Ananya Kamboj
Influence of Indian Tax Laws on Determination of Fees in Religious Institutions – A Legal and Constitutional Analysis
ABSTRACT
The religious institutions in India enjoy a very unique and exalted status – that of spiritual and welfare bodies. They are generally exempted from huge tax levies under the tax laws of India, particularly under the provisions of the Income Tax Act, 1961 and other enactments dealing with charitable trusts. Again once such institutions begin to raise revenue through activities like charging for religious services, ceremonies or overnight accommodations there would be no clear line drawn between contributions for charity and revenue generated in business operations. The research paper analyses how the Indian legal framework-in particular, tax laws-affects the computation and structuring of fees in religious institutions and the implication of financial practice on tax-exempt status.
Through the analysis of Articles 25 to 28 of the Constitution of India, it investigates the tension that exists between the constitutional right to religious freedom and the state’s power to regulate the economic and financial activities of religious institutions. The paper is therefore extended into major provisions of the Income Tax Act, particularly sections 11, 12A, 13, and 115BBC which pertain to exemptions on the taxation of religious structures but which may come under the application of Goods and Services Tax regulations in certain commercial activity.
Other judgments, for example, landmark judicial decisions of the cases of Thiagarajar Charities v. CIT[1] and CIT v. Radhasoami Satsang Sabha[2] are also studied to analyse how courts have defined charitable activities and commercial activity of religious organisations. It provides an analysis as to how these fees levied by religious institutes finally fall into the verdict of law, how such fees can inflict damage on the tax-exempt status of the institution, and what the regulatory role of bodies like the Central Board of Direct Taxes (CBDT) is in bringing their behaviour in consonance with tax laws.
Conclusion This study attempts to evaluate the overall consequences of these legal and regulatory provisions on public trust, financial transparency, and religious autonomy. In this respect, it provides a balanced approach that grants religious bodies latitude to play their welfare roles but within contexts of national tax compliance that would ensure public confidence in their financial probity. Findings The findings provide critical insights for policymakers, religious bodies, and tax authorities in operating an area of study like India where freedom and financial regulation intersect.
INTRODUCTION
Religious institutions in India have played a deep and meaningful role for historical purposes in the social, cultural, and spiritual topology of the country. From the temple to the mosque, the church to the gurdwara centers of education, charity, and community welfare. They represent a heritage of the rich tradition of religious pluralism existing in that country and are indispensable pillars of social support offering services ranging from health care to education, hosting numerous cultural and religious events. Religious institutions have thus always been entitled to substantial tax exemptions under Indian law more particularly through the Income Tax Act of 1961.
Even income of religious or charitable institutions is exempt from tax, provided such income is applied to religious or charitable purposes, under Sections 11, 12A, and 13 of the Income Tax Act. The exemptions act like a lifeline so that the funds of religious institutions can essentially go towards the welfare of the community.Indeed and in effect, this tax-exempt status supports their charitable pursuit by being free from taxation burdens. However, in dealing with the above complexification of the operations, specifically the charging for religious services, ceremonies, and other ancillary services, it very clearly obscures the distinction between charitable and commercial activities.
A fundamental issue in this computation is whether fees or charges on account of ceremonies such as marriages, ritual performances, or accommodation by religious institutions should be considered as charitable contributions or business revenue. The classification of such receipts is of paramount importance because it directly bears on the taxability of such organizations.
The donations for religious purposes would be still exempt from taxes, but services fees would be considered business operations income and the institution is thus liable to tax under the Income Tax Act. Hence, it creates confusion in the practice of religious institutions and in tax administrations because the nature of the fees is sometimes unclear. Due to which tax exemptions get questioned many times and are under scrutiny.
However, constitutional provisions on religious freedom and autonomy also go the worse way. Article 26 of the Constitution of India provides for independence of religious denomination to manage their affairs in matters of religion. Yet, the very article also permits the state to “regulate secular activities of religious institutions” including those “activities in connection with religious and charitable trusts.” Such regulation will include financial activities too, thus creating a balancing act between financial transparency and religious autonomy. More than ever there is a need to regulate the economic activities of these institutions so they do not take advantage of tax-exempt status while compromising public trust and accountability.
