Budget 2018: Why it is time to reconsider income tax exemption given to charitable institutions
If rendering noble services can beget one income tax exemption, there could other claimants for this honour
The Narendra Modi government has had an excellent track record of crackdown on black money principally through demonetisation of high denomination notes, rollout of goods and services tax (GST) and activation of the defunct anti-benami properties law. But it has been conspicuously silent on the issue of dubious charities. Unless a frontal attack is made on such pretenders by fluttering their dovecots --- taxing them --- its claim of giving no quarters to crooks would be scoffed at.
The income tax law historically has been guilty of mixing up noble deeds with charity. Education and medical relief are two chief elements of charitable purposes written into the income tax law. And if you fulfill a charitable purpose, you do not have to pay income tax on the income thus earned. Period. This libertarian approach to charity has spawned institutions that don’t even pretend to practice charity. There are colleges and deemed universities galore as well as hospitals all purportedly run by charitable institutions that fleece students and patients respectively. The Supreme Court has given its thumbs up to this libertarian approach in numerous cases by saying income tax exemption does not presuppose ‘eleemosynary’ activities i.e. giving away goods or services free of cost --- selling goods and services gratis.
In number of cases CIT v. Breach Candy Swimming Bath Trust(1955) 27 ITR 279 (Bom) and The Trustees of the Tribune, In re (1939) 7 ITR 423 (PC) it has been observed by the Honorable courts that it is not a necessary element in a charitable purpose that it should provide something for nothing or for less that it costs or for less than the ordinary price.
In other words, an eleemosynary element is not essential. Medical relief does not mean free treatment or treatment at less than the ordinary price for all patients. A hospital may be established for a charitable purpose, although, in order to provide itself with revenue apart from voluntary subscriptions, it runs special wards for patients who pay a full price
So much so today most of the hospitals in the private sector are run by charitable trusts, with corporate hospitals paying income tax being few and far between. College and deemed universities are owned by people ranging from film stars and politicians among others. They not only beget income tax-free status but also facilitate laundering of black money due to their touch-me-not status. That they cannot distribute profits or otherwise benefit the authors of trusts has hardly bothered their wily creators who know how to make money on the sly. More on the nuts and bolts of this some other time.
Let there be a liberal regime for donors so that who give wholeheartedly to the poor and needy from out of their taxable income beget tax break. Section 80G already does this. It can further be liberalised if needed but for god’s sake let us not give quarters to those who make a living out of charity.
Let us not confuse noble deeds or purposes with charity. They are as distinct from each other as chalk is from cheese. To be sure, imparting education is the noblest of deeds. Equally noble is providing healthcare. But if rendering noble services can bring about income tax exemption, there could other claimants for this honour like publishers who can say they serve the noble cause of disseminating knowledge. News channels and newspapers too can lay claim to income tax exemption if the government of the day deigns to further liberalise the definition of charitable purpose in the income tax law.
Religious trusts stand on a different footing in that they spend all the offerings on the poor like providing food, for instance and other public activities although it must be conceded that dubious amongst them have been lending themselves to money laundering too.
Finance Minister Arun Jaitley should start with educational institutions and hospitals run by charitable trusts in the forthcoming budget. They must be taxed like any other business. Period. Wrenching away tax exemption would take the sheen away from charitable trusts created for these purposes. Companies would transparently fill the void. There is no reason why for-profit companies cannot run educational institutions. The façade of charity as it is does not fool anyone. Students and patients sometimes try to prevail over the managements of these institutions, trying to explain that being charities they should not be fleecing their customers. But their pleas go in vain.
(The writer tweets @smurlidharan)
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