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New Direct Tax Code may lose out on relief
October, 03rd 2009

Income Tax officials have objected to replacement of the word "charitable" with "welfare" for tax relief purposes in the new Direct Taxes Code (DTC), saying it could lead to misuse of concessions that are aimed at encouraging people to undertake activities for the welfare of poor.    

Giving their feedback on the DTC to the Finance Ministry, senior tax officials from Mumbai and Ahmedabad have said that substituting "charitable" with "welfare" could widen the ambit of tax relief and benefit even those not-for-profit organisations which do not focus on welfare of poor.     

Arguing that the word "welfare" would dilute the element of benevolence, essential for charitable purposes, they said, original definition for charities (as in Income Tax Act, 1961) should be included in the new tax code.     

The draft of the DTC, which was unveiled by Finance Minister Pranab Mukherjee in August for public debate, is likely to be tabled in the monsoon session of Parliament next year.    

"In the present I-T Act, the exemptions of providing relief to common man were categorised as income derived from property held for charitable or religious purposes while the new tax code calls it as computation of income of non-profit organisations," a senior I-T official said.

While deciding cases of violation of tax exemption cases the I-T tribunals and courts across the country have interpreted "charity" with benevolence but in the new definition there can be "a non-profit service but no benevolence".     

For instance, an NGO, which runs an expensive multi-specialty hospital, may not earn profit, with no individual getting any dividends, but the hospital will always be away from the reach of the poor due to its exorbitant costs, an official explained.    

The new DTC has defined the provisions of NGO's and their activities from section 86 to 96 which aim to replace sections 11 to 13 and 10 (23C) of the present I-T Act.     

Tax officials have said that the phrase "advancement of any other object of general public utility" under the permitted welfare activities in Section 96(g) of the new Direct Tax Code (DTC) is ambiguous and there should be more clarity on it.     

I-T officers have also said that the "permitted welfare activity" under the same section, pertaining to preservation of environment, including watersheds, forests and wildlife, fall under the purview of respective state governments and hence would lead to ambiguities in deciding cases of exemption.

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