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Taxation of Waqfs in India

Taxation of the waqfs has been one of the most controversial and complicated issues in the history of the Indian waqf system. The basic dichotomy is the same as elsewhere: The government is out to maximise its revenue, but taxing excessively leads to fall in revenues that could have been spent on charity and so, is ultimately a self defeating affair. The issue is also complicated by the existence of two different legal systems, Islamic and secular. What was originally designed as a simple provision for totally exempting from tax the income of a charitable trust has, over the years, become a maze of sections, provisos etc., with the result that income tax officials are totally confused. The Income Tax Act was amended 27 times between 1971-76. The state interferes and tries to regulate maintenance of accounts, receipt of voluntary contributions, and the investment of trust funds. “We wonder if there is any other class of tax payers whose activities are so totally sought to be regulated … ” (Diwan, 1992: 17).

Concerning the wealth tax, the Central Waqf Act promulgates that although a mutawalli is not a trustee in the technical sense of the term, he has to be treated like one and assessed for wealth tax in the same manner and to the same extent as would the person on whose behalf the assets are held. Thus, as far as taxing the trustee/mutawalli is concerned, the differences between the trustee in the English law where he is treated as an owner and the mutawalli in Islamic law, where he is considered as a mere manager, have been disregarded and the mutawalli is treated as the owner, i.e., in a manner more appropriate for a trustee.


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Taxation of the awqaf was taken into consideration in a more systematic way in the Income Tax Act, 1961. The basic points of this law are as follows: Income derived from property held under trust for charitable or religious purposes is not assessed for tax if the income is applied to such purposes in India.

As for the trusts held only in part for religious purposes; exemption from assessment is given only to such trusts which were created before the commencement of the Act (1.4.1962) and again provided the income is applied appropriately in India. Exempt income must not exceed 25% of the income of the property held partially in trust.

This constitutes another restriction imposed by the 1961 Act. For, the 1922 Act had provided exemption irrespective of whether the trust had been created before or after the commencement of the Act and there was no ceiling prescribed. But, as part of the policy to channel waqf revenues to the treasury, these restrictions are relaxed providing that the income so accumulated or set apart is invested in government securities or others approved by the government. This is a manifestation for India of a universal and age-old tendency of many states and governments to incorporate waqf revenues.

Subsection 3 of the Section 11 rules that any income, which is applied to purposes other than charitable (i.e., the part reserved for the family), will be taxed. There is no change here, as the same clause existed under the 1922 Act.

Section 13/clause b/sub-clause ii/category iii deals with the family waqfs (wakf-alal-aulad) and is in direct conflict with Islamic law. It stipulates that those family waqfs created after April 1, 1962 will not be exempt from income tax. Thus, our argument that in spite of the Waqf Validating Act of 1913, there is still a lingering doubt about these waqfs is confirmed. Such inconsistency does not exist under Islamic law, which does not distinguish or discriminate between family and public waqfs.

Rashid suggests that at least the portion reserved for religious or public purposes should be exempted from taxation. Concerning those religious trusts restricted for a particular community, the fact that they are subject to taxation, is wrong for this policy hinders their establishment. It has been argued with considerable justification that the small loss of public revenue will be compensated by the more potent charitable institutions, which assist the programme and objectives of a welfare state (Rashid and Husain, 1979: 85).

Moreover, income tax is not the only tax family waqfs are burdened with. They also have to pay estate duty, once again, in direct conflict with the Islamic law. The High Court of Bombay has held in Khatizabai v. Controller of Estate Duty that estate duty is leviable on family waqf properties and not only on the portion which the settler had reserved for herself for her life time but also on the portion of the estate she had given to her children, i.e., on the entire corpus. This has led concerned Muslim jurists to protest:

“Property of a waqf alal aulad (family waqf), according to the Muslim Law, is divine property and therefore, res extra commercium. It is subject to the same restrictions as any public waqfs, as Muslim Law treats both private and public waqfs alike … The property in both cases is inalienable and non-heritable and both fall under the supervision of the Kadi Court. Section 5 of the Estate Duty Act therefore, does not appear prima facie to be applicable … ” (Rashid and Husain, 1979: 86).

It is clear that the judges in this particular case were affected by the provisions of the English law. As far as the Estate Duty is concerned, the whole thing boils down to the question of whether the property of a family waqf is transmitted to the next generation upon the death of the founder. But in such a waqf both the founder and his descendants are merely recipients of the usufruct of the corpus. They do not hold any absolute interest in the corpus. It is because of these complications originating in the very philosophy of the Islamic waqf system that the family waqfs should not be subjected to the Estate Duty. To attempt to do so betrays a fundamental lack of understanding of Islamic law.

Meanwhile a debate has been initiated between those who are for exemption and others against it. The basic points of this debate may be summarised as follows:

Arguments for Exemption:

  1. Waqf is created in perpetuity and its property is vest in God. Imposition of estate duty will result in the eventual liquidation of its corpus

  1. The notion that a family waqf is just a private trust to which no sanctity need be attached should be dispelled for good. Its objective will be better appreciated if it is remembered that Islamic law emphasises redistribution of wealth as much as accumulation thereof. Purely Islamic institutions; zakah and sadaqa assure further dispersal of wealth.

  2. The ultimate objective of many of these waqfs is charity. So, it will be the charity itself, which will be hit if taxation gradually finishes off the property.

Source: Murat Cizakca, A History of Philanthropic Foundations: The Islamic World From the Seventh Century to the Present. Republished with permission.