An Appeal to the FM on the Revised Direct Tax Code- Sign this to Save NGOs

The Finance Ministry has released a revised discussion paper on the proposed Direct Tax Code. The Revised Discussion Paper (herein after called Revised DTC) has addressed some concerns of the NGO Sector. However, most of the harsh and unsustainable clauses in the DTC for NPOs remain. If the proposed DTC is enacted, then the NPO sector will be very adversely impacted.

The Revised DTC has not addressed the following key concerns of the NPO sector:

1.Application of Income after current year : The Revised DTC has reaffirmed that the NPOs have to apply at least 90% of gross receipts or 85% of income for charitable purposes during the year of receipt which may not be practically possible. It will cause undue hardship to NPOs which are unable to spend the income due to legitimate reasons eg. late receipt of funds. Under the current provisions, NPOs are permitted to apply 100% of income in next 5 years if there are legitimate reasons for such non application. The proposed provision is taking a very myopic view of development work as NPOs also engage in long term projects which range from 3 to 5 years.
REQUEST : The NPOs be allowed to apply the Income for charitable purposes if the income is not applied, for legitimate reasons, during the year. It is imperative that the current provisions of section 11(2) and explanation to section 11(1) which provide 5 years and 1 year additional time for application of funds, are restored.

2. Accumulation of INCOME: The current provision of 15% indefinite accumulation has been withdrawn. The Revised DTC does not permit NPOs to save or accumulate even a single rupee. In other words, 100% of the income has to be utilised. Traditionally NPOs have been allowed 25% as accumulation for future. After 1st April 2002 NPOs are being permitted 15% as accumulation for future. If NPOs are compelled to apply 100% of their income every year then it will affect the future sustainability of the NPO sector as the corpus will be eroded and there will be no savings to negate inflation.
REQUEST : The NPOs be allowed to save and accumulate at least 15% of their current years income for future sustainability and to negate inflation. The current provisions of 85% application for charitable purposes should be retained.

3. Business activity of an NPO: Presently the incidental business activity is allowed under the Income Tax Act for the specified category of NPOs. The proposed Code has restricted the coverage of incidental business activity and has allowed only those business activities which are carried on while actually undertaking the welfare activities. This is in the right direction. However, after this change there is no need to deprive the sixth category NPOs from engaging in business activities. The current law and the proposed code prohibit business activities in case of NPOs engaged in ‘Advancement of any other activity of general public utility’. As the new code has redefined the incidentality of business and no NPO can engage in unrelated business activities, there is no need to prohibit one category of NPOs from engaging in business activity. In any case all categories of NPOs have to engage in incidental business activities only. If the business activity is incidental, then there is no reason why the benefit would not be extended to all categories of NPOs. The DTC has already taken an understandable step by providing under section 96 that ‘business shall be treated as incidental only if it is carried on in the course of implementing welfare activities’.
REQUEST : Clause (b) to section 96 of the proposed DTC should be deleted, since no NPO is allowed to have business which is not incidental. Therefore, all NPOs should be allowed to undertake business activities if carried on in the course of implementing charitable activities.

4. Conversion of an NPO into commercial organisation : Under section 94 it is provided that if the NPO Converts itself into an organisation which does not qualify for exemption, then it shall be liable to be taxed at the rate of 30% of its net worth. Such provision may cause problem to NPOs which are not considered as “charitable” in some assessment year for insignificant reasons. Further, this provision seems to be very harsh as it proposes to tax the entire networth accumulated over the years.
REQUEST : Section 94 of the proposed DTC should be deleted as other provisions of DTC have already addressed the issue. If an NPO ceases to be charitable, then automatically it will be taxed as an Association of Persons . There is no need for Section 94, since under the Income Tax Act, there is no provision for a public charity to convert itself into a commercial organisation. An NPO can not register under the Income Tax Act if its objects permit conversion into a commercial entity.