The paper shall analyze and explore the factors affecting the determination of fees in religious institutions and to what extent such financial practices are affected by the Indian tax laws. To achieve this end, this research paper will focus on:
1. How specifically the Indian tax framework in sections 11, 12A, 13, and 115BBC of the Income Tax Act governs religious institutions and their tax-exempt status.
2. Classification of the charges made by religious institutions under tax laws and how such charges affect the institution in terms of its standing both financially and in tax revenues.
3. How do constitutional protections, specifically Articles 25 to 28, mesh with tax laws on the regulation of religious financial activities while protecting religious freedoms?
4. The regulatory bodies, mainly the Central Board of Direct Taxes (CBDT), play a sizeable role in ensuring that the response remains strictly compliant and thus transparent.
The main aim of the study is to examine the nexus between religious autonomy and financial regulation in India. This paper executes its study by critically analyzing the legal and constitutional framework to examine if the system that exists strikes a fair balance between letting religious institutions fulfill their spiritual and charitable roles, while keeping these bodies financially transparent and accountable. Findings are expected to contribute to the topic concerning debates over religious freedoms and financial transparency in relation to tax compliance. This may inform future policy reforms and regulatory practices.
SCOPE OF THE STUDY
The scope of this research is comprehensive study of the nature of religious freedom that the Indian Constitution has ensured in relation to the taxation regimes applicable to religious institutions under the different species of the law on taxation. This study will analyze broad determinants of fees or donations so calculated in any religious institution from a legal, constitutional, and regulatory perspective. Every one of these dimensions within this paper is crucial to assess the balance to be achieved on two competing axes namely religious autonomy and financial transparency within a regulated framework.
1. Deconstruction of Constitutional Provisions on Religious Freedom and their Interaction with Taxation Laws
Religious denominations are granted certain rights under Articles 25 to 28 of the Indian Constitution, which protect the religious freedom of individuals but simultaneously vest some kind of regulatory power with the state over certain non-religious activities. Article 25 does provide the right to profess, practice and propagate religion freely and Article 26(b) allows religious institutions to run their own affairs. However, these rights are available subject to state regulation regarding certain economic and financial affairs. This research will investigate how these constitutional provisions combine with taxation laws in such a manner that they create provisions for tax exemptions and yet allow the government to exercise oversight of the financial operations of religious institutions. It will analyse how the state ensures it retains the right to tax income, which is generated from commercial activity conducted by religious institutions without compromising their religious freedom.
2. Analysis of Legal Frameworks Governing Tax Exemptions for Religious Institutions
The research critically addresses the complex legal structure governing tax-exempt status on religious institutions in India. Regarding the Income Tax Act, 1961, especially sections 11, 12A, 13, and 115BBC, careful evaluation and analysis have been made to understand how religious institutions can claim exemption on income generated from property held for religious or charitable purposes. Further, the conditions laid down by Section 12A for registration and the restrictions under Section 13 that deny exemptions where income benefits private persons or is commercial in nature would be looked into closely. It will further discuss the GST applicability in the economic activities of religious institutions along with other relevant legislations for example Charitable and Religious Trusts Act, 1920 by which religious trusts and its administration is governed.
3. Discussion on the Demarcation Between Charitable Activities and Commercial Services
One of the main thrusts of this paper is trying to differentiate between income-generating activities, which ought to appropriately be termed charitable and those that simply ought to be classified as commercial services. This line of differentiation is so important because it makes one a charitable institution whereby religious institutions can maintain their tax exempt status or result in their being taxed. It will look at the limits of donations and charges whereby organised charges for religious rituals like marriages, or other rituals will qualify as a form of business activity. The study will refer to relevant case laws, particularly Thiagarajar Charities v. CIT[3] and CIT v. Radhasoami Satsang Sabha[4] in analyzing how the courts determined this distinction and what it meant for religious organizations.
4. Exploratory Research on the Role of Taxing Authorities and Regulatory Bodies
Regulatory bodies play a very significant role to ensure that religious bodies carry out their organisations along with fulfilling taxation and meeting the charity statute. In this research, the role of CBDT[5] and other taxing authorities has been explored in regulating the financial activities of religious establishments. The paper will discuss requirements imposed on these institutions regarding auditing and reporting to tax authorities and how these tax authorities ensure conformity without offending constitutional protections of religious freedom. Also, it will consider the way tax authorities distinguish between charitable donations and income derived from services in order not to facilitate any misuse of tax exemptions.
