The Hindu Business Line : A raw deal for trusts

NON-PROFIT organisations (NPOs), such as charitable trusts and registered societies, undertaking educational, scientific, research or welfare work are known to complement the role of the Government in helping society. It is only because of the realisation of the role played by NPOs that fiscal statues the world over confer on them income-tax exemptions under certain conditions. However, the amendments in Budget 2002 with regard to the taxation of charitable/ religious trusts would hinder their growth.

Under the current law, a trust is permitted to accumulate 25 per cent of their income for an indefinite period without any condition. This means that 75 per cent of the addition to income had to be spent on the objects of the trust. The Finance Act has significantly changed Section 11 of the Income-Tax Act, 1961. Hereafter, the trust is forbidden from accumulating or setting apart the entire income or even a part of it. The whole income is expected to be spent. Conditions have been imposed under Section 11 (2) and the Explanation to Section 11(1) is substituted. Section 11(1B) is replaced by a new section. Inter-trust donations will not be allowed except from the corpus or from the current year's income.

The effect of these amendments will be to force NPOs to spend the entire reinvested surplus within two years by treating it as income and subjecting it to tax after the fifth year. They are expected to get the approval of the assessing officer (AO) every year even if the surplus is within 25 per cent. Under the existing law, the only requirement is that the accumulation beyond 25 per cent of the income should be spent within 10 years on the objectives of the trust. This ensures that the trust will not have accumulation alone as its object. The income should be spent on the objects of the trust. The amended provision lays down that accumulation within 25 per cent should be spent within five years. Else, it will be taxed as income from the sixth year.

The term "Application for the objects of the trust" has been given a narrow interpretation. A distinction is now sought to be made between adding to the corpus through a donation and through a small surplus in the current account of the trust.

The change has come in for criticism from Dr Raja Chelliah:

"It cannot be argued either that this proposal is an anti-tax-avoidance measure. No tax issue is involved. And today the various activities undertaken by voluntary organisations run by public-spirited individuals is a heart-warming feature of the Indian social scene. Even from the narrow governmental finance point of view, their activities are of great advantage because these activities would enable the Government to save a lot of expenditure which it would otherwise have to incur." The amendment to Section 10 (23C), omitting the provision permitting accumulation of 25 per cent of the income for an unlimited period and limiting such period to five years, will hit the finances of trusts and prevent them from being self-reliant.

The other major amendment relates to the prohibition of payment or credit out of accumulation of one trust to another trust by treating such payment or credit as not amounting to application of income. Inter-trust donation will hereafter be permitted either from the corpus or from the current year's income and not out of the surplus credited to the corpus. These amendments will make the law more complicated. On the one hand, the Government reposes faith in the trust by omitting the requirement of publication of accounts in newspapers and by permitting accumulation of the whole income instead of only 25 per cent for five years.

On the other hand, payments credited to other trusts will hereafter be considered taxable in the hands of the payer trust even if the other trust spends the entire income on charitable objects.

In response to some of the criticisms about the radical changes proposed in the taxation of trusts, the Finance Minister, Mr Yashwant Sinha, made changes in the Finance Bill, when it was being debated in Parliament. The proposal for the five-year limit on income accumulation was dropped enabling trusts to accumulate for an unlimited period. However, such accumulation of income cannot exceed 15 per cent. Yet another safeguard was introduced. Whenever the income of the trust exceeded Rs 50,000, the accounts should be compulsorily audited.

As in every other walk of life, there are both bona fide and mala fide trusts. The Act confers no benefit on private discretionary trusts. Tax exemption covers only public charitable trusts. If there is misuse or abuse of the mechanism of the trust, it is the investigative wing of the Department that should look into the matter.

Recent amendments to the law of trusts indicates an absolute distrust of a useful tool for social change.

Quite often, courts have had to intercede to settle matters — in the Thirumalai Tirupathi Devasthanam and the Ramakrishna Mission cases, for instance.

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