DR. WAQUAR ANWAR analyses the major differences between the proposed Direct Taxes Code and the existing Income Tax Act, and sees a vindictive attitude in drafting of the DTC.
Direct Taxes Code (Proposed) is different from the Income Tax Act as far as charitable or religious institutions are concerned. It was expected that the new legislation shall improve upon the Act already existing so that compliance may become easier for and attractive to income tax assesses. It is an established fact that easy tax laws attract better compliance. This is one of the objects of the new legislation in the form of Direct Taxes Code (DTC) that is intended to replace the cumbersome Income Tax Act (ITA). An analysis of the proposed DTC vis-à-vis ITA shows that this aspect has been missed when it comes to providing tax benefits for organisations that are engaged in charitable or religious activities. Discussions in the following paragraphs are intended to show major differences of this proposed legislation with the existing law with regard to religious institutions.
(A) DTC has rightly termed the entities engaged in charitable and religious activities as “non-profit organisations.” Agreeably, providing tax benefits is justified only because these institutions are not making profits. The conditions for such tax benefits as described in DTC [section 314(169)] are generally in agreement to what already exists in ITA. However, there is a major departure. ITA considers charitable organisations and religious ones as two separate entities. DTC has done away with this difference and considers religious entities to be basically non-profit organisations. It has made the latter a sub-group of the former. So now for any organisation to be treated as religious it should first be non-profit organisation as defined in the DTC. The definition of non-profit organisations in the DTC is in the nature of charitable organisations as described in ITA. Thus under DTC an organisation to be treated as religious entity should first be charitable as defined therein. This has resulted in withdrawing tax benefits available to religious organisations. This can easily be understood if we peruse at the relevant provisions of ITA.
(i) ITA has defined charitable purpose [section 2(15)] and has not defined religious activity. Tax benefit to donors under section 80G of ITA is available only in the case of charitable institutions [80G(5)]. In other words, the benefit of section 80G is not available to religious institutions.
(ii) Section 13(i)(b) of ITA says that any institution for charitable purposes will not get the tax benefit if it is created for the benefit of any particular religious community or caste. In other words, religious institutions can be created for the benefit of any particular community. The provisions of DTC hit this provision of ITA.
(B) ITA provides that where a charitable or religious institution is not able to apply 85 per cent of its income during a year it may accumulate that shortfall in application for five years [section 11(2)(a)]. Now DTC has reduced that period to three years [section 949(f)]. This tightening of belt may be uncalled for and it is in the nature of hitting below the belt.
(C) A new provision of depositing the amount received in the last month of the financial year in a specified deposit account scheme that shall be prescribed has been inserted in DTC [section 94(e)]. This is also in the nature of tightening the belt. DTC, as such, was meant to be an easing out exercise. Such subtle, if not blatant and hard, hitting provisions make it unwelcome, if not draconian.
(D) ITA does not differentiate between capital and revenue expenditure for application. Even capital expenditure justified for any institution is considered a genuine application in the course of attainment of its religious or charitable purposes. It appears that DTC is hitting on this area too. Section 94(a) of the Code provides that expenses for earning receipts of a “not for profit” organisation shall be allowed if it is not in the nature of capital expenditure. This particular provision, although inserted in a refined manner, is capable of making goings tough for such institutions. In fact, one of the benefits, if not the justification, for accumulation or setting apart funds up to five years was to let institutions arrange funds for big projects, probably of capital nature. The proposed provision of DTC will give huge powers to assessing officers to object to genuine expenses calling them to be of capital nature. Such a difference between revenue and capital expenses is uncalled for and is not in conformity with genuine activities hitherto getting tax benefits.
(E) Another negative attitude in drafting of DTC may be noted in respect of the concept of incidental business. ITA permits business of a charitable or religious institution that is “incidental to the attainment of objectives” of a trust or institution [section 11(4A)]. The scope of this provision has been badly affected by using a limiting expression of “business incidental to charitable activity” [section 103(a) of DTC]. Thus any possibility of any religious institution engaged in a business that is incidental to the attainment of its main activity has been vitiated. So there is no scope left for (say) printing and publication activities under the banner of a religious institution in the course of attainment of its main objective as the books and magazines are tradable items involving business activities in the nature of purchase, subscription, advertisement and sale.
There appears to be a vindictive attitude in drafting of the DTC although it was basically aimed at a positive exercise for smooth, blemish-free legislation so that compliance of the law may be willing and hassle-free. The draft of DTC needs to be revised ab-initio with a positive approach.