Much has been written in the last month about the impact of the new budget provisions on charitable donations, especially individual donations. Primarily, we have been led to believe that charitable donations will see a huge drop due to two key factors:
- New tax slab rates—where exemptions such as charitable donations will not be allowed.
- Required additional compliance in the form of re-registration and renewal of 12AA, 80G, and the filing of annual statement of donations under 80G.
I will take these two elements and present my hypothesis on how the future may play out, specifically for individual giving.
Individuals will continue to give, despite the introduction of the lower tax structure (without exemptions)
The perception is that there will be a significant reduction in charitable donations as individuals choose to shift to a lower tax rate regime without exemptions.
Tax benefits are a hygiene factor, and not the primary motivator for giving.
This argument assumes that people donate because of the tax breaks that they get on charitable donations. This is an incorrect assumption. Tax benefits are a hygiene factor, and not the primary motivator for giving.
According to the current laws, givers get a tax rebate on 50 percent of their donation under 80G. So, if one donated INR 1,000, then one would get a reduction of INR 500 from their taxable income. Assuming even a peak tax slab of 30 percent, this would result in them saving INR 150 in taxes. This amount is not attractive enough for individuals to choose to be ‘out-of-pocket’ by INR 850.
So, in most cases, one does not donate to save money. But having made a donation, people would like to claim their tax benefit.
The 2017 US Tax Cuts and Jobs Act did something similar to what India’s Union Budget 2020-21 proposes: they increased standard deductions available and reduced the need to make itemised 1 mentions for specific exemptions. The impact of that policy: donations by individuals fell by just one percent. This also is most likely because people may have donated but did not need to itemise under the new law.
Therefore, a change in tax slabs or tax rates is not going to change the propensity of an individual’s desire or motivation to donate. As a result, there is going to be minimal impact of the new tax structure on the amount of charitable donations made by individuals.
The new and stringent compliance requirements, however, will play out in multiple ways
The general belief is that the provisions related to renewal of registrations under 12AA and 80G, along with the annual statement of donations under 80G, will reduce charitable donations.
In FY 2018-19, nearly two lakh social organisations 2 filed their income tax returns. Technically, all these organisations have to get their 12A and 80G renewed between June and August 2020, along with many thousands of new nonprofits that will file for fresh registrations.
This is going to be a mammoth exercise, and unless the government changes the way it does business, or processes these applications and renewals, many nonprofits are going to be left without a 12AA or 80G come September 2020. And with fewer nonprofits, there will be fewer organisations asking for donations.
Nonprofits that get their required registrations in time may decide to forego individual donations—especially the small-ticket ones, since compliance in terms of the annual statement of donations that have to be filed (Annual Information Report, which is a new version of form 26AS) might be considered too much of an overhead for small amounts.
It is therefore most likely that most small and mid-sized nonprofits will avoid taking donations directly from individuals going forward. Even if they do consider retail donations or a retail strategy, they are most likely to use other intermediaries such as GiveIndia, Charities Aid Foundation (CAF), and so on, to get donations from individuals, thus avoiding the cumbersome and resource-heavy task of filing voluminous statements. They are thus likely to focus their energies on CSR, high networth individuals, and institutional funding.
The compliance requirement on nonprofits, however, does not change a donor’s intent to make a donation. Individuals will still want to donate, and they will do so somewhere. We should expect large charities such as Akshaya Patra, HelpAge India, CRY, and so on, and the intermediaries mentioned above to gain significantly due to two key reasons:
- They will have the IT systems and compliance rigour to do the paperwork required.
- Donors will trust these organisations to do the paperwork to ensure that their donation eventually shows up on their Annual Information Report (AIR) allowing them to claim the tax exemption. This same level of trust may not be there in smaller organisations.
If organisations can capitalise on the above points—developing internal systems to do the documentation and compliance, and build donor trust in their abilities, they can not only keep their individual donors, but also reach out to those who are unable to give to their usual charities. There is therefore a huge opportunity for charities—especially since individual donations from corporates increased to 58 percent in 2018-19 (as compared to 32 percent in 2017-18). 3
This requirement of an AIR is a huge step towards transparency of donations and resulting tax exemptions claimed. This will at least ensure two things:
- People not donating, but claiming exemptions, will be removed thus reducing the tax loss of the government to that extent.
