tax incentives for philanthropy

Do people donate money to charity to get tax exemption? For most donors the answer is ‘no’. They donate because they believe in the cause they support, or the quality of work that some NGOs are doing, or because they are committed citizens. Then why is there a need for tax incentives for the charitable sector? Why should the government forego the revenue generated by taxing charitable donations? Do tax incentives have any effect on charitable donations? As a study on tax incentives in 12 countries, including India, by the Center for Social Impact and Philanthropy (CSIP) at Ashoka University in research partnership with the Center for Budget and Governance shows, we do not know the answer to the last question. Accountability, highlights. This is because the effect of tax incentives on charitable donations has not been systematically studied in the Indian context. The only publicly accessible study uses data from the 1970s–80s, when tax incentives for philanthropy were more attractive than they are now because overall tax rates were much higher.

poorly studied area

Raising taxes is the main feature of the state. But remarkably, tax incentives for charities also have a long history. They go back to the 19th century in some of the countries studied, and are also provided in countries such as Brazil, which have a restrictive tax incentive system for civil society. Despite this, the role of tax incentives in supporting civil society is poorly studied in most countries, with the best studies being from the US and UK. These are mainly econometric studies that measure the increase (or decrease) in charitable donations through taxes. Incentive provision. These studies depend on the availability of tax and donor data to researchers. But even in these countries the non-monetary impact of tax incentives is not examined in depth. For example, do the legal relationships that tax incentives create between the state and civil society as a sector affect its financial health and stability?

It appears that in India, financial flows through tax incentives are not the mainstay of civil society (CSIP, 2021). However, given the holistic nature of the region, they may still be very important. Many NGOs in India are small and operate with budgets of less than ₹15 lakh annually (CSIP, 2019). The distribution of NGOs is also skewed: they are concentrated in states such as Uttar Pradesh (MOSPI, 2012). Most of the NGOs work in the field of health and education. For smaller NGOs in remote areas or those operating in less recognized areas, the position of tax incentives may still be important to establish legal recognition with the community, government entities and donors.

When examined from the perspective of government, civil society organizations have historically played an irreplaceable role in social development. Many government programs have emerged because of harmonious relationships with NGOs implementing an innovative idea. Governments have provided scale and state aid while NGOs have provided ideological energy and community experience. An example is the activity-based learning approach developed by Rishi Valley in Tamil Nadu in the early 2000s.

signaling effect

The most important role of tax incentives is that of ‘signal effect’ as a regulatory and legal link between the state and civil society. It shows that the state supports philanthropic activities and actively encourages private actors to engage with public problems through its revenues.

A systematic study of the impact of tax incentives is the need of the hour, especially one on various provisions in support of philanthropic activities that highlights the many ways in which India’s tax incentive regime can be made more responsive. For example, countries such as France have a credit-based system, which is more equitable than a deduction-based system, following which India privileges high-income payers. US and UK studies suggest that higher-income payers are more sensitive to tax incentives, and that carefully crafted systems can be used to target this category of donors. We also need to reconsider reinstating other categories of taxes, such as the wealth and inheritance tax, so that charity-focused tax incentives can benefit the nonprofit sector.

Our new tax regime has weakened state-civil society relations by giving payers the option to opt out of incentives for lower tax rates. Saving the revenue foregone from tax incentives may not add significantly to the exchequer, but it will affect the perception of the NGO sector for an average donor. And if it does, here’s hoping it’s backed up by research and logic.

Priyadarshini Singh is a Senior Visiting Fellow at CSIP and Research Fellow at the Center for Policy Research at Ashoka University.