Budget 2020-21: Uncharitable on Charities

Biologically, psychologically and temperamentally, females in general are proven to be soft, sober, kindhearted and generous. With a lady finance minister, it was expected that some of these qualities will reflect on her budget proposals. However, unfortunately what we see in the proposal, at least as far as the charities are concerned is devoid of these qualities. In fact what we see are just the contrary. Yes! The budget proposals are squarely uncharitable on the charities.

Changes that are retrograde

All the charities, at some point in time, ought to have gone through a thorough scrutiny of their intent, object and purpose and rational of establishing them as a charity, before they were granted a charity status under section 12(A)(a) or under 12AA depending on when they were registered. Similarly, Income Tax department also follows a process before approving a charity to issue 80G certificate against donations received by them. Every charity that is active and functional is required to file a mandatory tax return, annually, within a specified timeline.  Despite all these check points that already exists within the very same Act, to effectively scrap 12AA and to replace it with a new 12AB appears unwarranted.  Not sure if this is a reflection of distrust of the Finance Ministry on the Income Tax Assessment Officers, who scrutinise the annual returns of these NGO and is therefore, shifting the responsibility for periodic review of the Charity status to the Chief Commissioner of Income Tax. I presume the Chief Commissioners have better and more productive work to do, rather than dealing with the Charities and renewing their registrations and exemption status.

Donation details to be filed by Charities

Till now, when someone makes a voluntary contribution to a Charity, he/she is issued a 80G certificate, which entails them to claim a tax rebate by declaring the same at the time of filing of their Income Tax returns. Since the time electronic returns have become a norm, the department has also stopped asking for a hard copy of such 80G receipts. However, the departments still has the practice of randomly checking the authenticity of such claims by sending a letter to the respective charities, seeking their confirmation if such donation, as claimed by an individuals in their return, was received by the charity.

As per the proposed changes introduced in the budget, this process will change. From now on, the Charities have to file a return for all 80G donations received by them. This will then get auto populated in the individual electronic returns in the portal, in the same manner the TDS amount reflects on Form 26AS and also gets auto-populated in the individual tax returns.

While this sounds very simple and effective, there will be many operational challenges in complying with this provision on the part of the charity. Some such challenges that can be visualised are:

a.      Often the individuals request for 80G receipts only when they file their returns, which is 3-4 months into the next Financial Year. If, for some reason, the Charity did not have the complete information, including PAN of the individual donor concerned, the Charity may have to first correct its own return filed, before issuing 80G receipt to the individual. This may involve two to three days of time apart from additional cost to the Charity. Depending on when the individual makes such request, they may not have the patience to wait for 2-3 days.

b.     For security reasons some individuals do not wish to share their PAN # while giving donation. With this change, the Charity will have no option to issue 80G certificate, unless if it gets PAN number from the individuals.

c.      Most donations have now become online and the individual donors fill the data online. There is no mechanism to check the correctness of the PAN number that is declared by the donor or filled online. It is not clear if the donation details that is to be uploaded by charity will check correctness of the PAN number, like the way TDS returns get validated. 

This change in process will certainly increase the cost of fund raising to the Charities and the increased cost is going to spend on compliance, instead of using the scarce resources towards the charitable activities. On the other hand, there will also be revenue loss to the Government with this change. The reason for that is, currently the individual donors have to make effort to track all his/her donations and claim for rebate at the time of filing Income Tax returns. In that process tax rebate against some of the 80G receipts issued may not be availed. However, when it gets linked to PAN number and auto-populated in the Individual Tax Returns, every 80G receipt issue will result in a tax rebate and a revenue loss.

Changes to Personal Income Tax and its impact on Individual Giving

The budget also has given an interesting choice (which someone pointed out is effectively a Hobson’s choice) to individual tax payers, to continue with the current existing tax regime and avail all rebates or to shift to the new reduced tax rates regime, but forgo all rebate. However, if some individuals move to the new regime and not avail any rebate, 80G rebate and incentive that nudges individual giving to the charities will also be lost. This is expected to dampen individual giving to the charities.

In all the Budget 2020 proposals are going to adversely impact the Charities in India. The income is going to impact negatively; compliance costs will raise significantly and overall funds left with the Charities to do continue with their charitable activities will reduce. The Budget, therefore, is uncharitable on the Charities. 

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