1) Levy of tax where a charitable institution ceases to exist or converts into a non-charitable organization.
A charitable Trust, Society, Section 8 Company or an institution carrying on charitable activities may voluntarily wind up its activities and dissolve or may also merge with any other charitable or non-charitable institution, or it may convert into a non-charitable organization. In such a situation, the existing Income tax law does not provide any clarity as to how the assets of such a charitable institution should be dealt with.
In order to ensure that the intended purpose of tax exemption availed by a trust or institution is achieved, a specific provision in the Act is required for imposing a levy in the nature of an exit tax which is attracted when the organization is converted into a non-charitable organization or gets merged with a non-charitable organization or does not transfer the assets to another charitable organization.
Accordingly, it is proposed to amend the provisions of the Income tax Act and introduce a new Chapter to provide for levy of additional income-tax in case of conversion into, or merger with, any non-charitable form or on transfer of assets of a charitable organization on its dissolution to a non-charitable institution.
2) Phasing out of Deductions and Exemptions
The Finance Minister in his Budget Speech, last year had indicated that the rate of corporate tax will be reduced from 30% to 25% over the next four years along with corresponding phasing out of exemptions and deductions.
a) Phasing out 35AC — Expenditure on eligible projects or schemes
Donors enjoy 100% tax deduction on donations given to institutions having registration under 35AC.
It is proposed that no deduction shall be available with effect from 1st April 2017 (i.e. from Financial Year 2017-18 and subsequent years).
b) Phasing out 35CCD — Expenditure on skill development project.
Weighted deduction of 150% can be enjoyed on any expenditure incurred (not being expenditure in the nature of cost of any land or building) on any notified skill development project by a company.
Deduction shall now be restricted to 100 per cent from 1st April 2020 (i.e. from financial year 2020-21 onwards
c) Phasing out Section3 5(1)(ii) — Expenditure on scientific research.
Currently the available tax deduction is 175% of any sum paid to an approved scientific research association which has the object of undertaking scientific research. Similar deduction is also available if a sum is paid to an approved university, college or other institution and if such sum is used for scientific research.
It is now proposed to phase this out as follows:
Deduction shall be restricted to 150% from 01.04.2017 to 31.03.2020 (i.e. from financial year 2017-18 to financial year 2019-20) and deduction shall be restricted to 100% from 01.04.2020 (i.e. from financial year 2020-21 onwards).
d) Phasing out 35(1)(iii) — Expenditure on research in social science or statistical research.
Weighted deduction from the business income is allowed to the extent of 125% of contribution to an approved research association or university or college or other institution to be used for research in social science or statistical research.
It is now proposed that deduction shall be restricted to 100% with effect from 01.04.2017 (i.e. from financial year 2017-18 and subsequent years).
3) Service Tax
The Finance Minister had last year raised service tax rates from 12.36 per cent (including education cess) to 14 per cent; this was later bolstered by a 0.5 per cent cess for “Swachh Bharat”.
In this Budget, the Finance Minister has not raised service tax, but he has announced a “Krishi Kalyan” cess of 0.5%, which be levied on all services.
As a result, the total service tax liability, including the new cess announced, will now rise to 15%.
Service tax is levied on all services except a small negative list.
The Negative List entry covering ‘educational services by way of (a) pre-school education and education up to higher and secondary school or equivalent, (b) education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force and (c) education as a part of an approved vocational education course and the definition of ‘approved vocational education course’ are being omitted. However, the exemption shall continue by way of exemption notification No. 25/2012 – ST.
4) Amendment to FCRA 2010
In the Foreign Contribution (Regulation) Act, 2010, the following proviso shall be inserted in Section 2(1)(j)(vi) and shall be deemed to have been inserted with retrospective effect from the 26th September, 2010,namely:
“Provided that where the nominal value of share capital is within the limits specified for foreign investment under the Foreign Exchange Management Act, 1999, or the rules or regulations made there under, then, notwithstanding the nominal value of share capital of a company being more than one-half of such value at the time of making the contribution, such company shall not be a foreign source.”
This will mean that companies like HDFC Ltd., Axis Bank etc., which are companies registered under the Indian Companies Act, but because of more than 50% Foreign Direct Investors (FDI) were until now treated as ‘foreign source’ under FCRA 2010, will find relief and so will their NGO partners who do not have FCRA registration or prior permission.
5) Corporate Social Responsibility (CSR)
The Finance Minister announced nine focus areas of development of which education, skills and job creation was one of the key focus areas.
It is proposed to set up a Higher Education Financing Agency (HEFA) with an initial capital base of Rs. 1,000 crores. The HEFA will be a not-for-profit organization that will leverage funds from the market andsupplement them with donations and CSR funds, according to the finance minister. “These funds will be used to finance improvement in infrastructure in our top institutions and will be serviced through internal accruals” Mr. Jaitley said.
Companies may feel more incentivized to give to HEFA if there is tax destructibility. Also, it makes CSR reporting easy and the shift from accountability moves from the company to the ‘Government NGO’ (GONGO).
It’s interesting that year after year the Government creates new initiatives and expects CSR funds to flow into these initiatives, be it Swach Bharat Kosh or Clean Ganga, the Prime Minister’s Relief Fund or now HEFA.
Companies often contribute to funds like the Prime Minister’s Relief Fund to be in the good books of the Government, enjoy 100% tax deduction and minimizing accountability and CSR reporting!
Noshir Dadrawala
CEO – Centre for Advancement of Philanthropy
