Tuesday, August 18, 2009

India -- New Direct Tax Code 2009 to Affect Charities

A new Direct Tax Code has been proposed by the government of India to overhaul the outdated and cumbersome tax system that has existed until now; a draft and a discussion paper were recently released by the Union Finance Minister, Mr. Pranab Mukherjee. Among other changes, the new Code will have an effect on charities, as outlined here.  The Code replaces the term "charitable purpose" with the term "permitted welfare activities.”  “Permitted welfare activities” has been defined to mean any activity involving relief of the poor, advancement of education, provision of medical relief, preservation of environment, preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility. The scope of Section 2 (15) of the Income Tax Act has been broadened. Prior to this amendment, “Charitable purpose” included: “relief of the poor, education, medical relief and the advancement of any other object of general public utility.”   Finance (No.2) Act 2009 has now added: “preservation of the environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest”.

Advancement of any other object of general public utility will not include any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a fee or for any other consideration, irrespective of the nature of use, application or retention of the income from such activity.

The finance ministry has uploaded on its website (www.finmin.nic.in) the draft Direct Tax Code, a discussion paper, a comment on the code, and a place for people to respond to it.



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In the new Code the concept of EET has been introduced for all tax saving schemes. At present the contribution to the Public provident fund or provident fund of employers are tax free upto a certain amount, the maximum in PPF being Rs70,000/- and interest of 8% paid on such contributions is also tax free and once a year withdrawal from the past accumulations is also allowed subject to the ceiling prescribed. The new Tax code proposes to withdraw this advantages completely. Any withdrawals from the PPF after 2011 will be treated as income and taxed at the marginal rate of taxation. This proposal is obnoxious in the context that there is no social security system in our country and PPF entirely funded by the individuals out of their hard earnings provides a cushion for meeting bulk expenditure such as operations, house repairs and higher education and marriage expenses. Normally these expenses, in the current inflation context, may be anywhere between Rs3-5 lakhs and paying the lowest income tax rate of 10% on such withdrawals will be a substantial loss for the individual. Taking away the benfit of tax free interest at 8% pa is also a grievous injustice to the contributor. The new Tax code should continue at least the PPF in its present forms in the interests of senior citizens as they cannot park their hard earnings in speculative stockmarket investments.

Posted by: T.K Kasiviswanathan | Aug 28, 2009 6:13:42 PM

1) Will withdrawal from PPF after 1/4/2011, of amounts + interest accrued before 1/4/2011, be taxed?

2) Will interest accrued after 1/4/2011, on balance in PPF a/c as on 31/3/2011, be taxed on withdrawal after 1/4/2011?

If so, how to segregate them?

Posted by: Yezad Writer | Feb 3, 2010 1:26:14 AM

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