Well established charitable institutions doing yeomen service in health, education and other social sectors will see a drastic reduction in donations, in the next financial year, due to a proposal seeking lowering of admissible limit of donations for tax credit, in the Finance Bill 2008-09.
Under the existing provisions of the Income Tax Ordinance, 2001, a person is entitled to tax credit in respect of any donation to an educational, non-profit organisation or any relief fund established by the federal or provincial or local government.
The tax credit is allowed as a deduction from the tax liability of the donor of an amount which is calculated by applying the person''s effective tax rate to the donation given during the tax year. At present the limit of donation for tax credit in the case of individual and Association of Persons (AoP) is 30 percent of the taxable income, whereas in case of a company it is 15 percent.
The Finance Bill, now before the National Assembly, has proposed that the aforesaid ceilings of 30 and 15 percent be reduced to 10 percent for all persons. According to FBR, an empirical study indicates that the cost of tax credit so allowed is substantially high which needs to be rationalised.
The tax credit is regarded as a vital incentive in inducing persons specially the corporate sector to donate generously for charitable purposes, which contributes tremendously towards the welfare of the down trodden.
FBR expects an enhancement in its revenue by Rs 500 million due to the lowering of tax credit ceiling on donations. While those involved in raising these donations fear that the proposal may turn out to be a major disincentive in mobilising donations especially in the corporate sector.
Further, the unknown single ''empirical study'' cited by FBR, is negates dozens of studies which show that the administrative cost of delivery in social sectors through governmental organisations is higher than that of certified and audited private non-profit organisations undertaking the same task.
Public listed companies in 2006 donated RS 2.3 billion to tax-exempt charities, says a study of Pakistan Centre for Philanthropy. It will decline by one-third or Rs 760 million in case of reduction of tax deductible allowance.
While the rest of the world is encouraging corporate philanthropy and wants companies to donate at least one percent of their profit before tax (which would mean doubling of donations by Pakistani corporates), the present government in a retrogressive move wants donations to be reduced by one-third from companies and by half in case of individuals.