One of the changes proposed in the Finance Bill, 2011 relates to charitable institutions. The term ‘charitable purpose' has been subject matter of debate at various points of time at various forums, including the highest body i.e. the Supreme Court. The tax administrators have been viewing charitable institutions with suspicion and were not comfortable with these entities being exempt from tax.
The taxpayers too, have taken advantage of the available incentives. The culmination of the tug-of-war between the taxpayers and administrators resulted in the insertion of proviso to Section 2(15) by the Finance (No.2) Act, 2009 to declare that any activity in the nature of trade, commerce or business or in relation thereto for a cess or fee or any other consideration shall not be treated as a charitable activity. This amendment nullified many court decisions and set the tone and trend for taxing these entities in the years to come.
Again whether these activities are to be taxed as such or to be given some basic exemption limit perhaps posed a dilemma to the lawmakers and prompted them to insert a further proviso to Section 2(15) in Finance Bill, 2010. Thus the monetary limit of Rs 10 lakh towards aggregate receipts was fixed for the exemption benefit, notwithstanding whether the activities of the entity were in the nature of trade, commerce or business or in relation thereto.
For the third consecutive year, Section 2(15) has been subjected to an amendment. In the Budget 2011, the monetary limit has been enhanced to Rs 25 lakh in respect of receipts from the activity of any trade, commerce or business or from the activity of rendering any service in relation thereto.
Why such frequent changes? Perhaps the lawmakers are half-hearted in levying tax or sparing these entities from tax consequences. In the DTC, the Seventh Schedule provides exemption to non-profit organisations, but it does not cover any entity doing any trade, commerce or business. Chapter IV of the DTC is applicable to such organisations and these organisations have to cough out tax on their income at 15 per cent where the total income exceeds Rs 1,00,000.
When the Government is toying with the idea of aligning the provisions of existing tax law with DTC, why not levy tax on such organisations now itself at a lesser rate, say 5 or 10 per cent instead of allowing these entities to enjoy the benefit of tax relief?
Accounting perspective
Tax or no tax is with reference to aggregate receipts of the entity. This again gives some elbow room for adopting an accounting methodology to minimise, escape or postpone tax liability. The trap must fix the income as criteria for tax instead of ‘aggregate receipt' which could be exposed to differential accounting treatment due to choice in method of accounting available to any taxable unit.
Section 2(15) read with proviso and further proviso seem to override both Sections 11(4) and 11(4A). The fallout is, any commercial activity and income thereon if meant for charitable purpose, it is eligible for blanket tax exemption subject to the only rider that the aggregate receipt does not exceed the limit prescribed.
(The author is a Erode-based chartered accountant.)