The reality of anonymous donations is recognized by the Tax law and NGO’s who receive and are unable to identify who their donors are can be subject to taxation. The taxability of anonymous donations is determined based on the extent of unknown donations to total donations in conjunction with the theme of the NGO whether it has a religious purpose or charitable one or some combo of both.
Donations are essentially gifts from donors for social causes, unlike a gift which can be for other reasons viz to express love and affection, to celebrate is an award to recognize a contribution, etc. As NGO’s for social causes avail of tax exemption, and funds are collected from the public, thereby they are essentially like public bodies. Consequently, there are tax regulations on what is permissible as valid donations, what unacceptable donations are and what is termed as anonymous donations. The distinction between these three categories is important to understand.
What is an Anonymous Donation
Anonymous Donation to an NGO is a voluntary contribution where the recipient does not maintain any records of the identity indicating the name, address of the persons making such contribution in its books. Donation received in Hundi boxes kept at religious places, or donations received without any details of the donor are some of the examples of anonymous donations.
Sources of Donations
Donations for NGO’s typically come from one or more of the following sources
- Foreign sources – From non-Indian citizens, foreign foundations, foreign companies, foreign governments, etc.
- Corporate social responsibility (CSR) grants – From companies as per the CSR mandate in The Companies Act 2013.
- Government Grants – Central, State, and Local bodies.
- Donations from Indian citizens.
What determines the acceptability of valid donations
The acceptability of a donation is a function of the source, the identity, and requisite KYD (Know your Donor) of the donor, the specific social cause or religious purpose and what are the Governmental Registrations that it has. For example, a donation from a foreign source to an NGO without an FCRA Registration is an unacceptable donation. Not only is it unacceptable even a receipt inadvertently invites penalty under FCRA. Donations from Non-Resident Indian with foreign citizenship from their rupee bank accounts in the absence of FCRA are also prohibited. CSR grants to a third party NGO’s which don’t have a 3-year track record is also not considered as valid CSR spend. Another scenario is where social activity is not within the prescribed activities of Schedule VII of The Companies Act 2013 but fits within the definition of Sec 2(15) of The Income Tax Act on charitable activities such as the promotion of yoga or any advocacy which fits within the definition of general public utility. In this scenario, the donation may be valid under Sec 80G to the Corporate but would not qualify as CSR spend.
The KYD on donations and donors for Individuals is citizenship for FCRA compliance, PAN No for identity verification, address proof in the form of Aadhar or Driving License or Passport for traceability from an Income Tax perspective on scrutiny assessment procedures. Any omission in collecting and retaining KYD information can result in the donation being termed as an anonymous one.
Anonymous Donations – To whom does it apply
Anonymous donations apply to:
- Charitable trusts/institutions referred to u/s 11
- Universities and other educational institutions referred to u/s 10(23C)(iiiad) and 10(23C)(vi) or
- Hospitals and other medical institutions referred to u/s 10(23C)(iiiae) and 10(23C)(via)
- Notified funds or institutions referred to u/s 10(23C)(iv) or
- Notified trusts or institutions established wholly for public religious purposes or wholly for public religious or public charitable institutions referred to u/s 10(23C)(v)
How is tax determined on Anonymous donations
If any of the aforesaid organizations receive an anonymous donation, and then such anonymous donation shall be taxable in the hands of the recipient as per the rules laid down u/s 115BBC. Such anonymous donations shall be taxed at the maximum marginal rate ie, 30%. However, taxability would depend upon the purpose for which the trust or institution have been formed [Sec 115BBC (2)].
Where the trust has been formed wholly for religious purposes, then the provisions of Sec115BBC shall not apply i.e. anonymous donations are not taxable @ 30% and treated as donations received in the normal course.
Where a trust or institution is created partly for charitable and partly for religious purposes, then the provisions of Sec 115BBC shall be applicable only on such anonymous donations received with a specific direction towards medical or educational institutions run by such entities. Religious activities will be exempt from the ambit of taxability of Anonymous Donation. However, such entities will fall under an anonymous donation clause for medical or educational institutions run by such entities.
Where a trust or institution is created wholly for a charitable purpose, all anonymous donations are taxed at the rate of 30%.
Condition 2 and 3 are subject to
If aggregate anonymous donations are Rs 1 lac or less, Section 115BBC will not be applicable. If the aggregate anonymous donation is more than Rs 1 Lac but less than 5% of total donations received, Section 115BBC will not be applicable. If the aggregate anonymous donation is more than Rs 1 Lac and 5% of total donations received, the excess amount shall be taxable at the rate of 30%.
It is assumed that in the aforesaid scenarios, the NGOs a) partly religious and partly charitable entity and anonymous donations is for educational /medical institute run by the entity or b) wholly charitable entity.
There is in some quarters a belief that NGO’s are vehicles for money laundering, little realizing that the tax law, in fact, has a provision to regulate anonymity of the donors. Unfortunately, there is a lacuna in exempting religious bodies. On the one hand, the institution has tax exemption and at the same time, individual donors to religious bodies also don’t avail any tax exemption to their contribution. Therefore, anonymity seems to be permitted if the purpose is religious which is an archaic tradition and needs to be plugged. With India now on a digital mission with digital payments, direct benefit transfers, UPI etc.the time may be opportune. With the recent changes in the Tax Return Form ITR, the Individuals need to provide the PAN No of the NGO where they claim a tax deduction. While the Tax return form of the NGO does not require them to submit the list of Donors with their PAN No. In the current tax digitization trend, the Government may consider modifying the tax return form for NGO’s to include Donor PAN No and amounts received. This will surely plug any misuse of NGO’s funds.