Bill Gates and Warren Buffet are now household names all over the world, not only for what they have achieved in their professions but also for the generous donations they have made for charities.
Charitable giving is not unknown in India either. Many public institutions of repute have been created in this country with donations from the public, particularly rich industrialists and zamindars.
Some of the prominent ones among these are the Indian Institute of Science, Aligarh Muslim University, Banaras Hindu University and Birla Institute of Technology and Science. But most of these came into being before Independence. The years 1892 to 1947 marked what has been termed the 'Golden Age of Indian Philanthropy'. Philanthropy seems to have been on the wane since then.
The net share of private philanthropy in running public institutions was as high as 17 per cent in 1950; the share stands at less than 2 per cent now (according to a paper by Devesh Kapur and Pratap Bhanu Mehta).
While this is a reflection of the larger involvement of the government in areas like health and education, an important factor underlying this phenomenon could be the weak incentive provided in the Income Tax law for charitable giving.
Recognising the role of private charity in society, the Indian Income Tax law has, since its inception, provided for concessional treatment of donations to recognised charitable institutions alongside exemption of the incomes of trusts/institutions set up for charity.
Under the law currently in force, in general, 50 per cent of donations to recognised charities are eligible for deduction from the taxable income of an assessee. In the case of certain notified charities like the Prime Minister's National Relief Fund, deduction is allowed in full for the amount of the donation.
There is however, an overall ceiling on the amount eligible for deduction. Not more than 10 per cent of the income of the donor in a year qualifies for deduction. Again exceptions are made in the case of certain charities for whom the cap of 10 per cent does not apply.
Presumably, the restriction of 50 per cent of the donation as the amount for deduction and the cap of 10 per cent of the income of the year for the deduction were thought necessary in the interests of revenue. These limits do not seem to be appropriate any more.
For one thing, government revenues are currently on a roll. For another, there is a growing realisation that public charities and NGOs are badly needed to supplement state efforts in providing public services in many areas.
Also, evidence suggests that charitable giving is responsive to concessions in tax. In this background, the limits placed on concessions in tax for charitable donations mentioned above seem unduly restrictive and deserve to be done away with. Besides, the distinction made between different charities in the matter of amounts qualifying for deduction does not seem to be reasonable.
It is worth noting that contributions to institutions engaged in research and development made by a taxpayer out of income from business or profession are not subject to any limit and under Section 35 of the IT Act, are eligible for a weighted deduction of 100 per cent or more in several instances.
This provision, however, does not apply to donations made out of income derived from sources other than business or profession - like salary, interest, dividend or property. Such a distinction between donations based on the source of income does not stand to reason.
Another factor constraining charitable giving is the lack of public confidence in the genuineness of many of the ostensibly charitable organisations. Safeguards are prescribed in the law to ensure that the funds accruing to a charitable organisation are utilised solely for charitable purposes and against misuse by trustees.
Even so, there is a widespread feeling that the benefit of income tax concession for charities is being misused in many ways. This is primarily because the definition of charitable purpose itself suffers from several lacunae.
Coming down as it does from the Elizabethan era, the definition includes education and health as charitable service per se, that is, these services are presumed to be in the nature of "public good".
With education and medical services fast turning out to be money spinning activities, treating them as wholly charitable is no longer acceptable. At least partly they are in the nature of private good. Hence it is essential to incorporate the "public benefit" criterion in all activities claiming to be "charitable".
The British law of charity from which our tax provisions were derived has recognised this reality and lawmakers there are now trying to change their laws to strengthen the public benefit angle.
Our definition of charity also needs to be modified, such as by stipulating that user charges for services like school and hospital fees should be affordable by the majority or there should be provision for subsidising the services to underprivileged sections.
Consideration should also be given to making the definition exhaustive by bringing activities of current public relevance like advancement of sports and protection of environment under the umbrella of 'charity'.
Some institutions are accorded recognition as charity without having to undergo the discipline, which is laid down for charitable trusts in general, thereby opening up room for abuse.
There is, on the other hand, the requirement of multiple registration presumably as a safeguard against abuse - one for recognition as charitable entitled to exemption of income and another for eligibility of the donations for deduction from the donor's income.
This is needlessly irksome. The committees, which in the recent years have gone into the matter (Shome Committee, Kelkar Committee and earlier, the Chelliah Committee) also recommended that the provisions governing charitable institutions should be uniform and brought under one umbrella.
Apart from reforms on the lines suggested above, transparency in the utilisation of funds by charities - such as by requiring their accounts to be made open to the public - would help to instil more confidence in the charitable sector.
Some kind of "rating" of charitable organisations by the Income Tax authorities on their public website, based on their assessment record, would act as a guide to the public in choosing charities for support.
Bagchi is Emeritus Professor, NIPFP and Sen is a Commissioner of Income Tax. The views are personal
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