Governments across the world support the nonprofit sector through various measures. One of the most common and visible of these are tax incentives on charitable donations made by individuals and corporates.
The Centre for Social Impact and Philanthropy (CSIP), Ashoka University, and Centre for Budget and Governance Accountability (CBGA) conducted a study on the relationship between tax incentives and philanthropic giving. The study compares India’s incentive policy with that of 11 countries, namely Bangladesh, Brazil, China, France, Mexico, Norway, Singapore, South Africa, South Korea, UK and US, selected for the diversity of their economic status and models.
India falls somewhere in the middle because the rate of incentives offered has declined due to tax policy changes of 2017 and the introduction of a ‘dual tax structure’ in 2020. Lower personal income tax rates and the abolition of inheritance and wealth taxes have further reduced the attractiveness of tax incentives for philanthropy.
France, UK and Singapore have most generous tax incentives
Broadly speaking, France, Singapore, and the UK seem to have the most generous tax
incentive structures in the sample of 12 countries, while Bangladesh, Brazil and Mexico seem to be on the other side of the spectrum.
The extent of generosity of incentives is higher in these countries for different reasons. For example, in France, it is because the incentive is in the form of a credit. In the case of Singapore, it is because of the high rates of incentive and high ceiling, and in the case of the UK, it is the combination of the tax rate, form and rate. Bangladesh’s lower level of generosity is mainly on account of its lower rate of incentive, while for Brazil and Mexico, it is due to low ceilings.
India in the middle
India is somewhere in the middle in terms of the generosity of its tax incentives. Under its most popular tax incentive scheme (Section 80G of the Indian tax code), India allows a 50% deduction for donations to charitable organisations. The distinctive feature in India is that it is the only country among the 12 surveyed where donations to government entities and funds also attract tax incentives.
Further, the tax incentives provided to some government entities and funds are relatively more generous (with 100% deduction allowed). This difference in the level of generosity holds even in the case of the ceiling that applies to donations to charitable organisations on the one hand and select government entities and funds, on the other. While donations to charitable organisations has a ceiling of 10% of taxable income, that on donations to select government entities and funds has a much higher ceiling of 100%.
What can the Indian Government do?
Governments have an important role to play in encouraging charitable organisations and this role involves two broad considerations:framing policies with the objective of encouraging the charitable sector, and designing policies such that they are effective.
Given the fact that tax incentives for charitable donations already exist, India fulfils the first consideration. However, there is considerable scope to improve on the second aspect, which is to design policies that are effective in achieving the objective of increasing the resources of the charitable sector.
4 things the Indian government could do:
1. Rigorous studies for evidence-based policy making
There is a need to carry out rigorous studies on the impact of tax incentives on the charitable sector in India to understand their role and effectiveness. Indeed, some recent studies are available for certain other types of tax incentives that analyse whether these tax incentives helped in increasing employment and/or investment. These studies are important as they help provide a sense of whether tax incentives have been effective in achieving their intended objectives.
However, there is an acute lack of literature that assess the effectiveness of tax incentives for charitable donations and how they impact charitable organisations. Hence, it is necessary to undertake studies to assess the importance of tax incentivised charitable donations from the point of view of charitable
2. Improve availability of tax data
For informed policy-making, it is important that more disaggregated data (such as on the number of corporates/individuals donating, the amount donated by different tax slabs donors fall under, the sectoral composition of donations, etc.), are made available by the government.
The government of India provides aggregate numbers on revenue forgone for charitable donations to charities in the statement “Revenue Impact of Tax Incentives under the Central Tax System” in the Union Budget. However, the reporting structure on tax revenue forgone does not provide any further details that can help understand the amount donated by different sets of donors and the nature of the donations. In the Financial Year 2012-13, the Income-tax Department introduced an e-filed return (ITR-7) for charitable entities in which information on the donations received by the entity has to be provided. Similarly, all persons with incomes above Rs. 5 lakh are compulsorily required to file returns electronically.
With regard to the 80G deduction, the tax return of the donor contains the details of the donee and her/his Permanent Account Number (PAN) along with the amount on which the deduction has been claimed. Therefore, data capturing the details of the donation made by a donor along with details of the recipient is available with the Tax Department. The government should consider making such data public, in line with good practices in other countries, such as the USA.
3. Raise the level of incentives provided
In light of the massive gaps in India’s achievement of the Sustainable Development Goals, which have been exacerbated by the impact of the COVID-19 pandemic, an increase in the rate of incentive provided as well as raising of the ceiling would send a strong message to donors on the desirability of philanthropic contributions.
4. Re-introduce taxes that affect higher-income groups
Given the significant increase in inequality, particularly amid the COVID-19
pandemic, it is recommended that the government re-introduce wealth and inheritance tax, and provide incentives on them for charitable donations. The scale of importance of tax incentivised charitable donations from the point of view of charitable organisations. The scale of recorded charitable donations in countries such as India and China is much smaller compared to countries such as the UK and the USA, even after accounting for differences in the level of income.
The absence of wealth and inheritance tax is regarded as one of the reasons for the lower level of philanthropic giving. These taxes were removed on the ground that the administrative costs associated with collecting revenue outweigh the amount of revenue collected. However, this logic may not hold true anymore as with the digitalisation of tax returns as well as other measures, administrative costs are likely to have come down, whereas revenue collection from these taxes can be significant given the increase in wealth held by the rich.
Reintroduction of these taxes, along with incentives on them for philanthropic giving, will not only result in additional tax revenue for the government, it will also increase the resources of the charitable sector.