Finance Bill 2020 – Potential death knell for charitable giving

The proposed new income tax regime under which individuals & HUFs as also companies would be taxed at a reduced income tax rate, provided they forego exemptions and deductions may potentially sound the death kneel of charitable giving.

NGOs in India carry out their welfare and development work mainly with the aid of charitable contributions from individuals and funding from corporate houses. Such contributions are tax deductible for the donor and thus donations and grants to charitable trusts and institutions having 80G certificate is an added incentive provided to the donor, be it individual or a company.

Incentivizing charitable giving with tax deductibility is common in most developed and developing countries.

However, under Finance Bill 2020 and the Taxation Law Amendment Act 2019, under the guise of reduced tax for individuals and companies, tax deductions will have to forfeited.

Let’s examine the impact of the proposals under the Finance Bill 2020 and Taxation Law Amendment Act 2019.

Proposed reduced tax rate for individuals

Under Finance Bill 2020 there is no change in the existing income-tax slab rates for individuals and Hindu Undivided Family (HUF). However, a new income tax regime has been proposed under which individuals and HUFs would be taxed at a reduced rate provided they forego exemptions and deductions which are otherwise allowable under the Act. 

The exemptions and deductions that would have to be foregone would include, standard deduction, house rent allowance, leave travel concession, interest on loan taken for self-occupied house property, deductions under section 80C (Provident Fund/Public Provident Fund Contributions, Life Insurance premium etc.), 80CCD (NPS contributions by other than employees), 80D (medical insurance premium), 80TTA (bank interest) and 80G (donations to charitable institutions).

Individuals and HUF not having business income will enjoy flexibility to opt-in and optout of the scheme on a year to year basis. However, such flexibility will not be allowed for individuals and HUF having business income.

The reduced tax rates are proposed as under: 

Up to Rs. 2,50,000 – Nil

Rs. 2,50,001 – Rs. 5,00,000 – 5%

Rs. 5,00,001 – Rs. 7,50,000 – 10%

Rs. 7,50,001 – Rs.10,00,000 – 15%

Rs. 10,00,001 – Rs.12,50,000 – 20%

Rs. 12,50,001 – Rs. 15,00,000 – 25%

Above Rs. 15,00,000 – 30%

Thus, individuals and HUF who will opt for the above reduced rate of tax will not be entitled to tax deductions for donations given by them to charitable institutions u/s 80G.

Individuals who wish to donate because they believe in the cause (and not because of tax deductibility) may continue to give. However, we will know the real effect only once this Bill is passed and made effective from Financial Year 2020-21.

Proposed reduced tax rate for domestic companies

Pursuant to the Taxation Law Amendment Act 2019, the new income tax regime will allow companies to be taxed at a reduced income tax rate, provided they forego exemptions and deductions which are otherwise allowable under the Act.

Companies which opt for reduced tax rate will be exempt from payment of Minimum Alternate Tax (MAT) and the reduced rate of tax will be 22% (instead of tax rate ranging from 26% to 29.12% depending on turnover of the company)

The effective tax rate under the new regime will be @ 25.168% for domestic companies, provided they forego exemptions and deductions which are otherwise allowable under the Act and which would include deduction u/s 80G for donations and grants to charitable trusts and institutions.

Companies will be given an option to choose the regime for payment of tax. However, once an option is exercised, it cannot be withdrawn in subsequent years. 

Fundraising challenge

In our opinion, the bigger challenge under Finance Bill 2020 is not reapplying for tax exemption under 12AA or tax deduction under 80G. These are online application formalities which will be passed on by NGOs to their chartered accountants and tax consultations for a fee. The bigger challenge may actually be around fundraising.

Will individuals and companies still give if they are to forfeit tax deduction?

In our opinion, companies mandated under Section 135 of the Indian Companies Act 2013 to spend 2% of their pre-tax profits on CSR activities may still give. Individuals committed to certain charitable causes too may continue to give. In fact, fiscal year 2020-21 may actually be an eye opener for all of us – do people give for charity or tax deductibility? Most give for both. The test is whether there will be less giving or giving till it hurts (pun intended)!

Oh yes, we are cursed with living in interesting times!

Noshir H. Dadrawala