Income tax exemptions available to charitable trusts occupied in commercial activity may be withdrawn next year. The move may be part of Budget 2008-09, a senior government official told Business Standard.
Some other tax exemptions available to companies may also be pruned or altered, the official said.
Though tax proposals for the Budget are finalised only in February, income tax officials are examining how various exemptions could be phased out from the next financial year.
In 2006-07, the revenue foregone just on account of 16 direct tax incentives and deductions available to corporate India was just over Rs 50,000 crore (Rs 500 billion), 44 per cent more than the previous year.
Commercial entities claiming income tax exemption by registering under Section 12A of the Income Tax Act, 1961, as charitable organisations have been under the Central Board of Direct Taxes (CBDT) scanner for some time.
CBDT thinks companies are taking advantage of the definition of what constitutes charitable activity in Section 2 of the Income Tax Act, 1961.
The section says: "Charitable purpose includes advancement of any other object of general public utility".
The definition will have to be amended, the official added.
Pointing out that an institution like the Mormugao Port Trust (MPT) among many others is registered as a charity, the official said most port trusts are doing commercial business, but claim income tax exemptions under Section 12A.
"There are others too -- a state government-owned road transport, a chamber of commerce, north India's largest agricultural trading committee and a leading maritime board in West India -- are registered as charitable trusts. None of them are doing any charity as such," the official added.
However, the Mormugao Port Trust maintains that it is rendering a public service and claimed that the courts have upheld its stance.
"Not a single rupee goes as dividend to government or anyone else. Every surplus rupee is spent for maintenance and development of the port. It qualifies as a charitable institution completely," said Praveen Agarwal, chairman, Mormugao Port Trust.
"Twelve major ports plough back Rs 600-700 crore (Rs 6-7 billion), which otherwise would have gone towards tax, every year for expansion and development of ports. Tax on our income will inhibit expansion plans," Agarwal added.
Tax experts point out that unless the definition of "charitable activity" is changed in law, the Income Tax would continue to lose in litigation on this account.
"Many tribunals have upheld such entities as charitable trusts due to the definition which includes public utility", the official said.