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In Direct Tax Code, Religious and caste trusts out of exemption list
February, 14th 2011

All religious and charitable trusts set up for a particular religion or caste that are currently exempt from paying income tax or wealth tax will lose these benefits once the Direct Tax Code (DTC) comes into effect from April next year.

This will adversely impact the activities of all such trusts, which run temples, mosques, etc and provide free hospitalisation, education, shelters, etc, to those sections of the society lying outside the pale of the state's munificence. It may also disincentivise donors who will not be able to claim deduction of 50% of the donation from taxable income if the trusts are not nonprofit organisations.

The problem lies in the definition of a non-profit organisation under the DTC, which has granted exemption to any such entity being a religious trust or institution from the levy of income tax so long as it is not restricted to a particular religion or caste. There are several such trusts that serve the poor and destitute belonging to the Muslim, Jain, Catholic, Parsee and Hindu communities, among others.

I don't think that the people who drafted the DTC have realised the implications of what they have done, said HP Ranina, advocate, Supreme Court of India , addressing the media here on the issue. The provisions were drafted by tax officials without consulting any trustees. No justification has been given for withdrawing the exemptions... I think the IT commissioners want to bring all this to tax.

The Income Tax Act 1961, which has been in force for 50 years, has exempted all charitable trusts which were set up before April 1, 1962 for a particular religious community or caste. This provision does not exist in the new DTC and once the new law comes into force from April 1, 2012, all existing charitable trusts will have to pay income tax at the flat rate of 30% and wealth tax at 1%.

Trusts such as the 135-year-old Anjuman-I-Islam, which has 1,10,000 poor students from the Muslim community in its fold, will lose the benefits they enjoyed under the current Act since a non-profit organisation has been defined as one which does not belong to a particular religion or caste, said Zahir Kazi, president , Anjuman-I-Islam.

Apart from being unable to claim income or wealth tax exemption, the provision under the current Act that allows 100% accumulation of income by public charitable trusts for five years to build, say, a hospital or school, will not be included in DTC. Currently, a charitable trust is required to spend only 85% every year on the next year and the balance 15% can be accumulated for all times to come.

Under the DTC the amount can be accumulated only for three years. Various trusts have come together to form a federation of trusts that has already taken up the matter with the Parliamentary Standing Committee on Finance chaired by former finance minister Yashwant Sinha . A second meeting with the Standing Committee has been slated for February 25.

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