5. Impact Consideration on Public Trust and the Autonomy of Religious Institutions
Religious institutions carry a special status in India, owing to popular belief that religious institutions safeguard spiritual and charitable values. However, public trust does become shaken if the financial practices of such institutions are considered exploitative or incompatible with their charter and objectives. This study examines the nature of the imposition of structured fees and attendant tax implications on the perception of the public. It will, further, reflect on how religious organisations will balance the need for greater financial transparency with their independence in religious matters. Will increased regulations and transparency needs undermine religious institutions’ independence or conversely give more religion an added layer of public trust in their operations?
CONSTITUTIONAL PROVISIONS INVOLVED
Article 25 of the Constitution of India provides that “all persons are equally entitled to freedom of conscience and the right freely to profess, practice and propagate religion subject to public order, morality and health”. Therefore, this provision forms the bedrock of religious liberty in India. The individuals and religious groups are allowed to practice their faith without undue interference from the state. However, the right is not absolute. The state is allowed to impose reasonable restrictions, especially in secular activities that may be associated with religious activity such as financial or property transactions.
In taxation, religious bodies can demand exemptions on income generated from charitable and religious purposes, but state scrutiny on their economic transactions extends into secular or commercial endeavours. For example, in Sri Jagannath Temple Managing Committee v. State of Orissa[6], it held that the religious activities are within Article 25, but the management of property or income incident thereto of religious institutions, but is subject to regulations where public interest is involved. This case repeats the argument that though religious bodies have autonomy in matters concerning faith governmental authority to regulate its financially related functions is not restricted.
Article 26: Protection of the Rights of Religious Denominations to Manage Their Own Affairs
Article 26 gives religious denominations the right to manage their religious affairs, to establish and maintain institutions for religious and charitable purposes, and to administer property. Article 26(b) does make a distinction between matters of religion and secular activities, which might be brought within the purview of regulation by the state. The provision thereby has very important implications for religious institutions, particularly in the financial management and taxation of religious incomes.
In CIT v. Radhasoami Satsang Sabha[7], religious organizations were held to be liable to claim tax exemptions under the Income Tax Act so far as their receipts were applied directly for religious or charitable purposes. Receipts from secular activities were held taxable in such cases. This judgment describes how Article 26(b) protects the right of religious bodies to manage themselves while simultaneously allowing the state to apply its rules over transactions construed as secular.
Similarly, in the case T.M.A. Pai Foundation v. State of Karnataka[8], the apex court again held that religious institutions have a right to establish and run educational and charitable institutions under Article 26(a) but the state can still regulate the financial activities of such institutions so as to remain compliant with the ambient regulatory framework-for example the tax laws.
Article 27: Prohibition on Taxation for the Promotion of Any Particular Religion
Article 27 prohibits the state from imposing levies on a person due to any religion or religious organization being propagated or continued. This provision further emphasises the secular character of the Indian state with the prohibition of the use of public funds to bolster one religion or the other. Instead, Article 27 provides that no tax collected by the state can be used for the betterment of religious affairs and maintains a strict division between state coffers and religious entities.
However, this does not imply that religious establishments are immune to taxation. Income from those activities that had a commercial aspect, or the income that lacks direct ties with religious or charitable purposes, are taxable. For example, in The Commissioner of Hindu Religious Endowments v. LakshmindraThirthaSwamiar of Sri ShirurMutt,[9] it was explained by the Supreme Court that although the state cannot tax for promoting a religion, it still can tax the secular activities of the religious institutions and tax the income earned from them. This is a landmark case since it ruled that religious institutions do have to comply with tax laws, an aspect that was not previously regarded in relation to their religious activities, but these came under tax comprehensively when the activities of the religious bodies strayed beyond strictly religious activities.
