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  • Income Tax Act for The Voluntary Sector

    A Study Report

    Voluntary Action Network India (VANI)

  • Income Tax Act for the Voluntary Sector A Study Report

    Author: Voluntary Action Network India (VANI)

    March 2016

    Copyright Voluntary Action Network India The content of this book can be reproduced in whole or in parts with due acknowledgement to the publisher.

    Supported by: Bread for the World

    Published by:Voluntary Action Network India (VANI)BB-5, Ist Floor, Greater Kailash Enclave-II, New Delhi 110 048Phone: 011-29228127, 29226632Telefax: 011-41435535E-mail: info@vaniindia.orgWebsite: www.vaniindia.org

    Designed & Printed by:Print World # 9810185402E-mail: printworld96@gmail.com

  • Voluntary Action Network India (VANI)BB-5, Ist Floor, Greater Kailash Enclave-II,

    New Delhi - 110 048 (INDIA)Phone: 011-29228127/6632, Telefax: 011-41435535

    E-mail: info@vaniindia.org Website: www.vaniindia.org

  • Voluntary Action Network India (VANI)3

    CONTENTSAcknoledgement................................................................................................................. 03Preface................................................................................................................................. 04

    CHAPTER 1Overview of Taxation in India.......................................................................... 08

    CHAPTER 2Income of Voluntary Organizations and its Relative Computation.................. 11

    CHAPTER 3Project Grants................................................................................................. 14

    CHAPTER 4Voluntary Contributions................................................................................... 18

    CHAPTER 5Examination of Utilization and Accumulation Through Exemption.................. 20

    CHAPTER 6Charitable Purposes........................................................................................ 24

    CHAPTER 7Business Activity Under Section 2(15)............................................................. 28

    CHAPTER 8Service Tax on Voluntary Organizations.......................................................... 32

    CHAPTER 9Examining Section 10(23AC).......................................................................... 36

    CHAPTER 10Examining Section 80G................................................................................... 39

    CHAPTER 11Registration of VOs Under Income Tax for Claiming Exemption..................... 47

    CHAPTER 12Examining Section 35(AC).............................................................................. 49

    CHAPTER 13Comparative Analysis of Taxation Regimes in Different Countries................. 52

    CHAPTER 14Petitions by VANI to Finance Ministry............................................................. 58

    CHAPTER 15Analysis and Recommendations for Improving the Income Tax Act.............. 65

    References......................................................................................................................... 68

  • Voluntary Action Network India (VANI)4

    In the completion of this study report, we would like to acknowledge the academic contribution of Mr. Sanjay Patra,FMSF, Mr. Noshir Dadrawala, Center for Advancement of Philanthropy , Mr. Shivakumar, Gandhigram Trust, Ms.Benedicte Hermelin, Coordination SUD, Mr. Mark Sidel, ICNL, Mr. Aoi Horuchi, JANIC, Mr. Kazuho Tsuchiya,Japan NGO Center, Burkhard Gnrig and Miriam Niehaus International Civil Society Center, Germany.

    Regards,

    VANI Team

  • Voluntary Action Network India (VANI)5

    An array of social infirmities exists in India, requiring focused attention in inhibiting their effects through targetedpublic policies. Acting as the direct interfaces with the people and partnering with the Government of India, voluntaryorganizations have been crucial in being change makers in the template of social development. Functioning in serviceprovision and right based advocacy from populated urban centers to lowest denominations of rural areas in India,voluntary organizations/ non-profit entities or non-governmental organizations are steadily increasing their role inimplementing social programs which assuage social blockages and congestions and provide uniform pattern ofinclusive development. However implementing social programs crafted to provide support to people do not carrythe required fiscal and legal environment for non-profit organizations need. One of the most contested issues in thefiscal framework that many voluntary organizations face trouble with is the provisions of Income Tax governingthem. The Income Tax for the voluntary sector has been deluged by numerous issues that have sought to createproblems for many organizations falling under its fiscal ambit.

