Religious and charitable trusts could suffer a decline in profitability if the government accepts the working draft of the Income-Tax Bill, which was submitted last week. The draft has recommended that tax should be waived only on property which is used for achieving the trusts primary objective; the number of securities in which the trusts can invest should be limited; and religious contributions by donors should be taxed.
The expert group set up to draft the new bill had earlier indicated its line of thinking in a report. This sparked off representations by charitable and religious institutions to the expert group, the revenue department and Union finance minister P Chidam-baram. However, a reading of the draft bill indicates that these protests have been of no avail.
Some of the expert groups members said it had internally decided not to take the representations into account. Unlike their counterparts who drafted the Companies Bill, the IT Bill expert group had not promised to take cognisance of representations made during the public debate on its report.
Both committees followed a similar procedure of first finalising a report, which was circulated for public debate. This was followed by submission of a working draft of the bill. The government has already made the expert committees working draft the basis of the Companies Bill. A similar procedure is expected to be followed for the new Income-Tax Bill when it is moved during the winter session of Parliament.
Operating in conjunction, the three provisions will stifle the capabilities of charitable and religious trusts to generate donations. Simultaneously, an informal cap will be imposed on the capacity of such trusts to generate tax-free earnings. This will obviously have an adverse effect on their profitability.
Till now, a trust could seek tax waiver on income arising out of activities which were incidental to its main objectives (like running a school, college, hospital or even temple). Under the recommended provisions, tax waiver can be sought only for activities which are necessary for carrying out ``the primary objective of the trust. If the recommendations are accepted, Hamdard Dawakhana (Wakf) Delhi, for instance, will not be able to claim tax waiver on Rooh afza production. Similarly, the Ramjas and DAV trusts which hold large tracts of property will no longer be eligible for tax waiver on rentals earned from such property, unless it is being used to run schools and colleges.
The committee has also suggested that the number of approved investments against which such trusts can claim tax waiver should be reduced from 12 to four. This will ensure that return on investments for such trusts is reduced. While selecting the list, the expert group has taken into consideration the safety element. In other words, the phenomenal returns enjoyed by such trusts through investments in real estate and other investments will be scaled down.
The move to limit investment opportunities in real estate, while permitting investments in safe securities, had particularly irked Muslim trusts. These trusts have argued that usury is against their religious belief. However, the expert group feels the growing popularity of Islamic banking offers a solution to this problem. The group has also suggested that the government could consider involving the UTI to evolve a scheme to meet the requirementsof this class of trusts.
Additionally, the group has argued that a tax on donations will not limit the inflow of donations. A case in point is the Tirupati Devasthanam, where devotees donate without taking into account tax benefits to be reaped. The group has argued that religious donations should be taxed since they are a fall-out of personal beliefs, unlike donations for charitable purposes which have social benefits.