Article 28: Prohibition of Religious Education in State Institutions
Article 28 prohibits religious instruction in institutions wholly maintained out of the funds of the state. Religious instruction is, however permitted in institutions that have been formed by religious trusts or bodies, if the receiving of any such instruction shall be optional. This article maintains the secular character of institutions and facilities that are primarily run by the state but, at the same time, preserves the autonomy of religious institutions to institute religious teaching in their own educational institutions.
Although Article 28 is primarily concerned with religious education in schools, its ambit reaches the general financial control of an institution that may receive state assistance. Religious bodies whose educational or charitable institutions are at least partly state-funded may be subject to more stringent financial control, including tax. This argument strengthens the interest of the state to maintain secularism within publicly funded institutions, a goal related to the more general regulation of religious institutions’ financial dealings, especially when they benefit from public resources.
Finding the Right Balance Between Religious Autonomy and State Regulation Regarding Financial Matters
Although there are very strong safeguards within the Constitution to religious freedom, the state still has the opportunity to impose regulations upon the secular and financial activities of a religious institution. The balance becomes crucial particularly when religious bodies can generate money due to their collection of fees for services or through some other non religious sources of income. Religious institutions have been exempted from the Income Tax Act, 1961, but only in the case where the income generated by them is for any religious or charitable purposes.
The Supreme Court judicially has maintained that though religious institutions have autonomy over their affairs of spiritual direction, the secular or other financial activities of the religious institution can be regulated by the state. For example, in Thiagarajar Charities v. CIT[10], it was decided that income arising from property used for religious or charitable purpose are exempt though income arisen from commercial activities of the religious institution have to be taxed. This case sets out a need for distinguishing religious from secular activities in evaluating the tax liabilities of religious institutions.
Regulatory authorities – For instance, the Central Board of Direct Taxes – would ensure religious institutions got incorporated and maintained accounts and files in such a manner that their financial transactions did not cross tax frontiers since they were carrying on transactions without transparency. Though constitutional provisions guaranteed religious autonomy, institutions that follow religion could not be businesses beyond the secular character of the state; besides, religious autonomy should go hand in hand with regulation in finances to win the confidence of people.
Legal Framework Governing Tax Exemptions
The taxing statute governing tax exemptions of religious institutions in India is fundamentally available in the Income Tax Act, 1961, containing specific provisions for the promotion of charity and religious work coupled with the rule of law regarding tax obligations.
- Section 11: This grants exemption from income tax in relation to income arising from property used for religious and charitable purposes, thus allowing institutions to utilise such funds towards their intended philanthropic work free from taxation.
- Section 12A: This section makes provision for the requirements which religious institutions must comply with before registering and availing themselves of any claim for tax Application and registration give transparency about whether the income derived is being used for charitable or religious purposes.
- Section 13: This section lists when exemptions might be refused. These include if the income was pursued for private religious purposes or was used to favour certain persons, if the institution engaged in activities that were driven by motives of profit. These would be legal mechanisms aimed at preventing abuses of the grant of tax exemptions.
- Section 115BBC: This section relates to tax anonymity of donations over a specified limit whereby transparency is ensured, and unaccounted funds are reduced in religious institutions. The Goods and Services Tax charges taxes aside from the Income Tax Act on commercial operations conducted by religious institutions. In case these institution “enter into” business activities that society considers to be undertaken commercially, for instance, renting premises or charging for services rendered, they will be charged the GST, thereby making them pay their share of revenues to the state like any other business.
This means that the Charitable and Religious Trusts Act, 1920, actually stipulates the administration and financial dealings of religious institutions, which sets forth standards in the exercise of governance and accountability. This supplement the Income Tax Act by providing strength to the requirement of religious institutions for openness within their financial dealings such that the religious institutions operate within a clearly defined legal framework as they carry out their mandates.
ANALYSIS
1. Classification of Fees: Charitable Donations vs. Commercial Income
The most contentious issue relating to religious institutions is the classification of fees they charge for their services. The question essentially reduces to whether these fees should fall into the category of charitable donations or commercial income, a distinction that has a significant bearing on their income-tax treatment under the Income Tax Act, 1961.
Charitable Donations: When fees are regarded as voluntary donations in furtherance of religious or charitable activities, they normally fall within the exemption of Section 11. Hence, for example, those offerings that at times during religious ceremonies were offered to help a particular religious activity and donations intended for specific religious purposes are regarded to fall within the said provision, provided that donations are not solicited as payments for services.
