Tax incentives for Philanthropy 

News: Civil society plays a key role in development of the society. Hence, it is important to study various aspects that affect its functioning.

Despite this, impact of tax incentives on charitable donations has not been systematically studied in the Indian context. 

Is there any global in-depth research on the role of tax incentives in supporting civil society? 

No. The role of tax incentives in supporting civil society is poorly studied in most countries. 

Although there are some studies from the U.S. and the U.K., but here too, the non-monetary impact of tax incentives is not deeply examined. 

For example: Does the legal relationship that tax incentives create between the state and the civil society as a sector impact its financial health and stability? 

Why the issue of tax incentive to civil society is critical for the development ?  

Civil society organisations have historically played an irreplaceable role in social development. Many government programmes have emerged due to a harmonious relationship with NGOs that have implemented an innovative idea.  

Governments have provided the scale and state support, while the NGOs have provided the ideational energy and community experience.

For example: The activity-based learning approach developed by Rishi Valley in Tamil Nadu during the early 2000s.  

Why are tax incentives are important? 

Many NGOs in India are small and operate with budgets of less than ₹15 lakh a year and most work in areas like health and education which are critical for society’s progress. 

For these small NGOs in remote areas or those working in areas that are less recognised, the tax incentives may still be significant for establishing legal recognition with the community, government entities and donors. 

The most essential role of tax incentives is the ‘signalling effect’. It denotes that the state supports philanthropic activity and, through its revenue forgone, actively encourages private actors to engage with public problems. 

What is the way forward? 

There is an urgent need for a  systematic study of the impact of tax incentives. 

Government may reintroduce wealth and inheritance tax so that charity-focused tax incentives can benefit the non-profit sector. 

There is need for some changes to the new tax regime dilutes the state-civil society relationship by giving donors the option to opt out of incentives for lower tax rates. As this will spur the growth of research and study in the area. 

Source: This post is based on the article “Tax incentives for Philanthropy” published in The Hindu on 9th Feb 2022.       

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