Charitable trusts have played an important role in the development of the country. In times of calamities like floods etc trusts have served the needy in the most remote parts of the country.
Tax exemption for trusts has helped to a large extent and has stood the test of time despite the rigours of compliance and laborious housekeeping challenges associated with it. But there have been cases of misuse of trusts resulting in diversion of funds as also fundamental governance related matters like trustees perpetuating their positions and sometimes compromising it as well.
This article, however, focusses on the tax aspects of trusts.
The Background
The provisions relating to taxation of trusts is contained in sections 11 to 13 of the Income Tax Act (The Act) and are nothing short of a nightmare as far as compliance is concerned.
Right from the time of registration to cancellation, the procedural rigmarole tests the patience of the most experienced professionals. The root cause of the problem is claiming the tax exemption and ensuring that the accumulation is invested in the modes specified in section 11(5) of the Act.
Trusts have two streams of inflows. The corpus donations which flow directly to the balance sheet and the income donations which flow through the Income and Expenditure account. Trusts have to ensure that all income donations and other income are applied to the extent of 85 per cent and 15 per cent is to be accumulated and invested.
For this purpose application includes both revenue and capital expenditure and defrayed for the objects of the trust as specified in the trust deed. In today’s context some trusts do make huge surpluses but do not pay any income taxes.
They are however subject to GST on specific services rendered like subscription from members, delegate fees for seminars for members etc.
In the context of expanding the tax base, is it not the right time to levy tax on the surplus declared by trusts?
The logic
The distinction between charitable objects and quasi-commercial activities carried on by the trusts is getting hazy and interpretative.
Various clubs and Chambers of Commerce face tax challenges on the grounds that the concept of mutuality which was the foundation of tax exemption is no longer relevant.
Imparting of knowledge by conduct of seminars and workshops no doubt come under the activity of “educational” but by charging members and non-members for the same and making a surplus from it smacks of commercial intent, is the stand of the department.
Hairsplitting on such matters has lead to confusion and lack of clarity leading to unnecessary litigation.
The Direct Taxes Code Bill 2013 had contained a clear recommendation that on all Gross Receipts minus Gross Outgoings, Trusts should be levied a 15 per cent tax subject to a basic exemption of ₹1 lakh. There was also a recommendation that Trusts should be free to make their own investments on the accumulations rather than the Act specifying the modes of investment.
In effect the recommendations were far reaching, as they equated Trusts with other normal business entity for tax purposes.
A calibrated approach to taxation of trusts is a better option than going the whole hog. For starters a nominal tax of 10 per cent on the surplus declared by trusts is a good way to begin. The investment restrictions as stipulated in section 11(5) should continue till the overall governance framework of trusts is revisited in a comprehensive manner along with the host of procedures that are now sucking the time and energy of people managing the affairs of trusts.
At the end of it all there has to be trust in trusts rather than mistrust.
The writer is a Chartered Accountant