    The non-existence of specific definitions concerning voluntary organizations or NGOs has raked a multitude ofconcerns and problems when assessed by the Income Tax Act. Similarly associated with them are issues hoveringthat stymie the potential of the sector by placing conditions debilitating for many grassroot organizations (for examplesection 2(15) earnings to 20% of Total receipts). The voluntary sector has steadily advocated for reforms in the Actthat are regarded to deliver justice and equally provide a rational basis for impetus to their social developmentoperations. On the basis of these concerns, VANI conducted a study on the provisions of the Income Tax thatimmediately required intervention from the government and the voluntary sector alike. Through its study it was feltthat there were areas within the Act that needed renovation and accordingly design an approach that would prove toa toolkit for the voluntary sector to be informed over this issue. This study therefore emphasizes of certain segmentswhich need academic and practical understanding of concepts and the position of voluntary organizations under thelense of Income Tax. Thereforethis study more importantly is presented from the perspective of civil society and thevoluntary sector for the enlightenment of multiple stakeholders.

    I would like to extend my gratefulness for our fraternal national platforms and international organizations such asCoordination SUD, ICNL, JANIC, International Civil Society Center Berlin, for providing us case laws of theirprevailing taxation systems for non-profit sector. I would also thank VANIs expert committee who reviewed andprovided inputs in making this study more enriched. I also extend my thanks to Mr. Arjun Phillips for the overallresearch and preparation of the study and to the staff of VANI involved in its compilation. We earnestly hope thatthe study will cater to your requirements in understanding and comprehending the applicability and functioning ofIncome Tax applicable for Voluntary Organizations.

    Best Regards

    Harsh JaitliChief Executive Officer

  • Voluntary Action Network India (VANI)23

    The primary task of the study is to reveal the essence of the IT Act, which has till yet remained confined to theknowledge of financial experts and remained ambiguous to the understanding of those not from non-financebackgrounds. The study will focus to-

    Simplifying in understanding the Act through selected provisions Chart out the applicability of taxation on the kind of income Detail how taxation works by elaborating on the practical application of the act Comparing taxation practices of the voluntary sector of different countries Establish the blueprint for evolving a model policy for taxation

    The study on Income Tax is undertaken to amalgamate various issues and highlight the operational problemsvoluntary organizations face when working within the legal taxation framework. The Indian voluntary sector ismultifarious and variegated and its vastness is exhibited by the magnitude of social work rendered by the countlessorganizations working on different thematic issues.

    The Income tax Act has laid down specified provisions for voluntary organizations and regulates them accordingly.It has been observed that many voluntary organizations grapple in understanding clauses and sections of IncomeTax Act and hence are prone to harassment. During numerous consultations and workshops of VANI, organizationshave raised queries on the technical know-how of the Act and therefore a need was

    With this study, the aim is to educate organizations on the fundamental concepts of Income Tax applicable onvoluntary organizations and explore the legal implications associated with it. The study essentially caters toknowledge addition with regards to the operability of the Act and can be used as a handbook for understanding theminutest sections.

    The various tools for conducting the study-

    Desk Research- The study is completed using primary data accomplished by detailed analysis, through extensivereading and compilation from different sources.

    Interviews- Expert opinions were solicited from different financial experts.

    Comparative Analysis- In designing the best practices, information was solicited from various international voluntarysector conglomerates to provide the prevailing taxation regimes and its effect on their respective voluntary sector intheir countries.

    6

  • Voluntary Action Network India (VANI)237

    The study as pointed above can be used as a handbook in understanding the overall architecture of the taxationregime and its effect on the voluntary sector. It was felt that numerous manuals present on taxation were not sufficientin providing a starting point for inquiring into how the act works. Overlap by many provisions and clauses thatroutinely applied somewhere or the other, confusion pervaded organizations on how and when the pr

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