Headlines such as “Income Tax department cancels registration of Tata Trusts”, “How the Tax Department cancelled Tata Trusts
Registration” make one wonder why form has overpowered substance in our tax system, despite a slew of fast-paced reforms to make it progressive and assessee-friendly. Is the law a servant of logic or its master?
The fundamental question that needs to be asked is whether the law should be enforced if it comes to contradict logic. Every law when enacted has a mother statement setting out the objective of law, which is the essence of law. The interpretation of provisions contained in the law must be in consonance with the object. Similarly, any interpretation against the object of the law must be struck down.
Changes in laws are made either as a result of the failed logic of the earlier laws or to address new developments in society. Hopefully, when the tax issue of Tata Trusts
is decided by the judicial system, it will first seek an answer to the fundamental question: Why were the Tata trusts
given tax exemption
– or, for that matter, why is any charitable organisation given exemptions? Do the trusts continue to follow their objective? If so, obviously substance must prevail over form.
Although one does not have benefit of perusing the Tata Trusts application and file notings based on which these trusts were given their tax-exempt status, the prima facie rationale appears to be this: As opposed to other entities where profit is appropriated by the owners or employees for their benefit, in case of such trusts, the profit is appropriated by the trust for the benefit of unrelated beneficiaries who do not have any ownership or pecuniary relationship with the trusts and are not involved in any decision-making.
The other reason is that such tax exemptions lead to higher disposable income in the hands of trusts, enhancing their philanthropic activities.
Illustration by Binay Sinha
The two paramount factors that make any trust eligible for exemption is that the owners/trustees must not enrich themselves and employees are also not allowed to enrich themselves by drawing obnoxious remuneration, and the income must be used for charitable objectives. It is not and it cannot be the case that the law expects everyone to work pro bono.
The intent of this piece is to rationally examine the issues behind the present mess, which appears to be hurting the public good.
First, it is nobody’s case that tax exemption
is the objective of the law. Therefore, as long as the prime objective is charity-oriented, tax exemption
is a conscious decision of the authorities to boost the trusts’ disposable income. As a corollary, any change in law must keep up with the objective or intent behind the exemption and procedures should not and cannot become the master and result in nullifying intent.
With this clarity, the first premise is that any change in law must ensure that the trusts and their activities must remain agnostic to changes in taxation laws; otherwise, one is hurting the original intent, which appears to be sacrosanct, given the public interest and public good element of charitable activities.
Issues or questions that trusts face largely relate to their investments, tax exemption, tax law changes and voluntary withdrawal by trusts of registration with tax authorities.
Investments by trust: Various restrictions are placed on trusts on where they can invest their surpluses. There is, however, no clarity as to why trusts are not free to invest theirs surplus in any manner trustees deem fit in the best interest of trust, as long as the trustees are in compliance with provisions of trust deed. The only plausible reason appears to be that lawmakers feel that the prescribed investment avenues are less risky compared to investment in shares. It reflects the mindset of an era in which shares were treated as speculative investment. There is no logic to continue with such restrictions any more when trustees of the National Pension System are allowed to invest in shares, as do the provident fund authorities and the government itself. The intent of law may be good but such restrictions have outlived their utility. In fact, some permitted investment avenues are probably riskier. For instance, the law allows trusts to deposit money with cooperative banks. Given the serial failures of such institutions, should one still bat for such prescriptions? And why are shares of only public sector companies and depositories allowed? Is this a quid pro quo for tax exemption that trusts should fund government companies? And in what way are private sector companies untouchables? With deposit insurance of ~1 lakh should trusts having thousands of crores in bank fixed deposits risk its money? Who will bear the loss?
Therefore, there appears to be no logic for such restrictions. Ironically, while trusts can’t invest directly in shares, they are permitted to invest in mutual funds and units that have investments in shares? Can anyone explain this rationale?
(Next day: Why trust laws need a makeover) | The author is founder and managing director of Stakeholders Empowerment Services