When it comes to charity, there seems to be a generous side to Indian companies, which has escaped the public eye. lndian firms donated a whopping Rs 22,000 crore to charity in 2005-06 fiscal, according to data compiled by the government.
These firms are also on track to give away Rs 30,000 crore more in this fiscal to scores of trusts ostensibly engaged in charitable activities. The display of generosity is rewarded in the form of tax breaks provided by the government for donations to charity. So, for the Rs 22,000 crore of donations in 2005-06, these companies claimed tax breaks and saved a neat Rs 3,519 crore in taxes. This amount would have otherwise been paid to the government and bolstered its corporate tax kitty. All tax payers be it companies or individuals enjoy tax benefits on donations to charitable institutions under a provision in the Income-Tax Act, known as Section 80G.
The benefit will continue in the coming fiscal as well since the Centre has steered clear of tinkering with this politically sensitive tax exemption. The net result: it will forego revenues of close to Rs 5,090 crore this fiscal, going by the revenue foregone statement tabled in Parliament.
Back of the envelope calculations on the actual amount of donations made by companies to charitable institutions in 2005-06 and projections for 2006-07 are based on the data given in the revenue foregone statement given out along with this years Budget documents. This statement which reflects the major tax expenditure on corporate taxpayers has been prepared on the basis of tax returns.
The provision in the income tax law for a tax break for charity has been in force for nearly four decades now, starting 1967-68. It was aimed at encouraging tax payers to donate at least a part of their savings to charitable institutions. Over the years this exemption has been rampantly misused. The tax department is now gathering evidence to prove that many trusts have been set up to siphon off funds and escape tax, a senior revenue department official said.
In fact, Section 80 G features in the list of 160 odd tax exemptions that the government wants to phase out. Official sources said the government is looking at ways to plug misuse of the Section.
For starters, the amount of tax deduction that can be claimed under Section 80 G is linked to the category of donations. For instance, companies which donate to private trusts can claim a 50% deduction on the qualifying amount. This comes with a rider. The tax benefit is capped at 10% of the gross total income reduced by all other deductions such as contributions to PPF, insurance premia, pension schemes and so on.
The tax saving is higher on donations to trusts and funds set up by the government. In such cases, the entire amount of donation 100% qualifies for a tax deduction under Section 80 G. The 10% cap does not apply here.