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Waqfs: Arguments Against Exemption

  1. Exemption will favour only one section of the society and will thus be discriminatory. This argument focuses on the highly complex structure of the Indian society and reflects the concern of the lawmaker that if Muslim endowments are granted a tax exemption privilege, this may lead to discontent among the Hindus. The Hindu piety found expression in gifts to idols and images, in gifts to maths and other religious institutions. When properties are dedicated to a temple, the property vests in the idol which is considered to be a juristic person. When dedication is made to a math, the math itself is regarded as a juristic person, when dedication is made to an institution, the institution is regarded as a juristic person. The shabait of the temple, the mahant of the math, or the manager of the institution is not the person in whom the property vests. He is not even the trustee, although he is answerable like a trustee for mismanagement (Diwan, 1992: 7).

But Muslims were quick to respond; they proposed that all endowments should be granted the same privileges.

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  1. If these waqfs are subject to income tax why should they be exempted from the estate duty? This argument was countered as follows: There is a vital difference between these taxes; while the former does not tend to extinguish the property, estate duty being a capital levy on the principal value of the property, corpus, will eventually liquidate the waqf itself. Moreover, Muslims argued; since waqfs are a creation of the Islamic law, their sanctity and charitable character have to be judged under that law.

The bitter conflict between the revenue officials and sanctity of endowments has been summarised by Paras Diwan in the following revealing words:

“Tax exemption in the case of trusts is one thing, in the case of waqfs is another. Certain institutions of Hindu and Muslim Law have proved such quicksands that once the revenue authorities tread on them, they cannot extricate themselves from them and are sucked into the crevices deeper and deeper. In regard to levying income tax or wealth tax on the waqf, a somewhat curious and totally confused argument has been advanced. The argument runs thus: … the property of the waqf is tied in the ownership of God. But it is not owned by the God in secular sense, since God, the almighty of Muslims is impersonal; it has no form (and thus is not a juristic person as Hindu idol is). The mutawalli looks after the waqf as its manager … but the waqf properties do not vest in him. He is not a trustee as waqf properties do not vest in him as they do in a trustee. Thus waqf properties cannot be assessed: And on this argument it is immaterial whether waqf is public or private”.

These words reflect the frustration of a non-Muslim scholar as well as revenue officials. It is indeed not easy to tax waqfs without violating Islamic law. It is for this reason that the position of the mutawalli assumes such importance in India, for it is through him that the income tax is levied on the income of a waqf. More specifically in the Waqf Haji Karim Bux v. CIT, the following 2 questions were referred to the High Court:

  1. Whether a mutawalli could be treated as a trustee … and can be assessed to tax under section 21 of the Wealth Tax Act, 1957?

  2. Whether, the Tribunal is justified in holding that the shares of the mutawallis were indeterminate and therefore, not assessable.

Since in Islamic law the waqf property vests with God and not with the mutawalli, the latter cannot be considered as a trustee in the English sense. He is more like a manager. The mutawalli of a public waqf is a public official.

The mutawalli has the full power to use the waqf property for the purpose for which the waqf was created. If the waqf deed authorises him to exercise istibdal, he can even alienate the waqf property. Istibdal is permitted in India: in Md.Usuf v. Md.Sadig, a waqf deed provided for the sale of the waqf properties and to construct and maintain a rest house from the sale proceeds at Mecca. The courts approved this.

The so-called EARC Report no.10, written in 1982 has observed that it should not be the function of the tax department to monitor the functioning of the trusts and that the tax laws are not meant to regulate the trusts. The authors suggest that there should be a uniform and simplified law governing the religious endowments of all creeds. The sole effort of this law should be to grant tax exemptions to the deserving institutions and to tax effectively others, which are used as a devise to dodge taxes. We will observe whether these arguments on the taxation of waqfs were translated into reality in the latest act, which came into force in 1995.

Having made these observations, the authors of the report touched upon a vitally important issue in modern waqf management: establishment of joint-stock companies or businesses by waqfs in order to enhance their revenues. The reader will recall that the ability to establish joint-stock companies incorporated into the waqf was one of the primary reasons behind the latest dynamism observed in the Turkish waqf system. This is because the waqf with a company attached to it would be able to incorporate, if necessary, all of the latter’s profits and thus enhance its revenues substantially. As for losses, since the company has its own judicial personality, it can protect the waqf from liabilities towards third parties. In short, the ability of a waqf to establish a company enables a waqf to achieve a dynamism that it lacked before and at the same time it can be protected from liabilities towards third parties. Viewed from the perspective of Islamic partnership law, this arrangement can be called a two-layer mudaraba whereby, the waqf is the principal, rab-el mal, the company its agent, mudarib, and the third parties with whom the agent (company) conducts its business need not even know of the existence of the principal, i.e., there is a complete disjunction between the principal and the third parties (Udovitch, 1970: 171, 238-42). We will now observe how the same issue was addressed in India by the EARC committee.

“While it is difficult to object in principle to a charitable trust either owning a business or running a business itself, the question does arise as to the extent to which the energies of such a trust should be devoted to such income raising activity without giving rise to doubts about its essential character and their entitlement to tax exemption. Besides, businesses attached to charitable trusts enjoying tax advantages would have unfair competitive advantages vis a vis their competitors not attached to such institutions.

One possibility would be to determine a quantitative yardstick as to when the business activity becomes so dominant in the affairs of a charitable trust as to give rise to a legitimate question whether the organisation is in fact primarily a trust or a business concern … A judgement on merits in each case seems inescapable. But this sort of case-by-case decision leads to inconsistencies and divergent decisions by the court. The best course would therefore be to entrust the responsibility to give decisions in particular cases to a single executive agency of government and to make those decisions final and binding” (Diwan, 1992: 875).

Thus, the committee approached the whole issue with scepticism and doubt. Its concern about the energies of the waqf being wasted in commercial activity is totally unjustified in view of the fact that the company would have its own personnel and judicial personality. However, its other concern about the waqf related businesses enjoying tax exemption and thus causing unfair competition to others, appears to be correct.

Meanwhile, it should be noted that before disassociating itself, the committee has suggested that the decision should be based on the ratio of the business income to total income of the trust. If this ratio exceeds 75%, then the entire income of the organisation should be taxable. The committee’s main contribution may be summarised as follows: they proposed to change the previous method of taxing a charitable trust. This method is based on the notion that a charitable trust is tax exempt and leaves the government to decide whether a trust (with all its activities) falls within the purview of a “charitable trust”. If it does, it will be granted tax exemption on all of its income including the business. If the decision is negative, the trust will have to pay tax on all of its income. What the committee has done is to split a trust’s income into two categories: business and non-business and subject the former to taxation and grant exemption to the latter. Even the former may be granted exemption on the condition that the government agency decides in favour and rules that the business activity is incidental to the primary charitable activity of the trust. Thus, in a nutshell, assuming that the business income to total income ratio is less than 75%, an Indian waqf with a joint-stock company attached, would enjoy tax exemption (Diwan, 1992: 876).

As for the waqf-company linkage in the reverse direction, i.e., industrial conglomerates establishing trusts, the committee’s opinion was, once again, based on deep suspicion. More specifically, it was feared that industrial conglomerates would acquire the control of other companies through the trusts that they establish. Thus, instead of focusing on what well-financed waqfs could do for the society, the committee concentrated on the rivalry between companies. As a result, a highly dynamic form of waqf finance applied successfully in Turkey was obstructed in India.


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