Friday, February 24, 2023
Indian Supreme Court Applies "Paradigm Shift" on Commerciality and Unrelated Trade or Business
John and Mark wrote a lot about a "donative" theory of tax exemption, the central thesis of which is that tax exemption should be limited to organizations that demonstrate they are worthy of exemption by generating sufficient public support such that its capital derives from donations. A necessary corollary, of course is that an organization should not be tax exempt if too much of its operating capital derives from sales. We all pretty much agree that the ideal charity, for which tax exemption is appropriate, is the one to which donate, and which organization, in turn, gives all its resources to appropriate beneficiaries. Somewhere in their two articles, they admit that ideal has never been the exclusive model for tax exempt organizations and, if I recall correctly, almost all organizations rely to one degree or another on income from sales of the "charitable" product -- tuition admission prices or hospital charges, for example. The enduring question, of course, is how much fee for service or goods (charitable or not) is too much so that we no longer consider the organization charitable. That is the difficult question. I don't remember if John and Mark settled on a definitive answer applicable in all cases but I kinda doubt it.
In India, the Indian Supreme Court, has approved a "paradigm" shift, in effect imposing a donative requirement limiting tax exemption to charitable organizations whose fees for services or goods do not exceed 20% of "total receipts:"
The paradigm change achieved by Section 2(15) after its amendment in 2008 and as it stands today, is that firstly a GPU charity cannot engage in any activity in the nature of trade, commerce, business or any service in relation to such activities for any consideration (including a statutory fee etc.). This is emphasized in the negative language employed by the main part of Section 2(15). Therefore, the idea of a predominant object among several other objects, is discarded. The prohibition is relieved to a limited extent, by the proviso which carves out the condition by which otherwise prohibited activities can be engaged in by GPU charities. The conditions are:
(a) That such activities in the nature of trade, commerce, business or service (in relation to trade, commerce or business for consideration) should be in the course of “actual carrying on” of the GPU object, and
(b) The quantum of receipts from such activities should be exceed 20% of the total receipts.
(c) Both parts of the proviso: (i) and (ii) (to Section 2 (15)) have to be read conjunctively-given the conscious use of “or” connecting the two of them. This means that if a charitable trust carries on any activity in the nature of business, trade or commerce, in the actual course of fulfilling its objectives, the income from such business, should not exceed the limit defined in sub-clause (ii) to the proviso.
In what is apparently the first case applying the paradigm shift, the Indian Supreme Court remanded a case involving an exempt newspaper whose advertising income exceeded 20% of receipts. If I read the opinion correctly, any amount of unrelated fee for service/goods precludes tax exemption. Fee for related service/goods may not exceed 20% of all receipts. I gotta think this through. The Court remanded to the lower tribunal for finding on the "nature of the receipts." If advertising is unrelated to the charitable mission -- as it generally is here in the U.S. under the "fragmentation rule discussed in American College of Physicians," the newspaper may not accept any amount of advertising revenue. If it is related, advertising revenue may not exceed 20% of receipts. Meanwhile if you are interest in Indian law of ta exemption or just comparative law, download both opinions for an interesting discussion.
Click on the picture to get an "Analysis of the Current Legal Framework for Civil Society in India."