- With nonprofits reporting their donations transaction-wise we will start getting a true picture of 80G donations in the country.
Currently the government reports only the 80G tax exemptions claimed by tax payers. However, many smaller donors do not claim tax benefits either because the amounts donated are too small, forgotten, or that they haven’t received the donation receipts.
With nonprofits now having to report every donation made, and these showing up on the AIR automatically (and being pre-filled in the Income Tax Returns), the amount claimed under 80G will increase. This, in turn, will increase the tax revenue foregone by the government.
The government needs to simplify the process
Given the increased compliance that the government has sought from the sector, it in turn could take a few steps to ease the process of citizen giving. These are:
- Provide either a technology interface or application programme interface (API): This will allow nonprofits to upload 80G data in real-time (similar to the GST portal), so that donors can avail of their tax rebate. This will build trust among donors who may want to check a nonprofit’s systems by doing a trial run with a small donation; if this donation appears in the donor’s AIR in real-time, it will increase the donor’s faith in the nonprofit’s capabilities to manage compliance and provide them their tax benefit. It is very important to have this kind of system apart from a system of only annual or quarterly returns. The aim of such a system will be to build trust amongst donors.
- Do away with the donor address requirement: As the new statement will require the PAN number for all donations, the donor’s address will be available through PAN. The need for capturing the donor address again just adds to the reporting burden, and is one more point of friction for the giver.
- Provide 100 percent tax exemption for 80G donation: With all this transparency, most of the frauds related to exemption claimed but no donation made, will be rooted out. The government should therefore provide 100 percent tax exemption for charitable donations, much like it does for other investments and insurance.
- Allow employers to accept 80G proof: Employers should be specifically allowed to accept 80G donations available in the AIR as permissible tax deduction to help lower the tax liability of the employee.
Nonprofits deserve a level playing field
There is a clear dichotomy in the way the government treats donations vis-à-vis other forms of tax exemptions.
Exemptions related to investments, insurance, long-term fixed deposits, and housing loans accounted for nearly INR 80,000 crore worth of exemptions (Section 80C, 80CCC, 80CCD, 80CCG and 80D)—which is more than 83 percent of the overall tax revenue foregone in FY 2018-19. This is against the paltry INR 1,043 crore foregone under Section 80G. 4
Investment, insurance, and loan companies are also required to file statements that can be auto-populated in an AIR, but only for ‘high-value’ transactions, typically upwards of INR 10 lakhs. Nonprofits on the other hand, have to mention all donations more than INR 50,000 in their IT returns.
Post Budget 2020 however, nonprofits will have to report all donations, of even INR 50-100 for a donor to receive a tax benefit, but there is no such provision for the financial sector. Why is a sector—comprising barely 58 insurance companies, 45 AMCs, 140 odd banks, and a few government entities—that contributes to more than 80 percent of lost taxes not being asked for a similar level of compliance, but a sector comprising two lakh entities and contributing to just one percent of lost taxes subject to this enhanced compliance?
Additionally, the above financial services companies are large with access to technical, legal, and accounting resources that can easily follow on this level of compliance. Shouldn’t we therefore look to plug larger holes before plugging smaller, almost inconsequential ones, if the purpose indeed is to save on lost tax revenue?
- Itemised is the US terminology for taking exemptions.
- p 37, Receipt Budget 20-21, Annexure 7 Statement of Revenue Impact of Tax Incentives under the Central Tax System: Financial Years 2018-19 and 2019-20.
- Calculations based on Receipt Budget 20-21, Annexure 7 Statement of Revenue Impact of Tax Incentives under the Central Tax System: Financial Years 2018-19 and 2019-20.
- Adding up all deductions under these sections for Individual/Hindu Undivided Family (HUF) Tax Payers, p. 35-37 Receipt Budget 20-21, Annexure 7 Statement of Revenue Impact of Tax Incentives under the Central Tax System: Financial Years 2018-19 and 2019-2.