Commercial Income: All charges levied for performing religious ceremony functions, letting premises or providing lodging can be considered as commercial income. Such income, the institution would be subject to tax under Section 13. This would be because the industry is considered secular and trading rather than charitable. The distinction remains a contentious issue in CIT v. Radhasoami Satsang Sabha where it has been ruled that the must ensure that these incomes are strongly distinguished from merely religious functions. An important point of difference between these types is that because religious organizations may rely in part upon donations to keep their organizations operating, where they charge structured fees for services, often non-core, mission-related services, can become problematic in terms of tax liability and taxing out of the charitable and more into the commercial.
2. Constitutional Balance: Religious Autonomy and State Regulation
Articles 25 to 28 of the Constitution of India accord significant autonomy to religious institutions in the management of their religious as well as charitable affairs. Such autonomy is, however, subject to being curbed where the economic activities of the religious institutions are impervious to their spiritual mandate.
- Article 25: It grants the rights of religion’s practice and propagation to a person but permits reasonable restrictions on matters within the purview of public order, morality, health, or other secular activities. This provides the religious freedom for protection even as the state can regulate secular activities, with this including the financial operations of the religious institution itself.
- Article 26: Enshrines rights of religious denominations to manage their own affairs in matters of religion, but financial activities like collection of fees or management of property would fall within the competence of the state to regulate. The Supreme Court in Sri Jagannath Temple Managing Committee v. State of Orissa[11] held that the power of the state to regulate secular activities pertaining to religious denomination was not violative of freedom of religion under Article 25 and 26. This balance in the constitution reflects the interest of the state in the fact that these religious institutions, being exempt from taxes, shall not abuse their autonomy by allowing unregulated commercial activities. The case law pertaining to Articles 25 and 26 establishes the role of the judiciary in delimiting the reach of religious freedom while at the same time permitting the state to have a regulating power over financial and commercial matters.
3. Fee Structure and Its Impact on Tax Exposure of Religious Institutions
Fee structure at religious institutions is going to directly impact their tax status. Fees regularly paid for religious ceremonies, accommodations, or events that have nothing to do with the religion could be considered part of commercial income under Section 13 of the Income Tax Act, thus liable to tax.
Structured Fees: Institutions imposing regularly fixed charges for access to services such as weddings, spiritual consultations or lodging may no longer enjoy such income as charitable contributions. It may be classified as business and trade income, taxable. It is this factor that
was taken into consideration during CIT v. Dawoodi Bohra Jamat[12], in which the need for the foremost charitable purpose of activities to be continued so that tax-exempt status could be maintained was a matter of great importance.
Charitable Status: Formal charges for secular activities or other business ventures would vitiate the very character of charity. Under Section 12A, organizations that wish to enjoy exemptions under the section have to meet certain conditions. Such deviation towards businesses will lead to a denial of exemptions. The implication from the judgment of Thiagarajar Charities v. CIT[13] is that the organization must separate its charitable purpose from its commercial one in order not to lose the exceptions granted under Section 12A.
4. Regulatory Body Accountability: Ensuring Compliance
The regulatory body, with Central Board of Direct Taxes (CBDT) and other tax authorities, ensures religious institutions are compliant with all the laws and regulations governing their activities. According to the Income Tax Act, 1961, the Institutions should devise a system for financial activities in order to be exempt from tax.
There is also a demand for auditing and reporting so that religious institutes fall under the tax laws under which all incomes are solely used for religious or charitable purposes. Section 12A institutions have to maintain proper financial records to protect their exemption from tax and must also meet the requirements of audits. Bodies controlling and regulating would stop abuses of this tax exemption as there is more transparency with the operations of financial activities.
GST Applicability: As with other religious bodies conducting business, goods and services tax legislation applies also. In a scenario where religious bodies let rooms or host functions for business activities, the services offered shall be under goods and services tax. By this, the religious service is exempt; however, the hiring of a hall or conducting a business function is subjected to taxation. The Goods and Services Tax Act, 2017 insists on them to identify their religious purpose and pay their respective revenue on the commercial nature of the offered services.
