The Finance Bill, 2016 presented by the Finance Minister (FM) in the Parliament has already been discussed threadbare. The proposal to tax accumulated provident fund was vociferously opposed and the FM had to beat a hasty retreat. While the proposal to tax charitable trusts on occurrence of certain events also met with criticism, it has been somewhat muted. The Society sends a postbudget representation in which the issues arising from this proposal will be pointed out. After the Bill becomes an Act, the Journal carries a detailed article analysing the provisions. However, the provisions as proposed in regard to charitable trusts are so devastating that they merit an editorial comment.
The exemption of charitable trusts is based on the rationale that these institutions supplement the activities of a welfare state. The revenue generated is utilised for benevolent objects. It is for this reason that the government foregoes tax revenue from such institutions. The tax provisions in regard to charitable institutions have undergone substantial changes over the last two decades. The provisions in the 1922 Act were extremely lenient. The current Income-tax Act has attempted to plug loopholes which were being misused by certain persons. Over the last few years, the provisions have become much stricter, so much so that one often felt that charity was given a step-motherly treatment. While it is true that, at times, charitable trusts have been used as vehicles of tax avoidance/tax evasion, the acts of a few unscrupulous should not result in burdening genuine trusts with huge tax liabilities. While some regulation is welcome, the inability of the tax officials to bring to book the drivers of such vehicles should not lead to the painting of all charitable trusts with the same brush. This is precisely what the proposals in the Finance Bill seek to do.
There are a number of provisions in the proposed Chapter XII-EB that are blatantly unfair. The tax on trusts liability could be triggered by the occurrence of certain specified events. Once any of such events occurs, the charitable institution would be saddled with a huge tax liability which if it is required to defray will result in its activities coming to a halt. As per the proposals in the Bill, such tax liability has to be discharged in a very short time, in the case of cancellation of registration within 14 days of the cancellation order being received. In such a situation if the trust is made to pay tax even before the order is tested by a judicial forum, it would be manifestly unjust.
Another aspect of the matter, is the impact of section 2(15), which often results in an adversarial action either by way of denial of the exemption u/s. 11 or by way of cancellation of registration u/s. 12AA. It must be appreciated that if the objects of the trust from the point of time that it obtained registration have remained unchanged, merely because the proviso to section 2(15) is attracted, there should not be an impact affecting the exemption of earlier years. In the proposal, as is mooted, such an entity would be taxed on its accreted income with disastrous consequences. In certain cases entities are required to modify their objects. One has witnessed many situations, where the registering authority on an application being made notifying it of the change in objects invokes the provisions of section 2(15) and rejects the application thereby cancelling the registration u/s. 12AA. Here again, requiring the charitable institution to pay tax without the action being tested by an appellate forum is grossly unfair.
The problem is compounded / accentuated by the definition of “accreted income”. Accreted income has been defined as “fair market value of total assets on the specified date as exceeding total liabilities”. A small illustration will highlight how unjust this provision is. If a charitable trust has acquired an office of 1,000 square feet, in 1975 for a sum of say Rs. 4 lakh, the same is being used for the objects of the trust. This today would be valued at Rs. 4 crore. According to the proposal, on the cancellation of the registration of such a trust it would be liable to pay tax on the market value which is a notional income which the trust has not earned and is never likely to earn. In most other situations where the concept of fair market value is used, the sale has taken place and it is only the consideration that is being substituted. In this case the proposal brings into play two fictions the first one assumes a sale and the second assumes it to be at market value. All this in the case of a charitable trust!
Another aspect of the matter is that these taxing provisions are, in a sense, retrospective. By taxing the net worth, that is excess of assets over the liabilities and that too at fair market value, the Finance Minister is proposing to tax accumulation of the past which may have arisen out of absolute genuine charitable activity. To illustrate, an NGO may have been pursuing its objectives lawfully over say three decades. In order to ensure continuation of activity it has accumulated unspent income. In a particular year there is a small infraction of section 13 like making an advance to an interested person or an investment not qualifying u/s. 11(5). In such a case if registration is cancelled it would be a gross violation of the principle of equity and fairness.
Another unfortunate aspect of the matter is that the charitable trust will have to pay tax within a short period of 14 days of the liability arising. The provisions do not contemplate keeping the matter in abeyance till an appeal is preferred and the issue tested. If the provisions are really to be complied with, the trust would have no option but to sell off its assets with tragic consequences. In states where there are Acts governing Charitable trusts (like Maharashtra), obtaining permission to sell assets in the form of immovable property also takes months.
I am at a loss to understand, as to how the same authorities, who on the day of the budget issued a very fair and beneficial circular directing stay of demand on payment of 15% of the tax dues till the first appeal is pending can even contemplate provisions as draconian as have been discussed in the earlier paragraphs.
On a reading of the provisions, it appears that the severe impact they will have on genuine charitable institutions seems to have escaped the attention of the FM. I hope that the representations from all quarters get the attention that they deserve so that the proposals are revisited, and the much awaited “acche din” arrive for charitable institutions.
