Finance Minister Mr. Arun Jaitley
presented the Union Budget 2016-17 in Parliament on Monday, 29th
February 29, 2016.
Here are some issues of
concern/interest to the voluntary sector in India
1) Levy of tax where a
charitable institution ceases to exist or converts into a
non-charitable organization.
A charitable Trust, Society,
Section 8 Company or an institution carrying on charitable activities
may voluntarily wind up its activities and dissolve or may also merge
with any other charitable or non-charitable institution, or it may
convert into a non-charitable organization. In such a situation, the
existing Income tax law does not provide any clarity as to how the
assets of such a charitable institution should be dealt with.
In order to ensure that the
intended purpose of tax exemption availed by a trust or institution
is achieved, a specific provision in the Act is required for imposing
a levy in the nature of an exit tax
which is attracted when the organization is converted into a
non-charitable organization or gets merged with a non-charitable
organization or does not transfer the assets to another charitable
organization.
Accordingly, it is proposed to
amend the provisions of the Income tax Act and introduce a new
Chapter to provide for levy of additional income-tax in case of
conversion into, or merger with, any non-charitable form or on
transfer of assets of a charitable organization on its dissolution to
a non-charitable institution.
2) Phasing out of Deductions
and Exemptions
The Finance Minister in his Budget
Speech, last year had indicated that the rate of corporate tax will
be reduced from 30% to 25% over the next four years along with
corresponding phasing out of exemptions and deductions.
a) Phasing out 35AC --
Expenditure on eligible projects or schemes
Donors enjoy 100% tax deduction on
donations given to institutions having registration under 35AC.
It is proposed that no deduction
shall be available with effect from 1st
April 2017 (i.e. from Financial Year 2017-18 and subsequent years).
b) Phasing out 35CCD --
Expenditure on skill development project.
Weighted deduction of 150% can be
enjoyed on any expenditure incurred (not being expenditure in the
nature of cost of any land or building) on any notified skill
development project by a company.
Deduction shall now be restricted
to 100 per cent from 1st
April 2020 (i.e. from financial year 2020-21 onwards
c) Phasing out Section3
5(1)(ii) -- Expenditure on scientific research.
Currently the available tax
deduction is 175% of any sum paid to an approved scientific research
association which has the object of undertaking scientific research.
Similar deduction is also available if a sum is paid to an approved
university, college or other institution and if such sum is used for
scientific research.
It is now proposed to phase this
out as follows:
Deduction shall be restricted to
150% from 01.04.2017 to 31.03.2020 (i.e. from financial year 2017-18
to financial year 2019-20) and deduction shall be restricted to 100%
from 01.04.2020 (i.e. from financial year 2020-21 onwards).
d) Phasing out 35(1)(iii) --
Expenditure on research in social science or statistical research.
Weighted deduction from the
business income is allowed to the extent of 125% of contribution to
an approved research association or university or college or other
institution to be used for research in social science or statistical
research.
It is now proposed that deduction
shall be restricted to 100% with effect from 01.04.2017 (i.e. from
financial year 2017-18 and subsequent years).
3) Service Tax
The Finance Minister had last year
raised service tax rates from 12.36 per cent (including education
cess) to 14 per cent; this was later bolstered by a 0.5 per cent cess
for "Swachh Bharat".
In this Budget, the Finance
Minister has not raised service tax, but he has announced a "Krishi
Kalyan" cess of 0.5%, which be levied on
all services.
As a result, the total service
tax liability, including the new cess announced, will now rise to
15%.
Service tax is levied on all
services except a small negative list.
The Negative List entry covering
‘educational services by way of (a) pre-school education and
education up to higher and secondary school or equivalent, (b)
education as a part of a curriculum for obtaining a qualification
recognized by any law for the time being in force and (c) education
as a part of an approved vocational education course and the
definition of ‘approved vocational education course’ are being
omitted. However, the exemption shall continue by way of exemption
notification No. 25/2012 – ST.
4) Amendment to FCRA 2010
In the Foreign Contribution
(Regulation) Act, 2010, the following proviso shall be inserted in
Section 2(1)(j)(vi) and shall be deemed to have been inserted with
retrospective effect from the 26th
September, 2010,namely:
“Provided that where the nominal
value of share capital is within the limits specified for foreign
investment under the Foreign Exchange Management Act, 1999, or the
rules or regulations made there under, then, notwithstanding the
nominal value of share capital of a company being more than one-half
of such value at the time of making the contribution, such company
shall not be a foreign source.”
This will mean that companies like
HDFC Ltd., Axis Bank etc., which are companies registered under the
Indian Companies Act, but because of more than 50% Foreign Direct
Investors (FDI) were until now treated as ‘foreign source’ under
FCRA 2010, will find relief and so will their NGO partners who do not
have FCRA registration or prior permission.
5) Corporate Social
Responsibility (CSR)
The Finance Minister announced
nine focus areas of development of which education, skills and job
creation was one of the key focus areas.
It is proposed to set up a Higher
Education Financing Agency (HEFA) with an initial capital base of Rs.
1,000 crores. The HEFA will be a not-for-profit organization that
will leverage funds from the market and supplement
them with donations and CSR funds, according
to the finance minister. “These funds will be used to finance
improvement in infrastructure in our top institutions and will be
serviced through internal accruals” Mr. Jaitley said.
Companies may feel more
incentivized to give to HEFA if there is tax destructibility. Also,
it makes CSR reporting easy and the shift from accountability moves
from the company to the 'Government NGO' (GONGO).
It's interesting that year after
year the Government creates new initiatives and expects CSR funds to
flow into these initiatives, be it Swach
Bharat Kosh or Clean Ganga, the Prime
Minister’s Relief Fund or now HEFA.
Companies often contribute to
funds like the Prime Minister’s Relief Fund to be in the good books
of the Government, enjoy 100% tax deduction and minimizing
accountability and CSR reporting!
Noshir Dadrawala
CEO - Centre for Advancement of Philanthropy
for any further queries, please write to connect@capindia.in
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