The Economic Times, July 26, 2010

By Pradeep S Mehta

One of the areas that has not been highlighted in the current debate on the proposed direct taxes code (DTC) is its treatment of the voluntary sector. Such lack of attention is not warranted, given that the draft code contains a proposal to tax the surpluses of this sector. This has caused consternation in non-government circles. Such uniform taxation of all non-governmental organisations, hitherto treated as tax-exempt charities, is unjustified. A more discerning approach is advisable. The government needs to recognise the largeness and diversity of this sector in evolving a more nuanced approach to taxation.

The NGO sector includes voluntary organisations working on public welfare issues, trusts working as educational or religious institutions, chambers of commerce , sports bodies and so on. Their claim to tax exempt status is justified by their non-profit-making nature with no member standing to gain from any portion of their surpluses. Of these, the voluntary sector in India has come a long way. From purely philanthropic work to help the poor and destitutes (a la Mother Teresa), it has evolved as a professional and dynamic Fifth Estate. Its value in enhancing the quality of participatory democracy in India has been acknowledged by all other stakeholders.

The 1990s witnessed several forward-looking international conferences to address the various challenges faced by humanity. The Earth Summit in 1992, the Beijing Conference on Women in 1995 are a few examples . All this positive energy culminated in the adoption of the Millennium Development Goals by the international community in 2000 to address the scourge of poverty.

Such positive developments at the intergovernmental level have been complemented significantly and extremely effectively by the efforts of the voluntary sector in India and elsewhere to make the world a better place to live in. This sector, by drawing on the support of a number of progressive donors and governments, has led by example and discourse.

However, this rather complimentary overview of the activities of the voluntary sector should not be taken as an endorsement of all organisations. While a significant number of non-profits are doing exemplary work, ranging from grassroots to the policy arena, black sheep do exist, as they do in all sections of our society.

But if all voluntary organisations have not distinguished themselves through contributions to society, it is equally true that regulatory and legal governance of this sector smacks of obsolescence. Isn’t it funny that the Calcutta Port Trust and a non-profit , say Ramakrishna Mission, are governed by the same law, the Indian Trusts Act, 1882? In our case, we are governed by the Rajasthan Societies Act, but so are many (mushrooming ) educational institutions and some of them with the sole aim of profiteering.

Furthermore, we are bound by the same compulsions to register under the Foreign Contribution Regulation Act to avail of foreign donations, and under the Income-Tax Act for exemption from income tax as chambers of commerce whose objective is to promote private sector interests. It is such clubbing of non-profit organisations for the purpose of taxation that is unfair.

Such calls for more discerning treatment should not be misconstrued as a plea for abandoning the reform of laws to tax profiteering in non-governmental organisations , such as educational or sports bodies. There is no harm in taxing the surplus generated from business activities on the basis of a progressive tax regime after providing an exemption limit.

In the revised DTC, the current provision of 15% indefinite accumulation of income by non-profits has been withdrawn. Maintenance and accumulation of corpuses would become unviable under this regime, thus giving a body blow to the viability of this sector. This has to also contend with much more financial uncertainty than other sectors because of its dependence on donor funding. The lack of a corpus would rule out protection from inflation and other vagaries characterising the economic environment. Clearly, such a proposal is completely unreasonable: the revised DTC should restore the earlier (pre-2002 ) provision that allowed the non-profits to accumulate 25% of their income and that too for an indefinite period.

Another practical concern is regarding the treatment of received income: the revised DTC has proposed that non-profits would have to spend at least 90% of gross receipts or 85% of income accruing during a year in the same year. This again is not a viable proposition — for instance, consider receipt of money by an NGO towards the end of the financial year. Will it be possible to spend that amount in that financial year? Secondly, at times, all the money for a multi-year project is paid upfront by the donor, but the same cannot be treated as income in the year of receipt.

These criticisms of provisions directly impacting the functioning of the voluntary sector in India should lead to deep introspection. That apart, the new regime should also draw lessons from other countries with a more mature history of philanthropy. For instance, the US system of inheritance tax or UK’s legacy tax regime has helped hugely in developing the institution of philanthropy in those societies. Given that wealth creation in India is expected to scale unprecedented heights in future, the time has come to change our system of inheritance taxation so as to inculcate and encourage the habit of philanthropy among the population.

The DTC is a forward-looking step to make our fiscal regime more transparent and accountable to the citizens of the country. The government should not only change some of the proposed provisions of the new direct tax regime vis-a-vis the non-profit sector, it should leverage its partnership for development with this sector adequately by revising other relevant laws so that the sector becomes liberated enough to achieve its potential and is yet accountable to the people it serves.

The author is secretary general of CUTS International.

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