Between the heaven and a tax cut

This year, the industry of philanthropy in Pakistan joins the ranks of those that ask for special concessions in federal fiscal budget. The industry represented by Pakistan Centre for Philanthropy (PCP) and other private sector social sector players came together at the Sustainable Development Policy Institute last week for a “first ever budget proposal seminar for philanthropy sector over the last 70 years”.

Although no specific tax rates, or clauses were discussed, the spirit of that seminar was that philanthropy sector should be given tax incentives or concessions of some sort.  The underlying premise was that poor development spending by federal and provincial governments in Pakistan has left a huge gap which is being filled, to a significant degree, by private sector individuals and institutions, companies or organizations.

Another argument made in support of the demands for concessions is that Pakistanis are a philanthropic lot, and a whole lot could be achieved if individual philanthropy could be institutionalized, and if institutions could join hands as well as pool-in resources, there would be greater impact on the needy sections of the society.

These ideas rest on the assumption that tax cuts, concessions or incentives on charity would help raise more funds for charity and philanthropic activities. The only problem with that assumption is that it is not adequately researched or proven in Pakistan. Even in the case of US and UK, a growing body of research is showing that the evidence to the notion that tax deduction encourages people to be more charitable is not convincing.

Those asking for various forms of tax cuts or concessions for individual or institutional charity need to come up with evidence to prove that Pakistanis would give more in charity if there were tax cuts provided by the government.  Or that those currently not giving charity in Pakistan would become philanthropic if the government gives tax concessions.

Second, any discussion on philanthropy in Pakistan cannot be divorced from taxation. There are individuals and companies/organizations in Pakistan that do not pay taxes for one reason or another or otherwise hide their incomes. But the same people or companies also dole out substantial sums in charity and become a messiah of sorts in the area they live in. It would be morally repulsive if those who hide their incomes by way of double books, for example, are also given tax cuts on the amounts as they give as formal charity.

An assessment of NGOs and other charitable institutions also need to be made. According to a 2010 study by PCP, there are firms in Pakistan which, for instance, make Rs10 million in profits before taxation, but they give Rs4 million as corporate charity.  Do such high donations (as percentage of profit before taxation) by a for-profit textile mill make any sense?

It is also common knowledge that charity is often given to those NGOs which are under the management of a close relative – if not blood relations - of the owners and beneficiary shareholders of the companies, who rake in substantial sums of money in management fees with very little being actually spent on the ground.

A huge number of NGOs operations are run the following manner: take money from local or international donors on account of say spending for the socio-economic development of Kalash, charge high management fees, hire researchers, consultants from a clique of family and friends, spend 10 percent on the grounds, and 10 percent on photo-ops, glossy reports, a documentary with sad music, press releases, and there you have it: philanthropy 101 in Pakistan.

Fourth, one must be cognizant that tax exemptions are eventually tax expenditure, and so therefore, who is going to bear the cost of tax exemptions given by rich individuals and institutions, who will benefit the most from any tax deductions on charity?  In the case of Pakistan, the answer is the ‘poor man’ who will probably end up paying more in indirect taxes because at the end of the day the government will have to fill its coffers too.

At its heart, the question is why should a taxpayer XYZ bear the cost of tax exemption or even possibly pay higher taxes because taxpayer PQR is giving charity, which according to PCP’s recent study, is in any case guided by religion and compassion. In other words, if a person PQR (or persons at the helm of an organization) is giving charity to get a plot in heaven in the life after or to gain a feeling of satisfaction or self actualization then why must also that person get a tax cut at the expense of the public at large.

Lastly, could individual or corporate philanthropy ever be a substitute for social sector spending by the government. The amounts doled out in individual or corporate philanthropy may be significant but it surely cannot fill the gap left by the government, regardless of however noble the intentions may be.  These are some of the questions and concerns that need to be addressed before the philanthropy industry starts getting rents form the government in the form of tax expenditure.