There are very few Sections in the Income Tax Act that deal with charitable organisations. Those that exist further complicate matters for NGOS. There are cases where NGOs have had to go to the Supreme Court even for simple words used in the rules concerned. For instance, the word "applied" is used under Section 11(3)(a) whereas "utilized" is used in Section 11(3)(c). The difference in language became a centre of controversy in one case. The courts finally held that the Section had used the two words in the same sense. It is, therefore, essential that Acts are simplified to avoid unnecessary litigation.

Definition of Trust: NGOs are included under the definition of "Trust" in the IT Act. Though it is customary to use the term "Trust" in a generic manner, each country defines and applies this concept in its own way. One definition that has found favour universally is "a legal entity which is organized and operated primarily for public benefit purposes and not for private gain". In India, the IT Act has given an inclusive definition 2(15): Relief of poor; Education; Medical relief; and the advancement of any other object of general public activity.NGOs engaged in developmental work have to find a berth under any one of these definitions.

Registration: All NGOs have to register themselves with the IT commissioner in addition to registration under the Act concerned. There are many who have not registered themselves. The government should extend an amnesty scheme for such NGOs, on the lines of schemes for other sectors.

Income: The IT Act has defined the word "income" differently for NGOs. In the case of commercial activities, the profit generated out of the activities is taken as income, whereas even the grant-in-aid received for specific activities is considered as income. The definition of income under Section 11 is open to various interpretations. It is unfortunate that the IT department does not have a concrete and definite view about the grant-in-aid received by NGOs from national and international donors, including government. In some cases, the associations present such income as capital receipt whereas in other cases the grant-in-aid is declared as income. NGOs receive these for specific activities based on the budgetary requirements and in real sense these are not income. This is a grey area, and the department should consider excluding such grant-in-aids from the definition of income.

A World Bank Report discusses two key tests that could be considered for exempting lawful, economic, business or commercial activities from paying IT. The first is the test of "principal purposes" which looks at whether the principal activities and expenditure of an organisation are for non-commercial purposes. These organisations may get exemption provided (i) no profit or earnings are distributed to founders, members and so on and (ii) it is organised and operated principally for the purpose of conducting appropriate (not for profit) activities. The other is the test for "Destination of Income". Here, if the surplus earned from the activity of trade/business is committed for and actually utilised for the activities, it should be entitled to tax exemption.

The report states that: "Although the destination of income test is adopted in many countries it can cause the public to conclude that many NGOs are just commercial enterprises set up as tax-dodges. This image once created by a handful of NGOs affects the entire sector and gives it a bad reputation."' On the other hand, forbidding all commercial activities deprives NGOs of a major source of income. In a country with a developing market economy, it may be appropriate to strike the balance in favour of tax exemption. It is, therefore, suggested that organisations undertaking income-generating activities should apply the tests of the principal purpose and destination of income, as suggested by the World Bank report.

Educational and Medical Institutions: The exemption granted to these institutions has been withdrawn since Clause (22) and (22A) was reported to be widely misused. There have been cases where huge capitation fees were being charged by so-called educational institutions. But all NGOs cannot be deprived of tax benefits because of a few. There are cases where educational institutions and hospitals have genuinely been helping the needy. Since exemptions have been withdrawn over a limit, these organisations stand to lose. Hence, concessions already extended should not be withdrawn. Instead, the government should introduce a monitoring mechanism for checking the genuineness of the organisations and their activities.

Method of Accounting: The existing legislation gives a Trust the option of accrual basis or cash basis of accounting. In most cases, the Trusts adopt the cash basis of accounting. But in those cases where they have income generating activities they have to adopt the accrual basis of accounting. Hence it is suggested that the Trusts be allowed to maintain a hybrid system of accounting.

Capital Gains: There is no full exemption from capital gains for organisations registered under Section 12 (a) and they have to invest the sales proceeds only in acquiring further capital assets. This puts many NGOs in financial difficulties. They should be allowed to apply the realisation of the proceeds for the objects of the Trust.

Tax Deduction at Source: Many NGOs employ contractors and sub-contractors in construction and other activities. They normally undertake these activities on behalf of government agencies. Many adopt low-cost technology and work with budget constraints. In most cases, the TDS provision acts against the interest of charity. Therefore, except in the case of salaries, TDS should be made inapplicable to all such payments for registered organisations under Section 12(A). Similarly, many agencies have invested their corpus in approved securities. Here, tax should not be deducted if proof of registration is produced.

Time Limit for Exemptions: There are many cases where NGOs apply for exemption under Section 35(1)(ii) and 35(1)(iii), 35(AC) and 10(23)(C)(iv) etc. There are cases where either the department does not respond, or delays the response. This puts many NGOs into a difficult position. It is essential that the time limit is fixed, as in the case of registration of 12AA(2) where a six-month limit has been fixed.

Investments: Many NGOs and self-help groups have formed federations for micro-credit and micro enterprises. These federations plan to take advantage of the provisions under Section 25 of the Companies Act and want to float companies. For this they have to invest a nominal amount. But the IT department is of the view that such investments are not eligible for exemption. It is essential that reforms take cognisance of such paradoxes. Second generation reforms should usher in all-round structural and legal changes. The Prime Minister has said that to seize the new opportunities being offered by the changing economic environment, India will have to take a "fresh look" at the existing laws and regulations that have a bearing on rural development. NGOs, too, are an integral part of development, hence, the benefits of reforms should also reach them.

(The writer is a Chennai-based chartered accountant)