Why Should the State and Taxpayers Subsidize Private Charity? Time to Scrap Section 80G of the Income Tax Act
The current tax system is riddled with exemptions and exceptions, leading to legal disputes and inconsistencies across different jurisdictions. Time to cut the Gordian knot.
Should the State and Taxpayers Subsidize Private Charity?
Section 80G of the Income Tax Act, 1961, has long been regarded as a progressive provision, promoting philanthropy by offering tax incentives to individuals, corporations, and other taxpayers who donate to charitable institutions. However, this framework raises a critical question: why should the state and ordinary taxpayers subsidize private charitable donations? After all, these contributions are entirely voluntary, and those who make them are under no obligation to do so. While the intent behind Section 80G is undoubtedly commendable, it ultimately leads to a loss of public revenue, benefiting private donors at the expense of the wider taxpayer base. This article examines whether Section 80G continues to serve its intended purpose effectively or if it’s time to consider scrapping the provision altogether.
The Rationale Behind Section 80G
Section 80G was introduced to incentivize charitable donations by offering tax deductions. Under this provision, donors—ranging from individuals to corporations—can claim deductions between 50% to 100% of their donated amount, depending on the nature of the recipient organization. Eligible donees include charitable trusts, relief funds, and organizations registered under Section 12A/12AA of the Income Tax Act. The rationale behind this is that by encouraging private donations, the government can supplement its welfare activities, spreading social and economic benefits more broadly.
In theory, this approach seems to support a stronger civil society, with private wealth being channelled toward public good. It is particularly valuable for non-governmental organizations (NGOs) that depend on donations to support education, healthcare, disaster relief, and other critical sectors. By making these donations tax-deductible, the government incentivizes philanthropic contributions, thereby indirectly funding social welfare initiatives.
The Case for Continuing Section 80G
Proponents argue that Section 80G has been instrumental in mobilizing private resources for public welfare. Charitable organizations often lack the steady revenue streams needed to fund their activities and depend heavily on donations. Tax incentives can encourage wealthier individuals and companies to contribute to causes they may otherwise overlook. In a country like India, where social inequalities are stark and public resources are stretched, private philanthropy plays an essential role in filling gaps left by the government.
Additionally, charitable donations foster civic engagement and social responsibility. By donating to causes, individuals and businesses can feel more directly involved in improving society. The state, by offering a tax deduction, aligns itself with these efforts, recognizing the broader social benefits that come from fostering a culture of giving.
The Case Against Section 80G: Subsidizing Private Charity
A Government-Subsidized Private Choice
Despite its merits, Section 80G comes with significant downsides. The most glaring concern is that it allows private individuals and corporations to receive a tax break—effectively a government subsidy—for charitable donations they make voluntarily. Since tax deductions under Section 80G reduce the overall revenue collected by the state, this shortfall must be compensated for by the broader taxpaying public. Essentially, ordinary taxpayers, many of whom may not have the financial ability or inclination to make charitable donations, end up indirectly subsidizing the donations of wealthier individuals or corporations who benefit from this provision.
Challenges in Oversight and Fraudulent Claims
As the tax assessment process becomes increasingly "faceless," the Income Tax Department faces significant challenges in scrutinizing and verifying claims made under Section 80G. Reports of inflated donations and fabricated receipts have surfaced, putting further strain on the system. Without adequate oversight, the provision can be misused, with both taxpayers and the state ultimately bearing the burden of lost revenue. This issue highlights the risk of unchecked claims slipping through the system, exacerbating the revenue deficit.
Potential for Money Laundering
There is also a legitimate concern that Section 80G could be exploited for money laundering. In such cases, donors may claim tax deductions for their charitable contributions, receive the tax break, and then get a portion of their money returned in cash by the receiving entity. The charitable organization could then disguise these returns as petty cash expenses spread over the year, making it nearly impossible to track. This loophole opens the door to tax evasion, undermining the very purpose of the provision and raising serious questions about accountability and enforcement.
Lack of Transparency and Reliable Data
Another key issue surrounding Section 80G is the apparent lack of transparency regarding its impact on public revenue. The Income Tax Department does not seem to have readily available data on the scale of 80G registrations or the quantum of donations made under this provision. Estimates from 2019 suggest that over 100,000 organizations were registered under Section 80G, with the number likely having grown since then. However, precise data on the total amount of donations received remains elusive, though estimates suggest it runs into thousands of crores annually. Similarly, while it is believed that tax benefits claimed by donors under Section 80G total several thousand crore rupees per year, exact figures are not publicly reported. This lack of clarity raises questions about the efficacy of monitoring and evaluating the true financial impact of this tax incentive.
A Complicated and Cumbersome System
Section 80G is just one of many exemptions and exceptions that make up the labyrinthine income tax code. This complexity has led to widespread confusion and varying interpretations by different High Courts, contributing to a flood of special leave petitions (SLPs) before the Supreme Court. The resulting legal gridlock has further complicated the system, making the tax law inconsistent and burdensome for both taxpayers and the judiciary.
A Global Perspective
Many other democracies offer similar tax incentives for charitable giving, but often with stricter oversight and limitations. In the United States, the United Kingdom, and Canada, tax deductions for donations come with stringent reporting and accountability requirements. These systems are also much clearer in terms of limits and eligibility, avoiding the confusion and legal challenges that plague India's 80G framework.
Time to Scrap Section 80G?
Given these complications, is Section 80G still fit for purpose? The answer, in our humble opinion, is likely no. While the objective behind Section 80G is laudable, the practical difficulties of regulating and overseeing charitable deductions, combined with the broader impact on public revenue, make it increasingly untenable. The state should not be in the business of subsidizing private charity at the cost of ordinary taxpayers.
New Tax Code— Right Time, Right Place
In fact, during the last Budget session, Finance Minister Nirmala Sitharaman announced plans for a simplified income tax code. She acknowledged that the current tax system is riddled with exemptions and exceptions, leading to legal disputes and inconsistencies across different jurisdictions. This shift toward simplification offers the perfect opportunity to address the complexities surrounding Section 80G.
It is time to cut this Gordian knot. Repealing or deleting Section 80G would be a logical step toward simplifying the tax code and eliminating unnecessary complications. A practical approach to ensure a smooth transition would be the introduction of a sunset clause of two years, allowing both donors and charitable recipients ample time to adjust their tax affairs. Additionally, this period could be used to implement appropriate regulations on the large cash donations, often anonymous, made to trusts that operate under both charitable and religious capacities, ensuring better oversight and reducing potential misuse of funds. Such measures would help maintain transparency while promoting a more equitable and efficient tax system.1
In conclusion, while Section 80G was designed with good intentions, it now serves as a costly and inefficient mechanism that benefits a select few at the expense of the larger public. The Finance Minister’s move toward a simplified tax code presents an ideal opportunity to reconsider this provision and, ultimately, scrap it in favour of a more equitable tax system.
