By Noshir H. Dadrawala
In his Budget for 2014-15, Finance Minister Arun Jaitley has proposed a number of changes to the Income Tax Act. These have been widely discussed. However, what impact does the Finance Bill 2014 have on the Non-profit Sector in India?
Let’s start with what everyone seemed to be most concerned about – “Deductibility of CSR expenditure”
The Finance Minister has proposed that any CSR expenditure incurred by an assesse shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in sections 30 to 36 shall be allowed as deduction under those sections subject to fulfilment of conditions, if any, specified therein. These provisions will be incorporated in the ‘Charitable Institutions Referencer’ after the Finance (No.2) Act 2014 is passed.
In other words only certain social welfare spending activities by corporates would be eligible for tax benefits. The Finance Minister has maintained that all CSR works cannot be given the same treatment.
“As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing taxable income of the company,” the Finance Minister said. He further emphasized that the “objective of CSR is to share the government’s burden in providing social services. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the government by way of tax expenditure”.
As CSR expenditure, being an application of income, is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the existing provisions of section 37 of the Income Tax Act. Under this section, deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. However, only few projects as provided for in section 30 to 36 of the Income Tax Act would be eligible for tax benefits. The FM has included slum development under CSR ambit.
Withdrawal of exemption of income otherwise exempt under section 10
It has been proposed that a charitable institution whose registration under section 12AA/12A is in force will not be entitled to exemption under section 10 [except agricultural income and exemption under section 10(23C)]. Thus, such income will be included with other income of the institution and will have to applied to charitable/religious purposes in order to claim exemption under section 11.
Thus far, Courts in India have held that a charitable institution is entitled to an exemption under section 10 (e.g. agricultural income, dividend income, etc.), whether its income is exempt under section 11 to 13 or not.
Withdrawal of deduction of depreciation of assets in certain cases
A charitable institution which has been allowed the entire cost of asset as application of income will not be allowed a further deduction in respect of depreciation in computation of its income.
Up to now, the preeminent view of courts has been that a charitable institution is entitled to deduct depreciation in computation of its income, even if it has been allowed the entire cost of acquisition of asset as application of income.
Cancellation of registration of a charitable institution in certain cases
The registration of an institution may be cancelled if it is noticed that violates section 13, that is, its income does not enure for the benefit of general public;
it is for benefit of any particular religious community or caste (in case it is established after commencement of the Act);
any income or property of the trust is applied for benefit of specified persons such as author of trust, trustees etc.; or
its funds are invested in prohibited modes
However, registration will not be cancelled if it is proved that there was a reasonable cause for the activities to be carried out in the above manner.
This provision will be effective from 1st October 2014.
Up to now registration of a charitable institution was liable to be cancelled under two circumstances:
The activities of a trust or institution are not genuine, or;
The activities are not being carried out in accordance with the objects of the trust or institution.
Applicability to earlier years of the registration granted to a charitable institution
With effect from 1st October 2014, in case where an institution has been granted registration:
a. the benefit of sections 11 and 12 shall be available for any earlier assessment year if:
i. the assessment proceeding for such year is pending before the Assessing Officer as on the date of such registration; and
ii. the objects and activities of the institution in the said assessment year are the same as those on the basis of which such registration has been granted.
b. an assessment shall not be reopened under section 147 for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such institution had not obtained the registration under section 12AA for the said assessment year.
The above benefits would not be available in case of any institution whose:
a. application for registration was refused under section 12AA or
b. a registration once granted was cancelled.
So far, a trust or an institution could claim exemption under sections 11 and 12 only from the first day of the financial year in which it has made an application for registration under section 12AA. Thus, its income for earlier years is not exempt under section 11.
Anonymous donations (Section 115BBC)
The income-tax payable shall be the aggregate of the following:
a. 30% of the anonymous donations in excess of (i) 5% of the total donations received by the assessee or (ii) Rs. 1 lakh, whichever is higher, and
b. the amount of income-tax on the total income as reduced by the anonymous donations referred to in (a) above on which 30% tax is charged.
(a) Total Income Rs. 1,00,00,000
(b) Aggregate amount of anonymous donations received Rs. 40,00,000
(c) Total donations received Rs. 60,00,000
(d) 5% of total donations (5% of c.) Rs. 3,00,000
(e) Deduction (d or Rs. 1 lakh, whichever is higher) Rs. 3,00,000
(f) Amount liable to tax under section 115BBC @ 30% (b-e) Rs. 37,00,000
(g) Income liable to normal tax (a-b) Rs. 63,00,000
(h) Amount of tax on anonymous donations @3o% (f * 30%) Rs. 11,10,000
Under the existing provisions of Income tax, in case of certain charitable institutions receiving anonymous donations the income tax payable is the aggregate of the following:
a. 30% of the anonymous donations in excess of (i) 5% of the total donations received by the assessee or (ii) Rs. 1 lakh, whichever is higher; and
b. the amount of income tax on the total income as reduced by the full amount of anonymous donations.
Clearly some of the changes proposed by the FM will have far reaching consequences on charities in India.
[Author is the CEO – Centre for Advancement of Philanthropy]