Our tax system incentivises us to think of ourselves before others. Budget 2022 should not just aim to equalize the scales, but tilt them. I make 6 specific recommendations with respect to charitable donations to the Honourable Finance Minister with a goal to build an engaged citizenry that thinks about others more than it thinks about oneself.
1. 100 percent tax exemption for charitable donations
There is an economic, equitable and moral argument for 100 percent tax exemption on donations.
The economic argument is two-fold—firstly, the government was earlier worried about loss in revenue due to fraudulent claims of 80G tax exemptions. However, from this financial year, all donations have to be reported by NGOs and form part of the Annual Information Statement being produced by the income tax thus minimizing any possible loss of revenue to the government. This makes the possibility of fraud almost negligible while also providing a significant audit trail for the income tax for incorrect disclosures. The second reason the government would be concerned is a loss in tax revenues due to doubling of the exemption. Total tax foregone for FY18-19 (latest year for which government data is available) under 80G is Rs. 1,000 cr. for individual donors. This number would increase to Rs. 2,000 cr. with doubling of the tax exemption. Further many donors who were not claiming tax benefit so far would now see their donations on the Annual Information Statement and thus claim the same. Assuming only 50 percent donors were claiming tax exemption this number would rise to Rs. 4,000 Cr. Yet this is less than 5 percent of all tax exemptions given to individual donors (Rs. 95,000 cr. in FY18-19). If the government is very concerned about growing fiscal deficits, I would urge them to reduce this amount from the allocation to the social welfare budget which stands at Rs. 15.79 lakh crore. The cost of building an engaged citizenry could not have been smaller.
India is one among just three countries that offers less than 100 percent tax exemption, the others being France and Bangladesh.
The equitable argument is to be on par with most other countries. A study by the Charities Aid Foundation on tax incentives offered on charitable donations by 26 countries found that 19 countries offered a 100 percent tax exemption. India is one among just three countries that offers less than 100 percent, the others being France and Bangladesh. Nigeria is at the very bottom since it provides no incentive at all. We aim to join the league of developed countries and this is one example we should emulate as we seek to get there.
The moral argument by far is the most powerful. Investments made by individuals in certain financial instruments like tax saving mutual funds and insurance entitle a person to 100 percent tax exemption. And in these cases, we invest to benefit ourselves and our families. However, a charitable donation—one that helps another human being—offers only a 50 percent tax exemption. How does that make sense? Why are we being more incentivised to think about ourselves than others?
Donations to political parties already provide 100 percent tax exemption. It is time to do the same for charitable donations.
2. 150 percent tax exemption for NGOs listed on the to-be-formed Social Stock Exchange
The draft recommendations of the proposed Social Stock Exchange (SSE) provide for a 100 percent tax exemption for non-profits that are listed on the SSE; the rationale being that such organisations will have higher levels of governance and thus greater efficiency and impact. I will argue that such organizations should indeed be rewarded with even higher tax benefits of 150 percent, to direct citizens giving to organizations with greater efficacy and efficiency. And as we have seen above, the cost of tax benefits on donations does not make any discernible impact on India’s finances.
3. Allow tax exemptions on charitable donations under the New Tax Regime
Budget 2020-21 introduced two new tax systems—the existing one and the new one. Under the new tax system, individuals could pay lower taxes if they gave up all their exemptions. The US 2017 Tax Cuts and Jobs Act did something similar. It increased the standard deductions available thereby reducing the need to make itemised mentions for specific exemptions; in essence achieving the same effect of reduced taxes without having to mention specific deductions. Now, some representatives in the US Congress are trying to pass a bill that will allow charitable deductions over and above the standard deductions. They cite the moral argument for higher exemptions on charitable donations compared to any form of investment or insurance—a bill that “would make the tax law fair for everyone who makes a financial sacrifice in order to help those in need.”
Similarly, the government must seriously consider re-instituting charitable donations under the new tax regime as a way to build engaged citizens.
4. Allow proof of charitable donations by corporates
Come January and all corporates ask their employees for proof of investment/tax-saving (like house rent receipts etc) that they had declared at the beginning of the year. Providing these proofs, allows employees to reduce their tax outgo. However charitable donations are not accepted as tax-saving instruments and one needs to file for the same through their income tax returns and then wait for the refund to claim any benefit. If companies were allowed to accept proof of charitable donations, it would not only reduce this extra effort by individuals and the huge delay in getting the benefit but also make employees aware of charitable donations as a tax-saving instrument. And with the new rules, wherein the income tax is going to issue the receipt for donations (as Form 10BE) there is no risk for the corporate of any fraudulent claim.
5. Allow verified PAN as sufficient proof for charitable donations
Today while making donations, donors need to provide their name, address and PAN to claim tax benefits. Many donors get put-off by these onerous requirements while doing a good deed and don’t understand the need for the same—especially the address. It also makes the process more cumbersome and results in more donors falling off before donating. With the systems available today, it is possible to verify PAN against the income tax database for validity. If a PAN is found valid, the need for name/address should be done away with, given that the income tax has all this information and the PAN has been validated online. Name/address can be provided in case PAN is not available to ensure that details of the donor are always present. This one thing can make it very easy for donors to donate and thus increase donations significantly.
6. Donations by any electronic mode should be considered as non-anonymous
All donations without name/address are currently treated as anonymous donations. However, donations made via electronic means always come through some KYC account as all entities are regulated by the RBI and have to follow its norms on KYC. While such donations can be denied tax benefits if donor details are not available, they should not be treated as anonymous since they are coming from KYC accounts.
Our entire financial system is incentivised to make us think of ourselves before others. It’s time we equalise the scales if not tip them. This government has reminded us of our duty through their entire time in office. There are several instances of this: The demonetisation announcement (where it convinced people that it was undergoing hardship in order to get rid of black money), the GiveItUp LPG subsidy campaign (where households were encouraged to give up their LPG gas subsidy so that it could be redistributed to poorer households), and so on. By providing a 100 percent tax exemption to charitable donations, the government can signal that it wants us to think about others at least as much as we think about ourselves.