Income of Trusts in India Comes Under Scrutiny

10 January 2012

Update provided by Noshir Dadrawala of the Centre for Advancement of Philanthropy.*

Recently a number of leading public charitable trusts and institutions which for years enjoyed tax exemption have lost their 12Aa registration and their total income has been made taxable. Virtually all of them are well established, credible, well governed and contributing to the weal of society - be it empowering women and creating self-sufficiency or promoting art and culture.

India has moved on from charity to philanthropy and more recently to venture philanthropy. However, the question remains – are the laws governing nonprofits in India enabling enough? Everyone talks about the need for NGOs to become self-sustaining and reduce donor dependence. However, once again, does the law allow nonprofits to generate income without fear of losing tax exemption? The answer would be both, yes and no!

On one had the new Foreign Contributions Regulation ACT (FCRA) 2010 has brought some relief to nonprofits not having FCRA registration by legislating that ‘Foreign Contribution’ does not include commercial receipts. In other words under the new FCRA 2010,NGOs can now receive consultancy or other  commercial receipt from foreign sources even without having FCRA registrations. Even FCRA registered NGOs have been directed to receive such income in their domestic account &such commercial receipts are no longer required to be reported to the Home Ministry.

But, while the Home Ministry has encouraged NGOs to freely receive consultancy fees and commercial receipts from sale of their products, over the last few years the Ministry of Finance has not been particularly kind to certain types of NGOs.

Almost a decade ago Section 11(4A) of the Income Tax Act, 1961 had been amended (w.e.f. 1-4-1992) such that if the income from business of an NGO is incidental to the attainment of the objects of the organization and separate books of account are maintained by such an organization in respect of such business, the profit would not be considered for taxation. In other words, the profit is fully exempt from tax.

Also, income from a business undertaking which is itself held under trust for charitable purpose [under section 11(1)(a)] is tax exempt.
However, Finance Act 2008 changed the definition of "charitable purpose" given under Section 2(15) of the Income Tax Act such that “Advancement of any other object of general public utility” would not be considered as “charitable purpose” if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for any fee, cess or other consideration. Later, the Finance Act 2010 attempted to provide some relief by exempting the aggregate value of the receipts from such activities up to Rs. 10 Lakhs and finally under the Finance Act 2011 to Rs. 25 Lakhs.

Of course, NGOs / NPOs established for Relief of the poor, Education, Medical relief, Preservation of Environment (including watersheds, forests and wildlife), Preservation of monuments or places or objects of artistic or historic interest are not hit by the amendment introduced under the Finance Act 2008. Only NGOs / NPOs falling under the category “The advancement of any other object of general public utility” are affected.

This has been a major setback for charities in India creating an archaic atmosphere of ‘Donor Dependency’ instead of ‘Self-sufficiency’ through income generating activities.

* The Author is Chief Executive of the Centre for Advancement of Philanthropy (CAP). This is a matter that has affected scores of charities all across India and requires advocacy at the highest level with the Ministry of Finance. CAP is mobilizing the opinion and support of both tax experts and those affected.