In a move that could lead to some charitable trusts losing their registration, the income-tax (I-T) department has started scrutinizing the returns they had filed earlier, two officials said.
This follows a government directive last year to these trusts to pay income tax on the revenue they earn from commercial activities.
“Since not many trusts have identified their activities as commercial, we are scrutinizing their previous returns to determine the nature of their income,” said a tax official, who asked not to be identified as he is not allowed to speak with the media.
The official declined to name any of the trusts.
An amendment to section 2(15) of the I-T Act—that redefined charitable purpose and became effective from 1 April—stripped institutions such as research agencies, trade organizations and awareness creating organizations of some tax breaks they had previously enjoyed.
The amendment said the “advancement of any other object of general public utility” shall no longer be considered a charitable purpose if it involves “any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business”.
This means a charitable trust selling greeting cards, calendars and other products will now have to pay tax on earnings from these.
The new law has led some organizations to stop selling these products or spin off their commercial activities to stay tax-exempt, Mint reported on 20 June.
The Central Board of Direct Taxes, the country’s top agency that oversees tax administration, is working on guidelines for compulsory scrutiny of the accounts of such trusts to ensure they pay taxes and don’t circumvent rules, Mint reported on 27 May.
“Though detailed scrutiny guidelines are yet to come, we have started scrutinizing their previous returns,” another official of the I-T department said on condition of anonymity.
“If I-T authorities find any income commercial, they can tax it. But registration should not be cancelled unless their main activity is taxable,” said Vikas Vasal, executive director with consultancy firm KPMG India Pvt. Ltd.
“If a trust loses its (charitable) status, whatever receipts the entity gets are liable to tax,” Vasal said.
According to Sudhir Kapadia, a partner at consultancy firm Ernst and Young Pvt. Ltd, genuine charitable activities carried out by trusts should not be taxed.
“Most of the NGOs (non-governmental organizations) do not work for profit and, therefore, their activities should not be taxed,” Kapadia said. “Moreover, how you define trusts carrying out charitable activities can be a challenge.”
Pointing to shortcomings in the amendment to section 2(15), the official quoted first said: “The proviso should be expanded to include corporate hospitals and educational institutions, which are making profits from the fees charged. Exemptions should be given to those who receive income from donations.”