Law Street in The Economic Times (June 2007)

Ever participated in the corporate social responsibility program at your office? Guess, you do get a tax break for the contribution from your salary income. Don't you wish you could actually go across to that orphanage occassionally with a bunch of books and toys? The US grants a tax break for donations in kind. We should follow suit, this will reduce social inequality, one of the fears expressed recently by our Prime Minister.

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Happy reading and happy donating.

Good deeds deserve tax breaks

Law Street -Edition dated June 29, 2007

Recently Prime Minister Manmohan Singh’s statements took the entire corporate world in India by surprise. His intentions were no doubt laudable — to bridge the divide between the haves’ and have-nots’ since social inequity can lead to unrest. However, his hinting that huge salaries paid by India Inc were the cause for this divide was perhaps a bit unfair. Globalisation means that a person does not compare his salary with what his peer in another domestic company gets, but rather what his or her value is in the global market place.

In this knowledge economy, no company can afford to lose its key people. It is not surprising that India Inc revolted against his suggestion. Yet there are other ways of curbing this divide — including the digital divide. This can be done by perhaps providing incentives for companies engaged in charitable work or what is popularly known in corporate cubicles as corporate social responsibility.

It is true, that under the current provisions of section 80G of the Income tax Act, 1961 (‘the Act) tax deduction is available to any taxpayer (be it an individual or company) for donations made. This ranges from 50% to 100% of the amount of donation, subject to an overall limit. There is a restriction clause in the tax benefit, which states that for donations made to specific funds, the amount that is contributed and claimed as a deduction should not exceed 10% of the adjusted gross total income. This is called the net qualifying amount and it restricts the tax benefit that can be claimed by a taxpayer.

The need of the hour is to further incentivise charitable work. Perhaps, corporate entities could be encouraged to directly sponsor government-aided schools or hospitals? Have you ever walked into one such school? Zenobia Aunty, once an avid social worker prior to her bout of arthritic pains, states that most of these schools are in shambles. The roofs are generally leaking, the walls are cracked, the furniture is broken, the rooms are crowded, the toilet facilities largely lacking. True, in most states, lunch is provided to the children under a mid-day meal scheme, but even this, at times, is mired in political battles. Ditto is the case with most government hospitals. The doctors there strive to do their best, but lack of funds, means limited facilities.It cannot be denied that we are still a developing country. What is required is large scale participation from India Inc. Perhaps a cement company could donate tonnes of cement, an architect could provide his services free, a computer manufacturing company could provide computers, a software company the requisite software, a food manufacturer — confectioneries for special occasions such as Children’s Day?

India Inc could also arrange to provide for donations in kind — to ensure that it reaches the children directly without any intermediaries (sometimes things do get lost if the delivery mode comprises of a long chain), such as clothes, woollens, medicines, etc. Unfortunately, such donations in kind at present do not get any tax sops. But then, there is the tendency to think only of oneself. Focusing on I, me and mine can lead to social unrest, as well, and it is time to think more on the lines of ‘we’ in the social spectrum.

We at India Inc, including all its employees can do a lot more towards social upliftment. While this columnist was chatting with her US-based tax-author friend Kay Bell, she learnt that donations in kind are eligible for tax sops in the US. Kay says, many charities are happy to accept used clothing and household goods and you’re actually allowed to claim the fair market value of these items as a tax deduction. However, to curb the misuse of this provision, household goods that are donated must be in good condition (charitable organisations generally give a receipt to help support such claims). The tax return is required to detail, non-cash charitable contributions. There are additional caveats, if you are claiming a deduction of more than $5,000 for an item, a certificate from a qualified appraiser is required to be attached with the tax return. In some circumstances, the entire deduction is not allowed in the same year, but is staggered.

Yet the moot point is that donations in kind are eligible for tax sops. Now if the same could be emulated in India, it would definitely help boost corporate social responsibility. Further, Zenobia Aunty would also be assured that the biscuits donated by her actually reach the school children, instead of a cash donation that could perhaps be lost in the way.