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Appeal to reconsider draft direct tax code bill 2009
September, 15th 2009

The Draft Direct Tax Code Bill 2009 was released by the Ministry of Finance on 12th August 2009 for public comments.

Obviously the spirit behind this draft seems to be made so that the benefit accrued through taxation reaches to the last person on the fringes and the marganalised section of the society. But unfortunately from time and again, the government keeps ignoring the contribution of the voluntary sector in supporting it reach the marginalised section of the society.

On one hand the government announces the National Policy on the Voluntary Sector and on the other imposes tax restrictions.
The voluntary sector does appreciate the efforts of Finance Ministry to streamline and rationalize direct tax through this Code however, the initial observation on these codes, applicable to all voluntary organization of India, irrespective of their mission, vision and size, predicts a very gloomy future.

On one hand the government promises decent life to Aam Admi and on the other country is going through a challenging phase due to financial recession and failure of crops, it very unfortunate that those who are working hand in hand with government to serve the marginalized and poor are being targeted.
The preliminary listing of the changes proposed in the new Direct Taxes Code 2009 as listed below appears to lead to several adverse implications for the voluntary sector and may perhaps undermine its financial sustainability and management for a long time.
This Code is applicable to all organizations operating as not-profit entities, which can range from foundations, NGOs, research and advocacy organizations, charity hospitals, etc. Whether they are providing health or livelihood related services to marginalized in remote villages, or conducting research based advocacy, printing popular publications for public awareness, charging nominal user fee to provide sustainability to community initiative. Unfortunately, this Code puts large public (Ports, Religious, Public Schools, Corporate Hospitals) trusts and small organizations in one category.

NGOs will not be able to carry forward unspent income of one year to the next year, without paying a 15% tax on it. The same applies to multi-year grants they will not be able to set aside or accumulate funds for long-term projects. Income and expenditure will have to be accounted on cash basis only.

Many times we do get funds from Government or foreign agencies at any time of the year which normally spread across the financial year. Secondly, also due to local reasons, especially working with government have to adjust projects with local elections, availability of operating space, these project get extended. As per the proposed Code all that funds will be taxed. This will not only substantially reduce the budget meant for poor but also put NGOs in crises that are already starving due to non-availability of bilateral funds for India.
The grant-making making will become further complicated for most of the donor agencies of India. Many of them prefer to provide grant in one instalment for multi-year projects so that implementation does not effect. Now all that flexible grants provided by government or private agencies will be taxed.  
Though surplus of one year will be taxed, it may be difficult for the NGOs to bring forward deficit of a past year, and set it off against the surplus. Thus, if we spend borrowed money for a project, we may end up paying tax when the grant is actually received next year.
The concept of Charitable Purpose has been replaced by Permitted Welfare Activities. This might reduce innovation and flexibility of approach, as the concept of permitted is left undefined and vague. We would like to stress here that most of the flagship programmes of Indian government have their origin in experimentation and innovations by NGOs at grass roots level.

Some of them  are Asha in NRHM, Social audits in NREGA, decentralized districts planning done by Planning Commissions, Right to Information, Empowerment of Women and Dalits in Panchayats, universal primary education, etc. We fear that under this Code we have to argue, convince, and define our work to government officials every year. This will lead to not taking up innovative approaches to avoid taxation.

For the last few years many NGOs are involved in raising funds locally by either producing greeting cards which are also means to spread social development message, or charging nominal user fee to provide sustainability to the local initiatives. Our preliminary assessment makes us to believe that all this meagre income which is generally used in projects will be taxed. Approval under 35AC (100% deductibility for donors) is being discontinued. NGOs will be able to offer a maximum of 50% deductibility to their donors.
Most of us deal with public money which belongs to poor in this country in a very transparent manner; these restrictions will suffocate the local innovations, popular research based advocacy and other initiatives undertaken for the socio-economic development of the marginalized.
We appeal for your support in raising this issue by writing articles/editorials about this it in your esteemed newspaper and initiating a public debate on this which will hopefully urge the Finance Minister to revisit and reconsider the hindering aspects including the above mentioned, of the Code to make it more effective and facilitating instrument for the overall socio-economic development of the marginalized.
We are hopeful for your support and continued cooperation in this campaign of the voluntary sector in India.


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