The finance ministry is likely to drop the proposal to tax religious trusts. The proposal formed part of the direct taxes code and had raised eyebrows both within and outside the finance ministry.

The issue has been raised in the finance ministry's internal discussions. We are discussing whether the exemption was removed with intent or by mistake, said a finance ministry official.

Under Section 10 (23C) of the Income Tax Act, any trust or institution that works wholly for public religious and charitable purposes and is approved by the chief commissioner or director general, is tax exempt.

The tax code, however, has removed the term religious purpose from the exemption eligibility and instead said income of only those bodies that are registered under any Act of the Centre or the state and administer religious trusts, endowments or societies will be exempt.

Taxation experts have also opposed the proposal. In the existing system, all religious monuments registered with the commissioner of income tax get exemption, provided they are able to spend 85 per cent of the funds for religious purposes. In the direct taxes code, only government institutions such as the Wakf Board controlling religious trust are exempt, said Girish Ahuja, a chartered accountant.

In the same way, the income of authorities managing religious shrines such as Tirumala Tirupati Devasthanams and Vaishno Devi would be fully exempt from tax under the direct taxes code since they are established under a government Act.

Currently, institutions can be registered with the tax department to claim deduction. Under the new code, they can register only with the Centre or the state government to claim deduction. But this could be a problem since only three states have provision for registration Maharashtra, Gujarat and Orissa, said Hitesh Gajaria, partner, KPMG.

Moreover, Section 80G of the existing Income Tax Act gives 50 per cent exemption on donations made to religious trusts.

The new code has proposed such exemption only for renovation or repair of a temple, mosque, gurdwara, church or other place that has been notified in the official gazette to be of historic, archaeological or artistic importance or a place of public worship of renown throughout any state or states.

Experts said this proposal in the code would significantly reduce donations since any contribution meant for spending on religious activities of a shrine such as bhajans and kirtans, or charitable activity, like feeding or teaching the poor, would be fully taxed.

Religious places that will be eligible for tax exemptions on donations will be notified later. Any religious monument may not qualify to be of artistic or historic importance.

This will impact donations in a country where religion takes precedence over lots of issues, said Prashant Khatore, partner, Ernst & Young.

Ahuja agreed, Religious trusts are not taxed in most countries because they receive donations from the people. The authorities must have forgotten to put them in the exemption list.