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Saturday, Mar 02, 2002

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Noose on trusts tightened

Suresh Krishnamurthy

THE revenue forgone in 2000-01 by exempting trusts from tax could be as high as Rs 5,750 crore argued the Advanced Group on Tax Policy and Tax Administration, which gave its final report in May 2001. The group under the Chairmanship of Parthasarathi Shome advocated removal of tax exemption for non-profit organisations, which derive income from sources other than donation.

The Finance Minister, Mr. Yahwant Sinha, has however, sought to heed saner counsel. Personalities such as Mr Raja Chelliah, architect of the changes in the indirect tax system, and Mr S. Venkitaramanan, former Governor, Reserve Bank of India, had suggested that the Finance Minister ignore these recommendations.

In fact, the Finance Minister went on record to state that these exemptions should not be withdrawn since notified bodies and educational institutions were fulfilling social objectives.

Still, the regulatory noose around a trust's neck has been tightened. It is common practice for investors to set up trusts to avoid income-tax. The changed provisions now make such accommodations difficult. The law earlier allowed trusts to accumulate income up to 25 per cent of their revenues indefinitely. If such income were parked in specified securities then the exemption could be availed. Now, trusts cannot accumulate such income indefinitely. They can do so only for five years.

Compared to the recommendations of the group, the changes made this year are balanced. They appeal to equity in the form of allowing these non-profit organisations to perform their social obligations. In addition, they also ensure that the incentives for creating trusts with the specific purpose of avoiding taxes are also reduced.

The income managed by trusts is considerable. As at the end of March 2000, trusts held Rs 26,247 crore in fixed deposits of scheduled banks. Importantly, it increased by Rs 3,671 crore over the previous year. This suggests that the annual income of trusts were around Rs 15,000 crore in the year-ended March 31, 2000 prompting the suggestion that tax forgone could be around Rs 5,750 crore. The Finance Minister has, however, ignored the demands for the present. It remains to be seen if he will be as benevolent next year particularly if the industrial downturn continues.

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