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Legal Matters | New tax rules for charities will have them living in a state of perpetual trauma

There is merit in the argument that NGOs need to be reined in. However, these new rules lead to over-regulation of the non-profit sector and give arbitrary powers to the government 

April 25, 2022 / 03:56 PM IST
Representative Image

Representative Image

Some of the changes implemented through the budget of 2022 with far-reaching and drastic consequences for the non-profit sector, have gone practically unreported. If the segment that was receiving foreign funding was being squeezed through regulation the last few years, the time has come for even domestic organizations to begin feeling the heat.

Some of the changes incorporated – such as the mandate to maintain books of accounts and have them audited – are so basic that one wonders how they were not explicitly mandated this long. But other changes will have the effect of keeping the organizations in a state of perpetual trauma. Each of these changes look reasonable, even essential, on the face of it. But peel the layers, and you start to notice the hidden effects.

Take, for instance, the amendment to Section 12AB of the Income Tax Act which specifies the violations that could lead to cancellation of the registration of the institution. These include spending income other than for the ‘objects of the trust or institution’. The objections to this can be dismissed as frivolous. After all, if a charitable trust gets a tax exemption because it claims to want to do certain activities, it should stick to those limits.

However, consider a situation such as in April 2020, when the entire nation went into an unplanned lockdown, and people were left to fend for themselves. As governments were scrambling to get their act together, it was the NGOs that were in place to deliver essential services (something the public, as well as donors, expect the non-profit sector to do). Under the new regime, such an intervention, could potentially lead to the organization losing its tax registration.

Other conditions that can lead to cancellation of registration can include earning of income from businesses that are not incidental to the objects of the institution, or granting a benefit to ‘specified persons’, or related parties, vaguely speaking. Again, one could arguably justify such a restriction. But what of rental income from property an organization happens to own. Is it ‘incidental’ to its main objectives? Will arm’s length transactions be permitted with a related party?


What is important to remember is that these infringements, to an extent that they pertain to only a small portion of the income or expenses of the organization can be addressed through more reasonable steps - such as by withdrawing the tax exemption to the extent of these amounts. This would give a certain amount of operational flexibility to the organizations, while also ensuring that tax benefits are not derived in contravention of the purpose for which they have been obtained. (To be clear, in addition to the threat of cancellation, under the new amendments, these amounts will also be charged to tax at 30 percent as well as invite penalty of 100 percent at the first instance, and 200 percent thereafter).

What appears to be even more sinister is the procedure on discovery of any violations. The amendment to Section 143(3) states that in case the assessing officer notices any violation, a reference should be sent to the Principal Commissioner or Commissioner to take a decision on withdrawal of approval or registration. The Principal Commissioner/Commissioner will have to take a decision within six months.  Meanwhile, assessment proceedings will be put on hold.

In practice, this will have the effect of giving a six month period to organizations (interestingly, the same provisions are made applicable to news agencies that have income tax exemptions too – surprising then that this has gone completely under the radar) to get in line. Another surprising new amendment is in Section 12AB, where an organization can be selected in accordance with a risk management strategy formulated by the Board for inquiry into violations. One fears that this will be invoked to arbitrarily conduct roving inquiries into the affairs of organizations that the government wishes to target.

Needless to say, some will argue that NGOs need to be reined in. There is much merit in the argument too. However, the case here is of over-regulation, and arbitrary powers with the government. Take related party transactions in the for-profit sector. While looked down on, they are regulated by mandating disclosure, and putting them to the test of arm’s length reasonableness.

More importantly, while unlike corporations which are answerable to shareholders, NGOs have a more public responsibility, the government has no locus to assume the role of an overbearing parent, that too with arbitrary powers that can be used to shut them down. The organizations are answerable to their donors, and are subject to laws that apply to each of their activities. Again, reasonable regulation is welcome. But the current changes will only mean that their managements constantly live with the metaphorical sword of Damocles hanging over their heads.

Abraham C Mathews is an advocate based in Delhi. Twitter: @ebbruz.

Views are personal and do not represent the stand of this publication.

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Abraham C Mathews is an advocate based in Delhi. Twitter: @ebbruz. Views are personal.
first published: Apr 25, 2022 03:45 pm
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