[Answered] Discuss the importance and implications of tax incentives to philanthropic entities.

Philanthropic entities are non-profit non-governmental entities that utilize donated resources and income to provide socially useful services. NGOs, Charitable trusts and community foundation are some examples of Philanthropic entities. 

Tax incentives to philanthropic entities have a long history. However, the relation between tax incentives and philanthropy is complicated.  

Tax incentives are important for philanthropy because of following reasons. 

• The revenue forgone by the state, channelized through philanthropic entities reaches the remotest areas, where the reach of governance is limited. 
• It creates a positive perception about philanthropic entities. The revenue forgone by the state suggests that the state supports philanthropic activity. 

• It actively encourages the private sector to engage with public problems and contribute to the welfare of society. 
• It fills the void created by a lack of manpower or resources with the government to fulfill their obligations of social welfare in every part of the country in a much less expenses.  

However, there are several implications of tax incentives to philanthropic entities. 

• In many cases, tax incentives provided to philanthropic entities are misused to evade taxes, while no concrete work is done on the ground. It has led to mushrooming of several entities that have no concrete credentials. 
• The idea of tax incentives was appealing when the overall taxation was high but with reduction in tax rates the appeal of tax incentives has gone down.  

• At present the financial flows coming through tax incentives are not the main source of resources for civil society. 
• The present tax incentive regime has led to skewed distribution of NGOs sector wise, where most NGOs are engaged in health and education.  
• The geographical distribution is also skewed where most NGOs are present in states like Uttar Pradesh and North east still lags behind. 

The new tax regime in India gives the option to donors to opt out of incentives for lower tax rates. It may impact the ability of philanthropic entities to deliver services, especially those working in remote areas and lesser recognized sectors. 

There is a lack of research on the impact of tax incentives on philanthropic entities. Given the important role philanthropic entities play, any change in the state-civil society relation, in terms of incentives, shall be undertaken only after thorough study of its implications.