NEW DELHI: In an effort to address the ambiguity surrounding the tax liability of charitable organisations that generate income beyond donations, Nitin Gupta, Chairman of the Central Board of Direct Taxes, said that clarity has been established following a significant Supreme Court decision in the Ahmedabad Urban Development Authority case last year.
Gupta in an interaction with this paper said that assessing officers will determine whether the business component of such organisations is considered normal or abnormal, thereby determining their tax liability.
“The certainty is already there because of the SC decision. That is the rule of the country now. They will have to pay taxes on the business component. The decision says that whether the business is normal or abnormal, will be decided by the assessing officer. Accordingly, tax will be charged,” Gupta said.
The Supreme Court ruling, which came into effect in 2022, marked a turning point in the understanding of tax obligations for charitable organisations.
They play a crucial role in society, but their ability to carry out sustainable activities and scale up operations is often hindered by financial uncertainties. While grants and donations serve as the lifeblood of charities, securing them can be a challenging and unpredictable task. To address this issue, many organisations consider generating funds through their activities. However, the permissibility of earning fee-based or commercial income remains a subject of monumental ambiguity.
According to experts, the income-tax exemption for charitable organisations must be examined in relation to the activities they undertake. Charities engaged in objects of general public utility (GPU) face limitations, allowing them to raise non-grant income only up to 20% of their total receipts. This effectively forces GPU charities to rely heavily on donations to develop their initiatives. In the 2022 ruling, the Supreme Court emphasised that even within the 20% limit, revenue should be earned on a cost-to-cost basis, with marginal profits at best.
For years, charities have relied on the plough-back theory, arguing that any fee or revenue-based receipts are ultimately used for charitable purposes and should not be viewed negatively by Tax Authorities. However, the Supreme Court ruling rejected the plough-back theory, asserting that once commercial income is earned, the charitable character of the organisation could be compromised. According to the court, the utilization of commercial income does not impact its relevance.
“In light of the present times and recognising the contribution of the charitable organisations for the betterment of the society, it is expected that clarity on fee-based income earned by charitable organisations is provided, so that charities get an adequate breather to build and scale-up their operations,” Chetan Daga, who is a chartered accountant and founder of AdvantEdge Consulting said.
“It is true that certain elements have misused the income-tax exemption by carrying out commercial activities in the garb of charitable activities, however, it is hoped that the Revenue identifies such Black Sheep rather than treating the entire flock of sheep “Black”!,” he added.