There were two reports last week, one in the Indian Express and the other that quoted the same story in First Post regarding some amendments to the Income Tax Act, 1961 that went unnoticed. You can find them here and here.
The Finance Bill presented along with the Union Budget gives proposed amendments to tax laws in the country. Among all the customs/excise cuts and redressal mechanisms for tax disputes announced, there were two Clauses 7 and 9 that were included in the Finance Bill which everyone missed because it was not announced in the speech. These were regarding the powers of tax authorities regarding cracking down on incomes to charitable trusts or institutions.
Section 11 of the Income Tax (IT) Act deals with the “income from property held for charitable or religious purposes.” Section 12 of the IT Act deals with the “income of trusts or institutions from contributions.” These sections give prescriptions for the grant of exemptions in income tax derived from property held by a trust or through contributions (donations, grants and consultancy incomes).
Exemptions to income tax prescribed under Section 11 do not apply under the following conditions given in Section 13.
i) If the income does not ensure any benefits for the public
ii) If the income from the institution created is used for the benefit of a particular religion or caste
iii) If the income obtained is for the benefit of the owner of the trust
iv) If the forms or modes of investing are in anything other than those prescribed under sub-section (3) of Section 11
Finance Bill 2014 presented along with the Union Budget 2014-15 includes Clause 9 that amends Section 12AA to interpret the above four conditions as grounds for the Principal Commissioner or the Commissioner “to order in writing the cancellation of registration of such a trust or institution.”
So, the amendment only increases the powers of the Principal Commissioner or the Commissioner from imposing tax to also cancelling licences of registered NGOs.
The lack of a clear definition for ‘benefit of the public’ combined with additional powers to the tax authorities in cancelling registrations of such trusts maybe cause for concern.
In addition, Clause 7 of the Finance Bill 2014 amends Section 11 to “exclude any income derived from property held under the trust” from exemptions provided under the same Section.
In essence, while there were vigorous efforts to make the budget appear ‘investor friendly’ and to end ‘tax terrorism’ on businesses (BJP Manifesto, Union Budget Speech 2014-15), the civil society sector in the country will have a tough time ahead.