Chennai: Now, even animals have a reason to dread the taxman.
Thanks to a tax law passed last year, several wildlife groups such as the World Wide Fund for Nature (WWF) and other not-for-profit organizations such as Child Relief and You (CRY) have ceased selling greeting cards, calendars and other products or have spun off their commercial arms to stay tax exempt.
The funds from such sales provided valuable financing for emergencies as well as for lesser-known causes embraced by such conservation groups. These also offered more flexibility in spending than the money received from donations, which are often restricted by the donor to specific causes.
The country’s Income-tax Act defines a charitable entity as one that works in any of these areas: relief for the poor, education, medical relief, and advancement of general public utility. But companies not into any charitable cause were also claiming tax exemption stating that their businesses aided the advancement of general public utility.
Eventually, then finance minister P. Chidambaram, in his 2008 budget, amended the law to state that the “advancement of general public utility” would not be considered charitable if it involved any activity related to trade, commerce or business for a cess, fee or any other consideration.
“When the finance minister (Chidambaram) made his speech in Parliament, he said that genuine charitable organizations will not be affected by this law,” said Ravi Singh, chief executive of the Indian arm of WWF, the world’s largest independent nature conservation group. “But that hasn’t been the case.”
Shishir Jha, a spokesman for the Central Bureau of Direct Taxes, or CBDT, defended the amendment. “In many cases when we rejected their (companies’) application, they went to court and got a ruling in their favour,” Jha said. “This amendment is good news as voluntary organizations should not be raising bills on others.”
Nearly 61,000 charitable entities are registered with the government’s tax exemption unit, including the Board of Control for Cricket in India (BCCI), the world’s richest cricket board.
“Any tax law is a double-edged sword. So is this one as it tries to cut across bogus organizations… On the other hand, real NGOs (non-governmental organizations) cannot carry out commercial activity to support themselves,” said Vikas Vasal, executive director at auditing firm KPMG.
Conservation groups such as WWF and the Bombay Natural History Society, or BNHS, which are registered under the “general public utility” clause for tax exemption, stopped selling their merchandise last year after a circular regarding the change in the tax law was published.
These groups fear losing not just their exemption status, which could lead to the taxation of even donation money, but also the tax incentives offered to their donors.
WWF got less than 10% of its funding from merchandise sales last year. BNHS, a group with which noted birdman Salim Ali was associated, received less than 1% of its money through poster sales, auctions and benefit music concerts.
Though the amounts were small, they helped the organizations’ conservation efforts, especially in a year when donations were drying up amid the economic downturn.
“It is very bad timing on the part of the government… The global meltdown has affected humanitarian and environmental efforts more than any other field,” said Romulus Whitaker, a renowned wildlife conservationist who worked along with WWF and the Indian government to investigate the cause of the recent gharial deaths in the Chambal river. “Wildlife and environment is 10 times, 100 times more important than finding cancer cures. It is about curing the planet.”
In December 2007, about 50 gharials, of the remaining 1,300 such endangered crocodiles in India, were found dead in the National Chambal Sanctuary that protects a 400km stretch of the Chambal river flowing through Rajasthan, Madhya Pradesh and Uttar Pradesh.
WWF India dipped into its revenues from merchandise sales to investigate the deaths and mounted an effort towards fresh-water conservation.
This year, WWF has had to reduce its expenditure on environmental education by up to 70%. BNHS used income from merchandise sales to create awareness on endangered bird species. That source has now completely dried up.
“We speak about young ministers in our cabinet and then we kill the patriotism of other youngsters involved in causes such as wildlife conservation,” said Divyesh Parekh, head of marketing at BNHS, who fears that he and his three young employees may end up losing their jobs.
CRY, an organization working for the rights of underprivileged kids and registered under the “education” limb of the tax law, is also not taking chances.
CRY continues selling new year greeting cards and hosting events to raise contributions amounting to 5-6% of its total revenues, but through a partnership firm it set up in March.
As a result, the main organization continues to fit the definition of a charitable organization not undertaking any commercial activity and is tax exempt. The new partnership firm, RPM and Co., has to pay taxes on the income it earns.
“The way the law has been framed, it is leaving a lot of things ambiguous and a lot of things open for the interpretation by the assessing officer,” said Ila Hukku, director for CRY. “It has added a degree of complication to a work which in any case is not that easy.”
BNHS is also working on setting up a separate company that will sell merchandise and will donate its income to the parent company. This could keep the new company free of tax liabilities. These organizations are hoping current finance minister Pranab Mukherjee will offer better clarity in his budget on 6 July.
One solution could be to tax just the profits from commercial activities of charitable groups, suggests Sanjay Agarwal, a professional accountant who works closely with AccountAid, a legal and accounting consultancy for not-for-profit firms.
“The new law is triggering more paper entities and that should not be the objective of good legislation,” he said.
In the hunt
Examples of entities claiming tax exemption as a charitable general public utility
Gujarat Maritime Board: A public sector company that develops ports
BCCI: The world’s richest cricket board
Andhra Pradesh State Road Corporation: Public sector bus operator in Andhra Pradesh
Andhra Pradesh Riding Club: Organization that runs a race course