Maintenance of Public Trust and Transparency: Regulation is concerned not merely with the financial management of religious institutions but also with the handing of public trust. In this connection, information about the financial activities of religious institutions would reflect whether they are actually operating for charitable purposes or, in effect, operating for commercial purposes under the guise of tax-exempt status. Accordingly, religious institutions have to be responsible stakeholders for public trust, and failure to comply with tax law or perceived mala fide in the use of funds can cause appreciable harm to their reputation and public standing.
CONCLUSION
This paper critically analyses the complex relationship between religious institutions and the provision of tax exemption with regard to the financial operations in India through varying legal frameworks. The key point at which the findings lean is that there is an urgent need to balance the autonomy of religious institutions with state regulation, especially in relation to the tax laws that apply to religious institutions.
The classification of fees charged by religious institutions for purposes of determining whether those fees are charitable contributions or business income forms the nucleus around which all of this revolves. The difference between the two categories determines directly the tax liability of the institution. The Sections 11, 12A, and 13 of the Income Tax Act, 1961 negative effects attract religious institutions that resort to business activities by charging structured fees for services. An analysis of judicial precedents like CIT v. Radhasoami Satsang Sabha and CIT v. Dawoodi Bohra Jamat would bring out an unambiguous demarcation in distinction between charitable and commercial activities.
Secondly, provisions of Articles 25 and 26, which protect the independence of religious institutions over their affairs, but the independence itself is not absolute. Activities that are secular or financial in nature and connected with religious institutions can be regulated by the state in the interest of tax laws being complied with. The findings are that whereas religious institutions need not have the state interfere in their spiritual functions, they need to adhere to the state’s regulation when they are financially transacting. Such a balance is thus imperative so as not to entrench a hierarchical form of exploitation that surrounds mishandling of religious exemptions while at the same time ensuring that the secular nature of the state remained, as adhered to by cases like Sri Jagannath Temple Managing Committee v. State of Orissa.
The third implication is about the fee structure, which raises high concerns regarding charitable status. Institutional revenues, which set fees for services or other business undertakings, appear to work against its tax-free status. The findings of this research have proved that religious institutions should structure all incomes accruing to ensure their activities do not operate as commercial ventures so that it shall not attract taxes under Section 13. Tax free exemptions must respect fee structures and their charitable mission.
Lastly, the regulatory bodies such as the CBDT enforce tax legislation over religious institutions. This way, auditing and reporting will ensure the public has confidence in these institutions; hence, goods and services tax will be introduced into their business operations and will attract their revenue to the state’s kitty where they utilize profit-generating services. Conclusion of all evidence is that the religious freedom and state regulation in financial matters would call for delicate balance. Although religious institutions are very well protected in the Constitution as well as the Income Tax Act, they are also expected to meet regulatory standards so that their financial affairs would express themselves in transparency with charitable objectives. These indicate stronger controls of the commercial undertakings in the religious institutions with more open guidelines for fee structures, and then the tax-exempt status remains while offering accounts for public trust.
[1] Thiagarajar Charities v. CIT, (1997) 225 ITR 1010 (SC) (India)
[2] CIT v. Radhasoami Satsang Sabha, (1992) 193 ITR 321 (SC) (India)
[3] Supra Note 1.
[4] Supra Note 2.
[5] Central Board of Direct Taxes, Circular No. 100, Clarification on Charitable or Religious Trusts (CBDT, 1973), available at https://www.incometaxindia.gov.in (clarification on tax treatment of charitable and religious institutions).
[6] Sri Jagannath Temple Managing Committee v. State of Orissa, AIR 1960 SC 56 (India)
[7] Supra Note 2.
[8] T.M.A. Pai Foundation v. State of Karnataka, (2002) 8 SCC 481 (India)
[9] The Commissioner of Hindu Religious Endowments v. LakshmindraThirthaSwamiar of Sri Shirur Mutt, AIR 1954 SC 282 (India)
[10] Supra Note 1.
[11] Supra Note 6.
[12] CIT v. Dawoodi Bohra Jamat, (2014) 364 ITR 31 (SC) (India)
[13] Thiagarajar Charities v. CIT, (1997) 225 ITR 1010 (SC) (India)
