New Delhi: The Finance Minister's introduction of a new section 115BBC under the Income Tax Act to tax all anonymous donations at a flat rate of 30 per cent will affect lakhs of charitable institutions across the country.
As a result of such a tax a large number of small and big non-government organisations (NGO's) engaged in charitable activities for the less privileged would have limited resources with them as most of these institutions will now have to pay a tax of 30 per cent on the entire quantum of their receipts comprising anonymous donations.
While this was apparently done with an aim to curb black money, the move would be taking away funds that would have otherwise helped run eye operation camps, educational institutions, charitable clinics etc.
Besides, it would also affect institutions such Helpage India that does remarkable work for the aged people and the SOS villages working towards upliftment of children.
Also box containers placed at various places soliciting anonymous donations would suffer 30 per cent tax now.
Our shastras preach about donating for charitable causes without expecting any fame for the same.
While there were a good number of voluntary donors who came forward to donate and such donations were thus included in the total income of charitable Trusts and Institutions the new law would be dissuade such voluntary donors.
If the Government was so serious about taxing anonymous donations to put a check on unaccounted income then it should atleast have permitted deduction of amount applicable for charitable purpose out of the anonymous donations collected and thus tax should only be imposed on the net surplus.
The exact extract of the new section 115BBC is reproduced hereunder for ready reference:-
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Section 115BBC
- Where the total income of an assessee, being a person in receipt of income on behalf of any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax payable shall be the aggregate of- (i) the amount of Income-tax calculated on the income by way of any anonymous donation, at the rate of thirty per cent and (ii) the amount of Income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i).
- The provisions of sub-section (1) shall not apply to any anonymous donation received by- (a) Any trust or institution created or established wholly for religious purposes; (b) Any trust or institution created or established wholly for religious and charitable purposes other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.
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- For the purposes of this section, "anonymous donation" means any voluntary contribution referred to in sub-clause (iia) of clause (24) of section 2, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed. The theme of taxing certain anonymous donations has also been explained by the Government in the Explanatory Memorandum to the Finance Bill, 2006. The relevant extract is as under:- Income of wholly charitable or religious trusts or institutions or partly charitable or religious trusts or institutions is exempt under the Income-tax Act subject to fulfillment of certain conditions. In order to tax unaccounted money being contributed to these institutions by way of anonymous donations, it is proposed to insert a new section 115BBC so as to provide that any income by way of anonymous donations of the entities referred to in that section shall be included in the total income and taxed at the rate of 30 per cent.
Anonymous donations received by the following entities shall be covered by the new section:-
- (i) any trust or institution referred to in section 11; (ii) any university or other educational institution referred to in section 10(23C) (iiiad) and (vi); (iii) any hospital or other institution referred to in section 10(23C) (iiiae) and (via); (iv) any fund or institution referred to in section 10(23C) (iv) (v) any trust or institution referred to in section 10(23C) (v)
The following anonymous donations shall not be covered:
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- (a) donations received by any trust or institution created or established wholly for religious purposes. (b) donations received by any trust or institution created or established for both religious as well as charitable purposes other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.
It is also proposed to define anonymous donation to mean any voluntary contribution referred to in sub-clause (iia) of Clause (24) of section 2, where a person receiving such contribution does not maintain a record consisting of the identity of the person making such contribution indicating the name and address of the person and such other particulars as may be prescribed.
A step by step analysis of the new section 115BBC would further reveal that there's more to it:
Presently it is stated that any voluntary contribution in respect of which the charitable trust/institution does not keep desired records then it would be deemed to be an anonymous donation.
Presently it is provided that in respect of voluntary donations if the name and address of the person contributing for voluntary donations are not maintained in such event these donations would be treated not as "voluntary donations" but as "anonymous donation" and thus subjected to a maximum marginal rate of 30 per cent tax.
The fear amongst the trusts and institutions is that the Government in addition to name and address of the donor may even insist on the PAN number in the future.
And this may even form part of the Annual Information Return.
In such a situation the genuine good work of Charitable Trusts and Institutions would suffer.
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There are thousands of organizations that collect anonymous donations on "Gurupurnima" day as Gurudakshina or Guptdaan under which the donor is not expected to reveal his personal details.
