Study says rate of incentives has declined due to policy changes even as lower personal income tax rates and abolition of inheritance and wealth taxes reduce attractiveness of tax incentives
India falls somewhere in the middle of 12 nations in terms of the relation between tax incentives and philanthropic giving, according to a study carried out by the Centre for Social Impact and Philanthropy (CSIP) of Ashoka University, and the Centre for Budget and Governance Accountability (CBGA), which compares India’s incentive policy with that of 11 other countries — Bangladesh, Brazil, China, France, Mexico, Norway, Singapore, South Africa, South Korea, UK and the US.
The study said that the rate of incentives offered by the Indian government has declined due to tax policy changes in 2017 and the introduction of a ‘dual tax structure’ in 2020. Lower personal income tax rates and the abolition of inheritance and wealth taxes have further reduced the attractiveness of tax incentives for philanthropy, it added.
Governments across the world support the non-profit sector through various measures, the most common and visible of which is tax incentives on charitable donations by individuals and corporates.
Of the countries studied, France, Singapore and the UK have the most generous tax incentive structures, while Bangladesh, Brazil and Mexico fall at the lower end of the spectrum.
France rates highly because its incentives take the form of tax credit whereas for Singapore, it is the high rates of both incentive and ceiling. In the case of the UK, it is a combination of tax rate, form and the rate of incentive. Bangladesh’s low rate of incentive, and Brazil’s and Mexico’s low deduction ceilings determine their lower ratings.
The study finds that, taking other factors such as the culture of giving, level of economic development and individual personality into account, incentives do impact the ‘cost of giving’.
Influence on high-income groups
The findings show that an increase in tax incentives — i.e. a decline in the price of giving — leads to an increase in charitable donation. The influence of tax incentives for charitable donations is found to be higher for higher-income groups as opposed to average taxpayers while the eligibility of a large number of causes for tax incentives can have a positive influence on donations. Even when tax incentives are not a deciding factor in motivating charitable donations, they have a signalling effect which can positively influence donations.
In addition to this, an absence of taxes that affect the wealthy more, such as wealth tax and inheritance tax, weakens the influence of incentives on donations, the study showed.
Incentivising domestic philanthropic funding
According to Subrat Das, Executive Director, Centre for Budget and Governance Accountability, given the persistent challenges of inequality and the uneven post-pandemic recovery, India needs a quantum increase in domestic philanthropic funding directed towards upliftment of the marginalised.
Recommendations or suggestions include rigorous studies for evidence-based policy making, improving tax data availability, increasing tax exemptions on ‘giving’, and reintroducing certain taxes for HIGs.
“There are enormous gaps in our achievement of the sustainable development goals that have been further exacerbated by Covid-19. A serious re-examination of our tax incentive regime could not be more urgently required. Even just making data more accessible could unleash a flood of generosity from Indians across the country,” said Ingrid Srinath, Director, Centre for Social Impact and Philanthropy, Ashoka University.