actually paid during the year
to any other non-profit-organization engaged in similar permitted activity".
Clearly, advances paid to other NPOs are not to be treated as 'outgoings'.
This is logical.
If 'outgoings' do not include advances paid, should 'gross receipts' include
advances received? Clearly not! But not according to the draft code! As per
section 89(2)(a) of the DTC, 'gross receipts' include 'the amount of
voluntary contributions received'. Since the 'contributions received' could
well be in advance or for multi-year-expenditure, which accounting principle
could justify this absurd provision?
And finally, another severe blow to the sector in the draft code pertains to
the computation of exempted income for taxation. According to the existing
section 11(1), "...the following income shall not be included in the total
income..." On the other hand, according to the proposed section 87 in the
draft code, "...the total income shall be computed..." There is a clear
disadvantage implicit in the draft code.
To explain it further, the current norms permit accumulation of income by
NPOs. For instance, income from property held under a trust for charitable
purposes is exempt to the extent it is utilized for such purposes. In
addition to the income spent on such purposes during the relevant accounting
period, income accumulated or set apart for application to such purposes up
to 15% of the income is also exempt.
This privilege will no longer be available to such charities. One hopes the
finance minister will be more charitable to the charities.
(The author is CEO, GMR Varalakshmi Foundation, Views are personal.)