In any case even as per the present tax structure the voluntary donations so received by a Charity Trust or an Institution, is subjected to tax but the same gets deducted from the gross amount of money applied for charities.
However, the quantum of anonymous donation would not be deducted for the purpose of treating such anonymous donations as forming part of money applied for charitable purpose.
It is expected that from the list of names and addresses of the anonymous donors the tax department may again tap such donors to find out about the source of these anonymous donations and if no satisfactory answer is provided then it may be even treated as unexplained expenditure of the donor in terms of Section 69C of the Income-tax Act, 1961.
It is expected that due to these restrictions, genuine donors who are donating by way of anonymous donations may also shy away.
Charitable trusts such as the Lions Clubs, Rotary Clubs, the Junior Chambers also raise funds in hour of need.
They receive donations in cash as well as in kind but henceforth the new tax provision will take away 30 per cent of their gross cash collection out of anonymous donations.
Besides, practically it is difficult to maintain records of small donors. And charity at the time of national calamities could suffer.
A question arises whether collection of money by issue of Donation Coupons would constitute anonymous donation.
Well, if the counterfoil of such donations does not contain the details of name and address of the donor then the amount so collected through sale of "Donation Coupons" would be treated as an anonymous donation.
It is apprehended that at the time of tax assessment the charitable trusts and institutions may face a problem particularly when they have provided the list of donors name and address and thus got themselves exempted on being taxed as the anonymous donation but later on a letter from the tax department to such donor might reveal non existence of such person at the address so mentioned.
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In such a situation, the charitable trust would be subjected to tax on such amount at 30 per cent together with penal interest and a notice may also follow on the trust for concealment of income.
The situation would still be grim when a trust receives voluntary donations and provides a list of names and addresses of the donors and thus treats voluntary donations outside the ambit of anonymous donation and spends full amount during the year on charities and in later years during the course of tax assessment some portion of voluntary donations are taxed as anonymous donation due to non availability of the donor at the address and thus extra tax liability but no funds now available with the charity trust.
There could be a few shady organisations that indulge in charitable activities with no real intentions towards the same but such an act would mean punishing the genuine institutions as well.
In the present scenario, charitable trusts and institutions should as far as possible only accept corpus donations from their prospective donors which in any case is exempted under the Income-tax law and has no upper limit.
Likewise, in view of the changed tax laws it is better to have voluntary donations and not anonymous donations so as to a 30 per cent tax on the donation amount.
Just maintain records of name and addresses of the donor so as to justify your claim as a voluntary donation and not an anonymous donation.
Remember that out of the amount received by way of Voluntary Donation you can a paying Income Tax if you have spent atleast 85 per cent on charity but you get no tax deductions at all if it is an anonymous donation.
Many big charitable institutions that have a large membership base and whose members contribute small amount of money regularly would now be badly hurt with this new provision.
They would have to either pay 30 per cent tax on such anonymous donations or else start collecting donations only on monthly basis, maintain their details - name and address of the donor to the tax department which however may not be easy on a daily basis.
Likewise, if the anonymous donations of a charitable institution totals Rs one lakh and with no other source of income it spends the entire Rs one lakh on charity during the same year it would still have to pay Income-tax at the rate of 30 per cent on anonymous donations.
However it may be noted that the Diwali Mela Coupons, Winter Carnival Fete Coupons, Fashion Show Coupons/Tickets, Gala Fund Raising Dinner Coupons and Coupons/Tickets for Spiritual Retreats or Spiritual Education or lecture tickets/coupons, it is felt would be outside the purview of anonymous donation and thus the money so collected from these activities would be outside the purview of 30 per cent tax.
It is clearly provided in the new section that religious trusts as well as trusts carrying on religious as well as charitable activities would be outside the ambit of tax on anonymous donations.
Hence, the famous Lord Tirupati Balaji Trust, The ISKCON Trust, The Akshardham Trust and all other Trusts with Temples, Gurudwaras, Mosques would be outside the scope of tax liability in respect of anonymous donations received by them specially through the box collection known as anonymous donation.
The author is Tax and Investment Consultant at New Delhi for the last 35 years.
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