Thus, the awareness towards education and one's own health has brought rapid growth of education and medical institutions. Realising the necessity of such facilities up to now, the government had kept the income of the educational and medical institutions exempt from income tax if they were existing solely for charitable purposes and not for the purposes of profit.

It has been noticed that due to this blanket exemption, many institutions, both medical and educational, were misusing the provisions and were actually making huge profits, which instead of being used for furtherance of the social and charitable activities were used for their own personal motives.

In the Budget, the finance minister taking this into consideration has deleted the clauses relating toblanket exemption of income and brought educational and medical institutions, which are charitable in character under Section 11 & 12 of the Income Tax Act, 1961. From now onwards such institutions will be able to claim exemption in case they're able to fulfil certain necessary conditions as specified under such clauses.

Existing provisions:

Under the existing provisions, `'any income of a university or other educational institution, existing solely for educational purposes and not for the purposes of profit; and any income of a hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit,'' were exempt under Section 10(22) and 10(22A).

Due to a blanket exemption under Section 10, some of the educational and medical institutions were noteven filing the returns of their income. This led to widespread misuse of the funds and the facilities available to the above institutions due to non-deduction and scrutiny by the income tax authorities.

The educational and medical institutions were investing surplus funds into various modes which were not permissible and judicious under law. The surplus funds of the institutions were also invested with private parties which resulted in an unhealthy impact in furtherance of the objectives for which the exemption was allowed.

Also, the trustees of the various educational and medical institutions were using the facilities for their own personal purposes, without being taxed under law.

In order to curb evasion and misuse of tax, it has been proposed to omit Clause 22 and 22A of Section 10 of the Income Tax Act, 1961, and henceforth these institutions will be able to claim exemption under Section 11 and 12 only if they fulfil all the conditions stipulated:

1) The exemption is only available if theinstitutions are engaged in charitable purposes. As per section 2(15) of the Income Tax Act 1961, `charitable purpose' has been defined as:

`'Charitable purposes include relief of poor, education, medical relief and advancement of any other object of general public utility.''

2) The funds of the trust or institutions have to be invested in the modes as provided in section 11(5)

3) The institution should not directly or indirectly benefit any interested persons as provided in the tax law.

4) The institutions will lose exemption if they deem that the income or property of the charitable trusts or institutions are being applied for the benefit of interested persons.

5) The institutions will lose exemption if any part of the income is applied to private religious purposes.

6) The institutions will also lose exemption if any income is applied towards the benefit of particular religious community or caste except scheduled caste, scheduled tribes and also women and children which are excluded from thiscategory.

7) The institutions shall have to apply 75 per cent of its income for its charitable purpose. In case it is not so done, then tax will have to be paid on the balance income.

Exemptions from income tax will only be available when all those conditions and other limitations and in case of violation of any of the conditions, the whole of the income of the institutions will become taxable.

The Bill also seeks to insert a new sub-clause IIIB of section 10 to provide exemption to any such university or other educational institution or hospital or medical institution which is established by Central, State or Provincial Act or by local authority or any society which is wholly and substantially financed by the government.

This has an effect of basically bringing under tax net all the educational and medical institutions.

The Jindals are delhi-based chartered accountants