A new law under the Finance Bill applying new taxes speaks volumes of the government’s lack of understanding of the work, struggle and contributions of Non-Profit Organisations (NPOs) in Pakistan. We believe the government’s definition of the NPOs does not consider the diversity and nature of its work in Pakistan. It is disturbing to read the new tax amendments as they seriously infringe upon the autonomy of NPOs and clearly aims to stifle its independent voice in Pakistan.

Under the new law, a Clause D is added in section 100C of the Income tax Ordinance, which prescribes limit of 15 per cent on administrative and management expenses, is a sheer violation of agreement between the donors and the NPOs.

The government cannot come into it by fixing such a formula, which limits and violates the agreement between donors and the recipient NPOs. Many NPOs will not be able to comply with this restriction as they are service-delivery organisations, e.g., hospitals, schools, capacity-building and advocacy providers, microfinance service providers, etc.

Moreover, surplus funds of NPOs, if over and above 25 per cent of total receipts during the year will be taxed at a rate of 10 per cent. Many NPOs have advance planning needs for which certain surpluses have to be maintained or they have to manage risks which also imply maintenance of funds. This will be difficult to comply with as a rule and, therefore, many NPOs will be required to pay taxes on such funds. If the NPOs do not comply, they will be liable for corporate tax at 30 per cent.

Effectively, the government is taxing the NPOs at par with Multinational Companies. Pakistan continues to face daunting challenges in ending poverty and increasing literacy. It continues to perform badly on the gender development indices across the country and stands at 26.5 per cent poor, 58 per cent literate with most unequal gender disparity. 26 million children remain out-of-school and 85 per cent individuals do not have access to financial services.

Health care services are below the required minimum standard and maternal mortality is 178 deaths for 100,000 births, which is one of the highest in the world. Despite all macro-economic indicators, the country continues to lag behind in human development initiatives.

The NPOs work at many levels to address national interest and issues across the country. A set of successive, successful, and replicable microfinance programmes have helped over 5 million families (30 million beneficiaries) across the country to create 1 million jobs, 50 per cent of which are females. Nearly a million out of schools children are now enrolled and assisted to receive good quality education from numerous initiatives. 50 per cent of these are girls. 10,000 NPOs jointly employ over 500,000 individuals and create local job opportunities. 25,000 village and peri-urban community organisation further contribute as extension to this healthy number.

Over 23 million women now have better access to standard maternal and reproductive healthcare services. And, NPOs remain at the fore front to deliver essential rehabilitation services to the disaster affected people. Equally important is the role of NPOs in the movement of rights especially of women, children, minorities and people with disabilities. The efforts of NPOs in creating an enabling environment for poor women to participate in the political processes and fight against violence cannot be ignored. They have reached millions of men and women to fight for a just and peaceful society.

This new tax liability will impair the NPOs working model, dry up new funding, and prevent it from reaching out to the needy and poor. NPOs will start receiving reduced funds from it donors, especially international donors who can opt out to continue funding due to the new tax regime. The book keeping cost will further increase and may require hiring tax consultants to manage accounts. Additionally, the NPOs will direct their core activities in managing tax matters. NPOs don’t have an appellate right under the current tax regime, which can open up new harassment and corruption avenues to deal with.

There is no international precedent for such taxation on institutions which do charitable and welfare work. The present overly regulated controls are very intrusive and over-arching. After registration, the NPOs need to be certified from Pakistan Centre for Philanthropy (PCP); obtain prior NOCs from Economic Affairs Division (EAD) & Ministry of Interior, approval from FBR for tax exemptions, etc. In addition to that, the The Securities and Exchange Commission of Pakistan (SECP) is regulating institutions under section 42 of the Companies Ordinance, adding a new regulatory layer, which will further stifle the sector activities. Not to forget, that all NPOs are faced with regular threatening visits by different agencies.

NPOs complement government as its quasi on all social domains that contain poverty, if not end it, and improve literacy in the country. The government should not consider NPOs as its adversary but rather should accept them as allies in its fight against poverty, and facilitate to strengthen the sector.

Country’s current tax deficit is calculated at Rs3.2 trillion by the World Bank, while on average 29 per cent registered tax payers pay taxes. From the 10,000 NPOs that may be made liable to pay tax under the new regime, will contribute a mere 0.01 per cent assuming Rs1 billion can be raised through this additional whip. However, this tax liability will prove a huge obstacle in providing affordable and effective basic services to the poor.

A total of USD$ 6-7 billion come to Pakistan in the shape of aid from multiple donors from the outside world. This could see serious reduction- affecting various ongoing support programmes, such as Benazir Income Support Programme (BISP). Given international preferences, it may see fund diverted to the Syrian refugee crisis, etc., as a result of this new tax and discourage donors to withdraw fund support to Pakistan.

Conclusion

The government’s role is to ensure a thriving civil society which is capable of addressing the needs of its poor and to make laws to control hoax NGOs and "terrorist outfits". Regulating NPO through this tax whip will be highly counter-productive and self- defeating. There are, of course, many other ways and means to control that and keep anti-state activities at check.

The government should immediately put this law into abeyance and engage with the NPO representatives to resolve this punitive order.