Is India Inc doing enough on philanthropy? The answer to that question would vary widely. The government has said the inflow has improved considerably after it mandated companies to spend 2 per cent of their profits in corporate social responsibility. But the actual amount collected isn’t much really: The CSR expenditure of about 5,000 companies, according to the ministry of corporate affairs data, was just Rs 98.22 billion in 2015-16.
In its India Philanthropy Report 2017, Bain and Company gave some interesting figures. In relative terms, the share of corporate philanthropy in funds raised for the development sector has actually declined. In 2016, companies accounted for 15 per cent of the total share of private philanthropy, down from 30 per cent in 2011. There is some good news, however. Overall, total funds for the development sector have grown at 9 per cent over the past five years, increasing from Rs 1,500 billion to Rs 2,200 billion. While the government remains the largest contributor (Rs 1,500 billion in 2016), its share in total funding has been declining steadily.
primarily accounted for the Rs 700 billion five-year growth. Private donations made up a third of total contributions to the development sector in 2016, up from a mere 15 per cent in 2011. What is encouraging is that philanthropic funding from private individuals recorded a six-fold increase in recent years.
But the actual numbers are obviously still very small compared to the potential. What India needs is large scale charitable giving, or philanthropy. In the US, for example, charitable giving is around 2 per cent of its gross domestic product. In India, it’s much smaller.
One way of scaling this up is tax-exempt donation of equity. As elsewhere, India’s entrepreneurs hold an overwhelming share of their wealth in the equity of their companies. But donations through this route are a big problem. That’s because till 1973, India allowed donation of equity for charitable purposes, without the receiving foundations losing their income tax exemption status. The provision was withdrawn suddenly, possibly because of the mistrust of business in general. That, of course, was not a surprise as it was the period when the government introduced the MRTP Act, following it up with the Foreign Exchange Regulation Act.
It’s perhaps time for the government to once again introduce norms for donation of equity for charitable purposes, without the receiving foundations losing IT exemption status.
Charitable trusts/companies lose their IT exemption status
under Section 11 and 12 of the Income Tax Act, 1961, if they hold shares in companies (other than those in prescribed categories), acquired by them on or after June 1, 1973, and not disposed of till March 31 of that year subsequent to the year of acquisition. The position is the same irrespective of the mode of acquisition, that is, whether the shares are donated for the institution or purchased by the institution.
This needs to change. As Telugu Desam Member of Parliament Kesineni Srinivas says, globally, it is an accepted practice of high net worth individuals to donate a part of their shareholding in companies to charitable institutions. But not many entrepreneurs or HNIs in India take this route because of the tax tangle. This is a pity as the potential is huge. According to the Forbes 2017 list of 100 Indian billionaires, the total net worth of these billionaires is around $250 billion. Most of this wealth is held in the form of shares in companies, and even if 1 per cent of this wealth is donated towards charitable purposes, it is a relatively high amount. In any case, the original purpose behind the restriction imposed in 1973 — to prevent avoidance of estate duty, wealth tax, high tax on dividend income etc — is no longer valid. Many countries do allow charities to retain donated shares.
The point to note is that if trusts invest only in interest-earning securities like bonds, the real value of these will erode over time with inflation, making it difficult to sustain or expand charitable activities. After all, it has been proved beyond doubt that in the long run, equities give far better returns than bonds or fixed deposits.
Of course, proper safeguards must be taken to prevent misuse of this provision. For example, charitable institutions must be prevented from investing their own funds in capital markets
or entering into speculative transactions. Besides, a trust should be considered charitable only if the object of the trust is directed to the benefit of the community and not for an individual or group of individuals.
There is another compelling reason to turn the clock back. The government had prohibited tax-exempt charitable trusts from holding equity stakes in companies for new trusts, but allowed exemption to older ones, including the Tata and Birla trusts, which were permitted to continue holding shares. This is anyway discriminatory and must be corrected.