The most drastic amendment proposed in the Finance Bill, 2008, relates to the withdrawal of concession for voluntary agencies having activity or receipts in the nature of business, if they are established for carrying out the fourth object of general public utility.
On the ground, according to the Finance Minister, “obviously, this was not the intention of Parliament” followed by an assurance that “genuine charitable organisations will not in any way be affected.”
Other charitable purposes are not affected by the amendment, but there are a number of charitable organisations with the fourth object of general public utility, which carry on activities incidental to their objects, now exempt, will lose exemption. Could Parliament have been unaware that the exemption so far recognised was not in accord with its intention?
Impact of amendment
If the proposal becomes law, the fourth object of general public utility will continue to be a charitable object, but income from activities now exempt will become taxable. The amendment is provoked by the Supreme Court in CIT v Gujarat Maritime Board (2007) 295 ITR 516 (SC), which found that the statutory authority formed for the purpose of development of minor ports, was eligible for exemption on its receipts, since the activity was in respect of the fourth object of advancement of an object of general public utility. A public trust running a newspaper is exempt as decided in Trustees of the Tribune In re (1939) 7 ITR 415 (PC) followed in other trusts, running language newspapers, besides those in other decided cases with the objects of promoting hand-spinning, welfare of farmers, promotion of cottage industries and handicrafts, running a chamber of commerce, promoting exports, running a choultry or dharmashala, conducting a professional association, promoting scientific research, assisting widows to earn a livelihood, helping rural development, promotion of sports, dissemination of useful knowledge and forest preservation. The vast panorama of activities undertaken by numerous organisations enrich the life of the citizens. The instances cited are only few of the trusts, which were considered to be carrying on business, but all the same treated as exempt being incidental to the fourth object.
The claim of the Finance Minister that the exemption in cases of institution with the object of general public utility was not the intention of Parliament can hardly carry conviction in the light of the long history of the provisions and the judicial interpretation well accepted by the Government thus far, not because they were against the intention of Parliament but because these were considered to be in keeping with its intention.
Trusts and institutions do not all exclusively deal with relief of poor, education or medical relief. Their objects may invariably cover objects of general public utility. An educational institution may have some activity like distribution of text books at a profit for its students or a hospital may run a pharmacy so far considered as permitted activity to be incidental to the fourth object even if not solely confined to education or medical relief.
Even in the case of medical relief, which offers livelihood for the blind or otherwise disabled may not strictly fall under medical relief, but would be covered by the fourth object. National institutes formed for promotion of particular profession such as accountants would become liable on their income from placements service or supply of books and publications or conduct of examinations.
So far there had been no problem in the past, because they had qualified for exemption as their services were for the benefit of general public or a cross-section of public like aspiring professionals, with profit utilised for the objects. These may also be affected by the proposal.
Impact on donors
It is true, investment income need not be a casualty, because the amendment of “charitable purpose” excludes only income from commercial activity. But the effect of the amendment on Sec. 80G will be adverse. Recognition of Commissioner under Sec. 80G is necessary for a trust or institution to merit 50 per cent deduction for the donor. Recognition will not be forthcoming, if the trust or institution having a fourth charitable purpose has some taxable income, even if only part of its income is not exempt on account of the amendment.
Section 80G does not recognise eligibility, where part of income of charitable institutions may be taxable, because the amendment is to the definition of “charitable purpose” itself. In the result, the amendment made to “charitable purpose” could lose for most of the institutions not only the right to exemption for part of its income, but also recognition under Sec. 80G blocking the source of funds, the mainstay of their operations.
The Income-tax Department already has brought various amendments in Sec. 11 to 13 and section 10(23C) providing for rigid regulations for charitable institutions as regards investments, application, accumulation, audit, timely filing of returns with reports from Chartered Accountants, bar against any private benefit and the like. Registration can be withdrawn for violation of conditions for exemption. A separate wing for monitoring the exemption cases was also established. Instances of abuse of concessions requiring withdrawal of exemption on the close scrutiny undertaken for the past few years have not been significant. The sudden need for this amendment is not, therefore, understood.
Many public sector organisations, which have lost exemption like housing boards, city improvement trusts and marketing committees with effect from April 1, 2003, are availing themselves of exemption, subject to regulations now applicable for them, because they are covered by the fourth object. There would be absolutely no point in making them pay tax, when they are undertaking State functions under State supervision.
The Chairman of the Central Board of Direct Taxes has gone on record promising a circular exempting chambers of commerce, though the proposed amendment would squarely cover them. If chambers of commerce, which are also directly affected are to be spared, there are obviously other targeted institutions, which are not indicated. Are the trusts running language newspapers, sports bodies, professional institutions, home for disabled, women and children? It would be far better to withdraw exemption for targeted institutions under Sec. 11 to 13 by making an amendment to the definition of charitable purpose under Sec. 2(15) than a wholesale withdrawal.
There are a number of charitable institutions involved in the fourth object of general public utility, which are assisted by the State either by funds, grants or State co-operation. There are others, which are doing extremely useful services complying with all the regulations. At a sweep, this amendment could withdraw exemption for all.
Need for second look
The least that could be done now is to defer this amendment and some of the other far-reaching procedural amendments in a separate Amendment Bill, since these amendments could not have received as much attention as was required even on the part of the Finance Minister, since this has not been the subject matter of any prior discussion any time before. Hopefully,
Members of Parliament and knowledgeable public would react to the proposals after examining them. The amendment has to be definitely deferred, if not altogether scrapped.S. RAJARATNAM