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Donations may be taxable under new code
August, 18th 2009

The new tax code that India wants to move, removes an exemption currently given to donations made to religious institutions, but experts are divided on its impact.

Some say this could discourage giving, thereby affecting the philanthropic work being done by religious institutions. Others say it wont because the people and organizations that give do so not to claim tax benefits, but because they want to give.

The current law, under section 80G of the income-tax Act only disallows exemption for a donation made to a religious institution for the benefit of a particular community, according to Vikas Vasal, executive director at audit and consulting firm KPMG India Pvt. Ltd.

The new code, he added, states that any amount paid for any religious activity will not qualify for a deduction. This can impact the donations to all institutions.

The new draft tax code was released last week. The government hopes to incorporate suggestions from companies, individuals, and tax experts before codifying it.

A spokesperson for the Central Board of Direct Taxes declined comment on the issue.

Amitabh Singh, partner at audit and consulting firm Ernst and Young Pvt. Ltd said the move would only result in a small drop in donations. Generally, donations in India to religious institutions are faith-driven and not tax-driven.

The main opposition party, the Bharatiya Janata Party said it wants exemptions on donations to religious institutions to continue. We support legitimate concessions, and tax concessions to encourage such habits are important. A structured response on the new direct tax code will be made in the coming days, but our party is in support of continuance of tax concessions for charities and other similar religious activities, said the partys spokesperson Prakash Javadekar.

Taxing trusts and NGOs

The new draft code also suggests taxing trusts engaged in commercial activities and non- governmental organizations (NGOs). Currently, both are exempt from tax.

The move will likely affect the functioning of NGOs. It could also crimp the activities of trusts that actually turn a profit from providing healthcare or educational services. The new tax code will see the beginning of an era of taxing non-profits, said KPMGs Vasal.

Under the proposed code, the tax liability of a non-profit organization will be 15% of the amount of surplus it generates from permitted welfare activities or capital gains arising from a transfer of an asset.

The surplus will be the gross receipts less expenditure of the organization.

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