Only charity for a cause to get tax exemption
Charity sees the need, not the cause, it is said. However, the government now wants to see the cause before extending tax benefits.
By Deepshikha Sikarwar, TNN |
NEW DELHI: Charity sees the need, not the cause, it is said. However, the government now wants to see the cause before extending tax benefits.
It is examining a proposal to narrow the definition of charitable purpose to ensure only the trusts that carry out charitable activities are able to benefit from tax exemptions. An announcement may be made in the Budget.
The move follows a recent apex court decision in the case of Gujarat Maritime Board (GMB) which ruled the public utility was eligible to get registered as a charitable institution.
Government sources said the court ruling had created an anomalous situation, as tax benefit was intended to be given to only the institutions that carried out charitable work in the nature of public good, such as providing education or healthcare.
They pointed out that the court’s decision could open a Pandora’s Box for the income-tax department, with institutions engaged in infrastructure development or any such activity claiming tax exemption. The finance ministry wants to prevent such a situation, sources said.
At present, the Income-Tax Act defines charitable purpose as relief of the poor, education, medical relief and the advancement of any other object of general public utility. Sources said the proposal, at an initial stage with the government, is for modification in the definition of charitable purposes.
However, they said as an alternative, amending the Act to explicitly keep commercial institutions from claiming charitable status was also not ruled out.
While this would prevent a new public utility from registering as a charitable institution under Section 12A of the Income-Tax Act, to prevent tax benefits from flowing to the GMB, the department would have to amend the law retrospectively.
“Currently, charitable purpose has been defined under the Act to include an object of advancement or an object of general public utility.
Therefore, organisations engaged in development and maintenance of public facilities may claim their activity is covered within the meaning of charitable purposes and, hence, seek exemptions as a charitable entity and not be liable to tax. This is evident from the Supreme Court ruling in the case of GMB,” KPMG partner Vikas Vasal said.
The apex court, relying on the definition of charitable purposes, ruled that GMB was entitled to the charitable institution status. Income-tax department had denied GMB registration as a charitable institution.
The board then approached Income-Tax Appellate Tribunal which allowed it to register. The department then lost the case in Gujarat High Court and appealed unsuccessfully in the Supreme Court.
It is examining a proposal to narrow the definition of charitable purpose to ensure only the trusts that carry out charitable activities are able to benefit from tax exemptions. An announcement may be made in the Budget.
The move follows a recent apex court decision in the case of Gujarat Maritime Board (GMB) which ruled the public utility was eligible to get registered as a charitable institution.
Government sources said the court ruling had created an anomalous situation, as tax benefit was intended to be given to only the institutions that carried out charitable work in the nature of public good, such as providing education or healthcare.
They pointed out that the court’s decision could open a Pandora’s Box for the income-tax department, with institutions engaged in infrastructure development or any such activity claiming tax exemption. The finance ministry wants to prevent such a situation, sources said.
At present, the Income-Tax Act defines charitable purpose as relief of the poor, education, medical relief and the advancement of any other object of general public utility. Sources said the proposal, at an initial stage with the government, is for modification in the definition of charitable purposes.
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However, they said as an alternative, amending the Act to explicitly keep commercial institutions from claiming charitable status was also not ruled out.
While this would prevent a new public utility from registering as a charitable institution under Section 12A of the Income-Tax Act, to prevent tax benefits from flowing to the GMB, the department would have to amend the law retrospectively.
“Currently, charitable purpose has been defined under the Act to include an object of advancement or an object of general public utility.
Therefore, organisations engaged in development and maintenance of public facilities may claim their activity is covered within the meaning of charitable purposes and, hence, seek exemptions as a charitable entity and not be liable to tax. This is evident from the Supreme Court ruling in the case of GMB,” KPMG partner Vikas Vasal said.
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The apex court, relying on the definition of charitable purposes, ruled that GMB was entitled to the charitable institution status. Income-tax department had denied GMB registration as a charitable institution.
The board then approached Income-Tax Appellate Tribunal which allowed it to register. The department then lost the case in Gujarat High Court and appealed unsuccessfully in the Supreme Court.
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