Charitable tax code

The draft Direct Tax Code released by the Finance Minister Pranab Mukherjee on August 12, 2009 has several clauses pertaining to charitable trusts. The Centre for Advancement of Philanthropy newsletter Philanthropy (September-October 2009) published some of the relevant clauses:

Charitable organizations will not be allowed to carry forward unspent income from one financial year to the next. If they do, they will have to cough up 15 percent tax on the same! The same principle will apply for multi-year grants — organizations will not be able to set aside or accumulate funds for long-term projects. Income and expenditure will have to be accounted on cash basis only. In particular, grant-making agencies based in India will be affected the most.

"Though surplus of one year will be taxed, it may be difficult for the NPO (non profit organization) to bring forward deficit of a past year, and set it off against the surplus. Thus, if you spend borrowed money for a project, you may end up paying tax when the grant is actually received next year.

"Further restrictions are being placed on incidental business activities. For example, a charitable organization selling greeting cards may be able to do so only if these are produced by the beneficiaries.

"Concept of ‘Charitable Purpose’ is proposed to be replaced by ‘permitted welfare activities.’

"Approval under 35AC (100 percent deductibility for donors) will be discontinued. Charitable organizations will be able to offer a maximum of 50 percent deductibility to their donors.

"These changes are likely to come into play with effect from April 1, 2010.

"On the positive side, NPOs will be able to invest surplus funds in share market or private banks. They will also not be required to pay 30 percent tax on anonymous donations.”