Non-profits in Budget FY18 – (II)

Following up on last week’s discussion, today’s article looks at the second of the major announcements made in the budget speech pertaining to non-profits (Knops) in Pakistan: if an NPO is unable to spend more than 75 percent of its ‘income’ on charitable and welfare activities, the unspent amount shall be taxed at 10 percent and the organization will retain its NPO status (as opposed to the current law of a 30 percent tax on the entire amount and the revocation of the organization’s NPO status).

Where to begin with such laws? Firstly, it was nice of Ishaq Dar to remind us of the present law – a 30 percent tax and cancellation of NPO status. As far as BR Research’s channel checks go, no NPO has ever suffered any such penalty. If this law does exist, it exists somewhere on paper, outdated, perhaps applicable to the Bait-ul-Mal or BISP.

What sense does this law make? What compulsion is there for an NPO to spend 75 percent of its ‘income’ (recall that ‘income’ for a lot of NPOs is in the form of donations, charity, funding, grants, etc.)? Will the leftover amount not eventually be used for charitable/welfare purposes?

The law does not apply to restricted funds – those funds that are accompanied by conditions and restricted in their usage. For instance, let’s take the case of a donor-funded NPO. The model is often project-based, with donors releasing the amount in tranches upon the completion of various targets, rather than a lump-sum payment. In such cases, there is no question of any money being left over, as the release of funds is post facto. In case there is a lump-sum payment by donors to NPOs – or payment made before the completion of a target – any money left over is either given back to the donor or accommodated into the project. There can be no savings, and there is a lot of oversight and controls – checking of receipts, quotations, and so forth. In this case, the law is redundant and does not apply.

Then again, there’s the case of unrestricted funds – when an NPO is receiving donations from individuals or companies and is not answerable to its donors, or has its own sources of income like property, government securities, etc. Even here, there are a few points to consider when applying this law.

Firstly, the proposed/existing law serves no apparent purpose! Even if an NPO is misusing its funds, what good does encouraging 100 percent expenditure do? It all comes down to auditing and checking the accounts, and that exists for NPOs just like it does for any other company in Pakistan. Secondly, with this law in place, an NPO’s ability to expand or purchase assets like land or government securities in order to sustain itself would become restricted to just 25 percent of its income. And finally, it is unclear whether the law applies to accumulated surplus or the current year’s surplus.

In conclusion, the announcement by the Finance Minister is indeed quite troubling and shows desperation for tax collection. Also, the distinction needs to be drawn between the different types of NPOs; a think tank is not the same as a hospital, and a university is not the same as a charity. The laws for each need to be different, this much should be obvious.