Is the new NGO tax a good idea?
NGO tax to be challenged in court
The writer is a development anthropologist. He teaches at George Washington University
There are growing tensions between NGOs and the government in Pakistan, and the recent decision to impose taxation on the non-profit sector is another manifestation of this adversarial relationship.
It was at the beginning of the current budget year, back in June, when the government announced its decision to place a new 10 per cent tax on the NGOs. This tax was meant to be applied to NGOs which spend 15 per cent or more of their budget on administrative costs, or organisations which have more than 25% of the organisation’s budget left over by the end of a year.
NGOs seem poised to challenge the new tax law in court, and it remains to be seen who the judiciary will side with. The government had tried to justify its decision by pointing out that it was not taxing all NGOs, but only the ones spending a lot of money on their own administrative costs, or those with surplus funds left. The apparent aim of the tax was to cut down waste and misuse of NGO funds and encourage large national and international NGOs to spend more funds on the people whom they are meant to serve, instead of their own overheads. It seems unlikely that the NGO taxation attempt is a revenue-raising exercise, given the laxity shown by the government to tax larger sectors of the economy such as agriculture. The 10,000 or so NGOs that may be made liable to pay this new tax, will contribute an insignificant amount in comparison.
While the idea of NGOs offering corporate level salaries to higher staff is perhaps excessive, it is not that salary bracket which is specifically being targeted. Rather it is the total amount NGOs spend on salaries. Yet, many NGOs need to have many salaried staff to ensure the extensive outreach which is vital for their mandate to reach out to a broad range of people. Even the government’s decision of taxing NGOs which spend less than 75% of their yearly budgets on programmes is not a sensible decision, given that humanitarian organisations need to put aside money in reserve for responding to emergencies and disasters. This taxation measure will probably increase book keeping costs of NGOs and may hinder their operational efficiency.
Several NGOs themselves have described the new tax as part of a series of attempts to crack down on NGOs. This includes increasing scrutiny of their operations, restrictions on their geographic scope of operations, and even allegations of NGOs promoting blasphemy or pornography. The NGO taxation attempt also follows a series of other administrative hurdles. The government has also been trying to make foreign funding of NGOs subjected to more restrictive monitoring. Given this sequence of attempts, some major donors have signalled that they may cease their funding to Pakistani NGOs, especially if the government does not revoke its plan to tax them.
The above NGO concerns are legitimate but they do not imply that the government should not have any oversight of NGOs. After all, NGOs must also comply with a range of requirements to qualify for donor funding. The state certainly has the right to prevent anti-state or extremist elements operating under the garb of NGOs, and to prevent misuse of funds meant for the poor. However, developing punitive measures to stifle criticism on issues such as corruption, malgovernance, or other evident state failures is not acceptable.
Thus far, measures being put into place to regulate NGOs, or make them more effective in reaching out to their intended beneficiaries, are counterproductive instead. Our government needs to adopt a more conciliatory approach, working with relevant line departments, coalitions of NGOs and other think tanks which work on socio-economic development issues, to identify relevant and acceptable criteria for NGOs to comply with.
Published in The Express Tribune, October 20th, 2017.
It was at the beginning of the current budget year, back in June, when the government announced its decision to place a new 10 per cent tax on the NGOs. This tax was meant to be applied to NGOs which spend 15 per cent or more of their budget on administrative costs, or organisations which have more than 25% of the organisation’s budget left over by the end of a year.
NGOs seem poised to challenge the new tax law in court, and it remains to be seen who the judiciary will side with. The government had tried to justify its decision by pointing out that it was not taxing all NGOs, but only the ones spending a lot of money on their own administrative costs, or those with surplus funds left. The apparent aim of the tax was to cut down waste and misuse of NGO funds and encourage large national and international NGOs to spend more funds on the people whom they are meant to serve, instead of their own overheads. It seems unlikely that the NGO taxation attempt is a revenue-raising exercise, given the laxity shown by the government to tax larger sectors of the economy such as agriculture. The 10,000 or so NGOs that may be made liable to pay this new tax, will contribute an insignificant amount in comparison.
While the idea of NGOs offering corporate level salaries to higher staff is perhaps excessive, it is not that salary bracket which is specifically being targeted. Rather it is the total amount NGOs spend on salaries. Yet, many NGOs need to have many salaried staff to ensure the extensive outreach which is vital for their mandate to reach out to a broad range of people. Even the government’s decision of taxing NGOs which spend less than 75% of their yearly budgets on programmes is not a sensible decision, given that humanitarian organisations need to put aside money in reserve for responding to emergencies and disasters. This taxation measure will probably increase book keeping costs of NGOs and may hinder their operational efficiency.
Several NGOs themselves have described the new tax as part of a series of attempts to crack down on NGOs. This includes increasing scrutiny of their operations, restrictions on their geographic scope of operations, and even allegations of NGOs promoting blasphemy or pornography. The NGO taxation attempt also follows a series of other administrative hurdles. The government has also been trying to make foreign funding of NGOs subjected to more restrictive monitoring. Given this sequence of attempts, some major donors have signalled that they may cease their funding to Pakistani NGOs, especially if the government does not revoke its plan to tax them.
The above NGO concerns are legitimate but they do not imply that the government should not have any oversight of NGOs. After all, NGOs must also comply with a range of requirements to qualify for donor funding. The state certainly has the right to prevent anti-state or extremist elements operating under the garb of NGOs, and to prevent misuse of funds meant for the poor. However, developing punitive measures to stifle criticism on issues such as corruption, malgovernance, or other evident state failures is not acceptable.
Thus far, measures being put into place to regulate NGOs, or make them more effective in reaching out to their intended beneficiaries, are counterproductive instead. Our government needs to adopt a more conciliatory approach, working with relevant line departments, coalitions of NGOs and other think tanks which work on socio-economic development issues, to identify relevant and acceptable criteria for NGOs to comply with.
Published in The Express Tribune, October 20th, 2017.