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Charities under tax scanner

New Delhi, May 10: The government plans to introduce a bill in Parliament seeking to plug loopholes in the sections of the income tax law dealing with charities.

This can be done by amending section 80G dealing with donations to allow a tax rebate at the rate of 20 to 30 per cent instead of tax deductions from gross income.

Officials said an internal task force set up by the finance ministry has recommended moves to stop flow of funds to shell charities and trusts away from the tax net.

Currently, a charity has to spend 80 per cent of its income from donations or other sources in any given year, within five years. In case it is unable to do so, it has to pay an income tax on it at the rate that applies to it.

Often, these charities are used as tax pass-throughs. Revenue department officials said it has been found that thousands of crores of rupees in taxes are avoided by parking money in one or the other charitable institution.

'In some cases, charities are used as shells where certain kinds of funds are being parked and then withdrawn through accounting stratagems when required by the promoters of these institutions or trusts,' they said.

To avoid this, it is proposed that no blanket exemption be given on donations under section 80G as at present. Instead, a tax rebate at the marginal rate of 20 to 30 per cent will be given to those who pay the sums.

But at the same time, the ceiling on 80G donations will be withdrawn. There is another proposal that charities be defined as donative or commercial non-profit organisations (NPO).

Those trusts and institutions, which are run on at least 90 per cent donations, will be called ‘donative trusts’ and will get the benefit of sections 10(23) and 11(2). This will allow them to retain their income up to five years without paying any tax.

Others will be governed by normal rules. However, revenue officials said there is also a proposal to relax these sections somewhat in the case of donative NPOs. A trust which is unable to spend 80 per cent of its income within the stipulated five-year period could donate this money to another charity, something which is not allowed now.

However, the second trust has to spend this money within five years, failing which it will have to pay tax on the money donated. It will not be allowed to pass on this money to any other trust.

Finance ministry officials said the government would bring a legislation on this after consultations with other ministries and various partners of the UPA government.

'This is a sensitive issue and a consensus is needed before it can be cleared,' officials said.

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