PM Cares Fund verdict: The dissonance on the budgetary impact of contributions

The Supreme Court on August 18 settled multiple aspects of the legality of the PM Cares Fund. It was decided in favour of the government.

There was however one aspect of the judgement that was odd. This was the section which dealt with the nature of the contributions to the PM Cares Fund. The relevant part of the ruling is as follows:

The PM Cares Fund consists of voluntary contributions from individuals/organisations and does not get any Budgetary support. No Government money is credited in the PM Cares Fund.”

The second sentence cited above is accurate. However, the preceding sentence is inconsistent with the way the government views the issue.

The context to this is that contributions to PM Cares Fund are 100% tax exempt under Section 80 (G) of the Income Tax Act.

The Fund itself is exempted from paying tax under Section 10 (23) (c).

In the annual union budget, these exemptions are classified as revenue foregone. In other words, these tax exemptions do have a material impact on the union budget. Consequently, one of the budget documents, Receipt Budget, calculates the cost of tax exemptions such as the one the PM Cares Fund receives.

Tax exemptions are viewed as a form of preferences and reflect a significant policy of the government.

Finance minister Nirmala Sitharaman is an ex-officio trustee of the PM Cares Fund. The Receipt Budget she tabled in the Parliament in February had the following to say about tax exemptions.

Such preferences have a definite revenue impact and can also be viewed as an indirect subsidy to preferred tax payers, also referred to as ‘tax expenditure’.”

The fulcrum of direct tax reform of both UPA and NDA governments has been to close down such indirect subsidies in order to broaden the tax base. The widening of the tax base is expected to help the government lower the tax rate.

Therefore, the Supreme Court’s characterisation of contributions into the PM Cares Fund is inconsistent with the official position of the Indian government.

Tax exemptions do have an impact on the budget. 

No government money is directly credited into PM Cares Fund. But the government does provide it an indirect subsidy, the cost of which is revenue foregone. 

The PM Cares Fund receives indirect budgetary support, according to the finance ministry’s view of tax exemptions.

DISCLAIMER : Views expressed above are the author’s own.