Taxing charitable trusts

As per a new section included in the Direct Tax Code Bill (DTC) 2010, trusts working exclusively for religious communities will no longer be treated as No Profit Organizations (NPO) and their income will be subject to 30 percent tax. Nor is that all. The trusts will also have to pay an annual wealth tax of one percent on the total value of their property. These provisions will come into force from April 2012. Religious and charitable trusts across communities are agitating against these punishing changes, reported Daily News and Analysis (DNA) on February 14, 2011.

The Income Tax Act 1961 which has been in force for half a century has exempted all charitable trusts that were set up before April 1, 1962 for a particular community or caste. The new provisions will adversely affect the activities of trusts which run temples, mosques, etc and provide free hospitalization, education and shelter to the needy. This may prove a disincentive for prospective donors who will no longer be able to claim deduction of 50 percent of the donation from taxable income if the trusts are NPOs. Another problem that arises is the definition of an NPO under DTC, which has granted exemption to religious trusts or institutions from payment of income tax so long as it has not been restricted to a particular religion or caste, mentions The Economic Times (ET) on February 14, 2011. A large number of such trusts cater for the poor and destitute belonging to the Muslim, Jain, Catholic, Parsi and Hindu communities.

Various trusts have come together to form a Federation of Charitable and Religious Trusts that has taken up the matter with the parliamentary standing committee on finance chaired by former finance minister Yashwant Sinha, DNA reports. According to the Federation the new draft bill will create ambiguities in the definition of religious trusts and take away tax exemptions. Senior advocate and tax expert Homi Ranina told DNA that while NPOs are exempt from paying income tax under the new DTC, trusts working exclusively for a particular religious community will not be treated as NPOs and will be subjected to the levies.