A strong and vibrant social sector, with companies, communities and the state collaborating to solve social problems, is integral to nation-building. But across Asia, the growth of the social sector is impeded by fluctuating, confusing regulations, funding shortfall and a trust deficit among key stakeholders. This is a key finding in the Doing Good Index 2022 released recently by the Centre for Asian Philanthropy and Society (CAPS). The report, covering 17 Asian economies, indicates that while there has been a push towards ease of doing business in India, the same cannot be said for the ease of doing good. With changes in the Foreign Contribution (Regulation) Act (FCRA), obtaining requisite approvals to receive foreign funding has doubled since 2020, often taking as long as two years.
FCRA law changes do not, of course, impact domestic philanthropic funding. And in fact, given the phenomenal wealth increase in India, domestic individual and family philanthropy should catalyse funding for the country’s development needs – in 2021 alone, the country’s wealthiest could have added USD 9 billion to the funding pool had they been as generous as their counterparts in the United States.
An enabling policy and regulatory environment can help unlock this vast pool of private philanthropic funding, similar to the impetus provided by corporate law CSR provisions to corporate funding development needs.
In the context of promoting individual philanthropy in India, it is pertinent to look at key tax provisions that impact philanthropic contributions by individuals. There is room to refine some of these provisions, as discussed below.
Income tax deduction for donations: Individuals get a 50 percent income tax deduction for donations to non-profit organisations (NPOs) subject to an overall ceiling of 10 percent of total gross income (100 percent deduction is restricted to government-led funds like the PM’s National Relief Fund). As per a recent study of tax incentives for philanthropy across 12 countries (including the USA, UK, Brazil, China, South Africa, and Mexico), India is the only country other than Bangladesh which restricts the deduction to less than 100 of the amounts donated. India is also amongst the few countries (others being South Africa, Brazil, Mexico and Bangladesh) that have the lowest ceilings on the amount that can be claimed (10% in India, 30% in China). There is, therefore, a case for increasing both the rate of income tax deduction and the aggregate ceiling.
Exemption from GST for donations: Contributions to NPOs for charitable activities are not subject to GST. However, in November 2021, the Maharashtra Authority for Advance Ruling concluded that the applicant charitable trust would be charged 18% GST for grants received on the basis that the trust’s activities of providing services to orphans, homeless children and destitute women did not qualify as ‘charitable activities’ as defined under the state’s GST laws. While the advance ruling is case and state specific, it does create an element of uncertainty in the minds of donors and NPOs. Unambiguous, beneficial interpretation of extant laws would help to promote philanthropic efforts and collaborations between wealth creators and NPOs.
Income tax exemption for registered NPOs: Income tax exemption is available for incomes (including by way of donations) of NPOs that is applied towards charitable purposes within India. Income which is accumulated or set apart for application towards charitable objects is also exempt, provided such accumulations do not exceed 15% of the income (such accumulated amounts should get utilized within five years).
Taxability of in-kind contributions: Contributions by way of assets, like an individual’s shareholding in a company, constitute a taxable transfer triggering capital gains tax unless such transfer is by way of an irrevocable trust. Moreover, the shares need to be converted into prescribed modes of investment within one year, failing which, they become taxable in the hands of the NPO. Similarly, any other contributions made with a specific direction to form part of the corpus of the NPO are also required to adhere to these specified investment modes. Since wealth is often concentrated in the form of equity stake held in companies and similar assets, should the transfer of such assets for philanthropic purposes be tax-neutral? Income tax laws do provide for such tax neutrality if the assets are transferred to a private irrevocable trust for the benefit of relatives. If the transfer of wealth to one’s children and other relatives is not taxed, a transfer made to a private philanthropic foundation merits similar tax neutrality without imposing restrictions on converting the assets into specified modes of investment.
Further, since private foundations are typically set up by way of a trust or a Section 8 company (the latter tends to be the preferred entity form given more robust compliance/governance under the Companies Act, 2013), there is a case to extend tax neutrality not just for the contribution of assets (transfer) by way of irrevocable trust but to a Section 8 company as well. Moreover, extant general anti-avoidance provisions under the income tax law should prevent any abuse of such incentives for tax avoidance.
One may ask whether individuals engage in philanthropy to get a tax rebate. The answer from most philanthropists in India will be an emphatic ‘no’ if you look to the sizable, inspiring philanthropic efforts of individuals like Azim Premji, Nandan & Rohini Nilekani, Piramal family, Anu Aga and family, Ashish Dhawan, Nithin and Nikhil Kamath, etc. They give because they believe in the causes they support, the impact being created on the ground by NPOs, and because they believe they can contribute to nation-building.
It could be argued that income tax rates in India have been declining consistently over the last 30 years. The removal of wealth tax and inheritance tax has further reduced the benefits that donors can derive from tax incentives for giving. Why, then, are tax incentives needed to promote philanthropy?
Firstly, tax incentives can ‘greenlight’ government support for wealth creators participating in nation-building through philanthropic efforts. Secondly, massive gaps in India’s achievement of the Sustainable Development Goals, clubbed with constraints on government social sector spending, merit state support for accelerating philanthropic contributions. Lastly, it is equitable to align tax provisions for setting up a private philanthropic foundation with that for setting up a private family trust.
To enable evidence-based policymaking, a systematic study may be undertaken using government data on the quantum of individual philanthropic giving (distinct from CSR funding), and the impact of tax incentives and revenue foregone by the government. This would help identify how India’s tax framework can facilitate the “ease of doing good”.
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