The Finance Minister
Ministry of Finance Government of India
New Delhi 110001
Dear Nirmala Sitharaman,
I am writing this letter to seek an appointment to submit a representation on some of the clauses of the Finance Bill, 2020 which will adversely affect the not-for-profit sector and as a result weaken the work on poverty alleviation and other charitable causes.
Firstly I welcome your proposal as indicated in your Budget speech ‘to allot a Unique Registration Number to each charitable institution’. This will help in collating a country-wide database of all registered organizations.
I bring to your attention the following three proposals which we consider would adversely impact the functioning of non-profit organizations in India. These proposals, if implemented, will increase administrative compliance manifold both at Government level and assessed level, create a challenging environment for voluntary organizations and will create hurdles in the achievement of SDGs as also the delivery of services to the poor and the needy. These proposals are:
1. Immediate revalidation of registration under section 12A or 12AA (between June 2020 and January 2021) and renewal every five years.
2. Immediate revalidation of section 80G certificate immediately (between June 2020 and January 2021) and renewal every five years.
3. Report on details of each donation, including donors’ PAN numbers, to be allowed deduction under section 80G.
I identify some of the key implications of these proposals:
1. Section 12AA Revalidation & Periodic Renewal
About 2.17 lakh 1 non-profit organization are registered under section 12A/12AA. This allows them protection from income tax, as long as they file Tax Returns. All tax returns must be filed online, and many are subjected to scrutiny under CASS (Computer Assisted Scrutiny Selection). It is our experience that most large charities are covered under scrutiny. Any organization that does not comply with the conditions of exemption is disallowed the exemption for the year. If there is continuing non-compliance, 12A/12AA registration can be revoked. With effect from 2019, this can also be revoked for non-compliance under any other law.
I understand that in case of any non-compliance of current tax provisions, an organization would need to be examined if its tax exemption status should continue. However, it does not seem fair to subject all organizations, who are otherwise complying with all current provisions, to similar scrutiny.
If 12A/12AA registration is revoked for any reason, it has enormous financial implications for the organization. Its assets, including land and buildings, are valued at market prices, and liabilities deducted. The net worth is treated as accreted income and charged to tax @ 42.744%. The market value of land owned by many old institutions has increased enormously. Many schools, temples, churches, hospitals, will not be able to settle this demand without selling off their land and buildings. They will just cease to function, creating enormous hardships and disruption on such entities.
With imminent revalidation and periodic renewal of 12A/12AA, many non-profit organizations operating in the interior will likely end up losing their 12A/12AA simply because they were not aware or failed to provide the necessary documents. This could result in prolonged litigation and possible denudation of the religious and charitable landscape. The impact on the public at large cannot be visualized at this stage but will be enormous, possibly traumatic.
The renewal process itself will be a drain on the government machinery. Though it would be for the Government to assess the viability of getting all the organizations’ 12A assessed in one go, considering there are only 7 Director (Exemption) offices, the enormous burden that it would put on already thin resources could result in arbitrariness, if not extraneous demands while examining the 12A/12AA registrations.
My Proposal: Considering the existing mechanism of registration and compulsory filing of an annual tax return by such entities, where every non-profit organization’s genuineness of its charitable activities is examined, this provision appears entirely unnecessary and should be withdrawn. Present mechanisms 2 introduced last year, provide the Government sufficient oversight over misuse or non-compliance of the charity exemptions. In case of continuous default in filing of Income Tax returns, the Govt may consider such provision like a cancellation.
2. Revalidation and renewal under Section 80G
Only around 67,000 3 non-profit organizations are approved under section 80G. The government has always encouraged the wealthy to donate to social causes, and this is also recognized in the National Voluntary Policy as approved by the Government of India. This is an important pillar of Indian philanthropy. The Government has already tightened rules for individual donations by restricting cash donations to Rs. 2000/-.
I understand that the Government would like to ensure that only genuine donations are provided tax benefits. There would be only a few organizations that may be resorting to malpractice in donations. Budget estimates show that annual loss of revenue on account of 80G deductions is Rs 2,516 4 crores. Even assuming that 20% of this leakage is due to fake donation receipts, the cost of the exchequer would be around Rs 500 crores. This would be much less than the administrative cost of revalidation and periodic renewal of 80G. In any case, there is every likelihood that the fake charities will again enter the fold and continue bleeding the exchequer.
My Proposal: It is proposed, that the Income Tax authorities thoroughly examine the genuineness of charitable organizations at the time of assessment. This would be the most effective and efficient way. In any case, the Government has already brought the proposal of matching donations between donor & donee. This would further put curb on any incorrect section 80G claims by individuals.
Therefore, it is submitted that this provision will not yield any benefits and will merely increase paperwork both for the Tax Department and the organizations. Our plea is that the proposal should, therefore, be withdrawn.
3. Donor’s PAN for 80G Deduction
There is also a proposal requiring charities to submit annual returns giving details of each donor, including PAN of each donor. The Department will match the deductions claimed by donors against this return. If the donations do not, the donor will be denied a deduction.
In principle, this appears to be a welcome and more effective alternative to the periodic renewal of 80G approval. However, there are a number of practical issues. Firstly, the provision does not exempt online donations or donations made through crossed account payee cheques, where the transactions can easily be validated. Secondly, it does not offer a floor limit for the tabulation. The listing and providing of all donations from Rupee 1 upwards will be a humongous task. Many of them will not even be able to undertake this and would be forced to opt-out of 80G altogether. Thirdly, online donations will be affected as most donors do not always carry or remember their PAN. Some are also averse to sharing it online. All this will affect hundreds of thousands of organizations across India and reduce the self-dependence of non-profit organizations on Indian funds as also the propensity to give to charity.
My Proposal: It is submitted that the proposal for uploading and internal matching of donations may be modified to apply only to donations more than Rs. 10,000 each, whether made in cash or by cheque/bank transfer.
These amendments proposed by the Finance Bill, 2020 are also not in line with the National Voluntary Policy as adopted by the Atal Bihari’s Government after consultations with the sector which is now the official policy of the Government of India. It suggests explicitly that Government will simplify and streamline tax provisions. The budget proposals mentioned above will not be in line with ‘Ease of Business’ for charities which would be spending a disproportionate amount of time in ensuring tax compliances. We also must not forget that it impacts not only large charities but all the 2.17 lakh non-profit organizations.
In view of the above, I request that the tax proposals mentioned above should be put in abeyance and in light of existing rigorous assessment processes which are in any case undertaken by most charitable organizations.
William Nicholas Gomes
Human Rights Activist and Freelance Journalist
York, United Kingdom