Unlocking philanthropic capital

India has always had a very rich tradition of giving. People have responded generously at times of acute distress as we saw during the Covid crisis and as we see during natural calamities. Steady state philanthropy is slowly maturing in India with givers making larger commitments and investing in meaningful systemic long-term change and also partnering with the government. This trend needs to be encouraged and strengthened to realise the full potential of personal philanthropy which can reach anywhere between ₹75,000 to 1,00,000 crore per annum as reported in a recent report Wealth with Purpose released by AIP and BCG. To unlock this potential many steps have to be taken, We discuss a few of these related to the changes brought about in the recent budget.

In the Union Budget 2024, the government has taken some positive steps towards rationalisation of charity tax provisions in the Income-tax Act, 1961 (ITA) relating to administration and compliance of charitable institutions, through four specific amendments which can promote simplification, flexibility and scale for the not-for-profit sector:

• Simplification: Taxability of charitable institutions is currently governed by two regimes--Section 10(23C) relating to educational and hospital charitable institutions, and Sections 11 to 13, relevant for all types of charitable institutions. Exemption under both these regimes is subject to certain conditions and procedural compliances. In light of amendments made in past few years, the gap between the two regimes has narrowed down considerably. The Budget now proposes to merge these two regimes by setting a sunset date for Section 10(23C), gradually transitioning all institutions, to the Section 11-13 regime. This is a welcome step that will simplify the regime for the sector without impacting the continuity of tax exemption status.
• Enabling scale: At present, there are no enabling tax provisions dealing with merger of charitable entities. The budget has proposed a clarificatory amendment to explicitly exempt mergers of charitable entities from levy of exit tax upon fulfilment of certain conditions which will be prescribed by the Central Board of Direct Taxes.
• Flexibility: There are two proposals that can lend some additional flexibility to charitable institutions:
  1. Delay in applying for charity registration could jeopardise tax exemption status of institutions, potentially triggering levy of exit tax. The Budget proposes to empower tax authorities to condone such delays if the applicant can demonstrate reasonable cause, thereby shielding them from an onerous exit tax liability.
  2. There were instances where registered charitable institutions were unable to register under Section 80G (that facilitates tax deductions for donors) on account of bona fide reasons. It is now proposed to extend the timeframe for applying for Section 80G registration at any time, which will facilitate fund-raising efforts.
  3. There is also a proposal to extend the time limit for processing of charity exemption applications to provide tax authorities additional time for thorough evaluation.

The finance minister announced a comprehensive review of the ITA, aimed at making it more concise, clear, and cogent. This review provides a great opportunity to not just further rationalise and simplify the tax regime for charitable institutions, but also align it with the socio-economic environment where strategic philanthropy (as distinct from charity) can play a catalytic role in India’s development trajectory and partner with the government in achieving its social objectives faster and more efficiently.

The AIP-BCG report on philanthropy in India indicates 90% of ultra high net worth individuals (UHNI) respondents want to increase their philanthropic contributions. The report finds that UHNIs can potentially contribute ₹75,000+ crore annually by allocating just 5% of their incremental wealth compared to the current contribution.

At present the ITA treats all charitable institutions – grassroots non-government organisations (NGOs), as well as private philanthropic foundations/entities under the same provisions, despite their distinct objectives and structures. Drawing a clear distinction between these entities and establishing a regulatory framework conducive to promoting greater personal philanthropy is essential to unlock the tremendous potential it has in supporting the government’s development priorities.

A key enabler for this could be to change the provisions around contribution of shares to charitable institutions, particularly private philanthropic foundations. The ITA review provides an opportunity to change stringent conditions around this through a consultation process with stakeholders.

There is also a need to revisit the provisions relating to how charitable organisations and philanthropic institutions can create and use a corpus of funds to enable them to become more resilient. For instance, NGOs were originally required to apply 75% of their income every financial year towards charitable activities. In the past several years, this has become 85%. Reinstating the earlier 75% requirement will allow charitable organisations to build reserves for future exigencies and long-term sustainability.

The budget has commenced the process of simplifying and streamlining charity tax provisions. The upcoming review of the ITA is a great opportunity to further align tax laws with global best practices in encouraging philanthropists to contribute strategically towards nation-building in line with government priorities.

This article is authored by Radhika Jain, philanthropy partner, AIP and Sheetal Shah, partner, EY LLP.