New tax regime disincentivises charity donations, says study

Ashoka University-CBGA study recommends restoration of inheritance and wealth taxes

The option of paying income tax at lower rates in lieu of giving up exemptions and deductions has disincentivised donations for charity, a study has said.

The option was given in the Budget of 2020. Ahead of the Budget this year, the study has recommended reintroducing inheritance tax and wealth tax because inequalities have widened due to the pandemic. The study, conducted by the Centre for Social Impact and Philanthropy (CSIP), Ashoka University, and Centre for Budget and Governance Accountability (CBGA), said, “... overall, the tax incentive structure for giving to the charitable sector seems to have become less generous over time and has hence reduced the benefit that donors can derive.”

Citing reasons for this, the study, titled “Tax Incentives for Philanthropic Giving: A Study of 12 Countries”, said a new optional tax regime for personal income tax was introduced. Under that a taxpayer can choose between two structures. One structure, the older one, has higher rates and incentivises philanthropic giving. The other one has lower rates but does not incentivise donations. “These changes, coupled with the lowering of rates of personal income tax and corporate income tax over time, have reduced the generosity of the tax incentive structure,” the study said.

When it was pointed out that lower tax rates with fewer exemptions were nowadays considered a sound tax policy, Ingrid Srinath, director at the Centre for Social Impact and Philanthropy, Ashoka University, said: “We need to strike a balance between various goals of tax policy.” With revenues foregone on account of 80G deductions estimated to be under Rs 1,000 crore for 2021-22, there is considerable headroom to increase incentives as well as the ceiling on deductions, with a negligible impact on tax revenues, Srinath said.

Section 80G of the Income Tax Act provides deduction from one’s income for donating to specified charitable institutions.

Additionally, the study said the abolition of wealth tax and inheritance tax meant there was no possibility of providing incentives for charitable donations on these taxes.

V P Singh as finance minister had abolished inheritance tax in 1985 while Arun Jaitley in the same capacity had scrapped wealth tax in 2015. Transaction costs in gathering them were much higher than their collection. The study recommended the government re-introduce wealth and inheritance tax, and provide incentives on them for charitable donations, given the significant increase in inequality, particularly amid the pandemic.

The scale of recorded charitable donations in countries such as India and China is small compared to jurisdictions such as the UK and the US, even after accounting for differences in the level of income, the study said, citing the absence of wealth and inheritance tax as one of the reasons for this. “This logic (of removing the taxes) may not hold true anymore as with the digitalisation of tax returns as well as other measures, administrative costs are likely to have come down, whereas revenue collection from these taxes can be significant, given the increase in wealth held by the rich.”

Reintroducing these taxes, along with incentives on them for philanthropic giving, will not only result in additional tax revenue but will also increase the resources of the charitable sector, the study said.

When told that restoring the taxes would disincentivise the people to invest more at a time when more investment was required, Srinath, who provided technical inputs to the report, said the countries studied in the report -- the US, the UK, France, Brazil, South Africa, and South Korea -- had an inheritance tax, one of the most effective policy instruments against inequality.

“The USA and UK have a capital gains tax as well, and France a wealth tax. Renowned economists around the world have been advocating the restitution of the wealth tax, at least on the most wealthy, to address runaway inequality that has reached unsustainable proportions,” Srinath said. The study said during the pandemic, many countries changed tax incentives to encourage donations. In the sample of 12 countries, while the US and China increased the level of benefit, India did not do any such thing. “In India, the only change was the introduction of a new fund called PM CARES,” the study said.