Pakistan’s business community, at large, likes to give more charity than taxes. The country is the sixth-largest charity giving nation in the world, amounting to Rs650 billion per annum in donations. People like to give more charity than taxes due to the trust deficit on the state apparatus and the insignificant incentives they receive against them.

This year, Pakistan earned Rs3,400 billion in tax revenues — approximately 10% of GDP. This is amongst the lowest in the world, even behind Bangladesh and Sir Lanka. According to the World Bank, Pakistan currently carries Rs500 billion tax anomalies.

Now levying additional taxes on non-profit organizations (NPOs) by adding clause D in Section 100C of the Income Tax Ordinance seems to be an uninformed decision reflected in the current Finance Bill 2017. Would this decision add any significance to revenues or act as a hindrance in the way of uplifting marginalized segments of society? NPOs’ money is largely humanitarian aid received as charity and exempted from tax across the world. Will it be taxed even after Islamabad signed 27 UN conventions? And shouldn’t it be dealt with by the Federal Board of Revenue (FBR) and not the Economic Affairs Division (EAD)?

The Finance Bill 2017 asks NPOs to limit their administrative cost up to 15% and pay 10% tax on surplus money. If they do not comply, they shall be taxed at the corporate tax rate of 30%. Before opening Pandora’s Box of implications on NPOs, a quick point on opportunity cost of levying tax is that according to rough estimates there are 100,000 NPOs that may contribute to the tax deficit of 0.01% to 0.03% only, as less than 10,000 carry that operational size. On the other hand, this shall hinder social uplift of marginalized segments by opening ways to breaching, leaking and corruption as NPOs survival strategy because it is impossible for them to comply with the change.

One of the issues related to NPOs is the popular myth that they get enormous money to propagate foreign agendas and dubious practices. This general perception lacks substance and evidence. On the basis of such assumptions, we cannot make policy decisions to bar their functioning by imposing unnecessary sanctions of NOCs and now undue taxes. In comparison, we should look at the contribution made by NPOs in the social development sector. They have given employment opportunities to more than 500,000 individuals from poor and marginalized communities. They are working hand in hand with the government as an ally in all sectors. Limiting them to 15% administrative cost will result in an employment recession.

Another issue is that the NPOs calendar may not be in accordance with the government’s calendar because the donors’ timeline varies around the year. For example, if a year-long project begins from February and is unable to spend all its funds before June 30, on July 1 st  the FBR may consider the unspent cost as surplus and impose 10% tax on it, forgetting that this money is the receipt and expense of already planned activities which is neither savings nor surplus.

There is a dire need to segregate NPOs as they are not business-oriented or profit-making entities. Dealing with philanthropic transactions as business transactions, shows the government’s lack of capacity and expertise in the particular area. Besides, the FBR should not be the institution dealing with NPOs. Pakistan recently signed 27 UN conventions, including human, social and environment rights governance principles. On the one hand, we want to receive humanitarian aid to strengthen our social and private sector and on the other, we are stepping out of its mandate by levying taxes.

We need to review this decision and increase the growth rate instead of burdening the existing structures. By improving economic and social growth we can increase numbers to direct and indirect taxpayers. Broadening the base for tax collection and maximizing documentation of cash economy flows can also be added avenues.

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