Financial Times

Taxing NGO's and crisis over shorter duration visas

There is growing concern among the NGO's on the seemingly rising anti-NGO sentiment emanating from the government and sections of the media.

Volunteers clearing debris left from the aftermath of the 2004 tsunami

Most NGO workers who were contacted were reluctant to go on the record but did say issues such as the Inland Revenue Department's tax policy towards NGO's which eats into 30 percent of their funds are excessive. Taxing non-profit work outside of tax on interest and payments on personal liabilities is a disincentive for the sector as a whole, said Executive Director of the Consortium of Humanitarian Agencies (CHA), Jeevan Thiagarajah. However, he did say there is close dialogue between the CHA, the Inland Revenue Department and the Ministry of Finance to address these concerns.

NGO staff have also been experiencing difficulties in obtaining visas. Mr Thiagarajah said security clearance is normally given for the period of one year from the police of the home country but visas are being renewed at shorter durations with periods of three months at a time.

He said he does not believe that the government of Sri Lanka as a whole is anti-NGO. "The connotation of NGO's is also larger than life," he said. “Many are small community driven enterprises with social service as an intent. A few in the overall context access 'funds'. In the past two and half decades the identities, symbols and at times the voices emanating from these funded agencies have been the markers by which stories have been written, opinion and at times policy formed. The media has through its portrayals formed opinions, some flattering, many not so. The NGO's have not been able to shake free of the negative connotations."

In the 2005 Budget Speech, former Minister of Finance Dr. Sarath Amunugama laid out the rationale for taxing NGO's. He said many NGO's are carrying out activities which are not monitored adequately and therefore, it was necessary to adopt a proper system of monitoring of such organizations particularly in the areas of activities carried out and funds utilized by them.

The tax liability and Remission of Tax Payable in terms of Section 96A of the Inland Revenue Act No.38 of 2000 states that 3 percent of any money received in any year of assessment by any NGO defined in paragraph (01), by way of grants, donations, contributions or any other means be treated as profits arising to it in Sri Lanka, and such profits are taxed at the rate of 30% (as specified in item 24 of the Sixth Schedule to the Inland Revenue Act) for that year of assessment. This liability is in addition to any tax that would be payable by NGO's on profit or income, if any, from any other source of income such as profits from trade, business, rent, interest, etc… The Act further states that the Commissioner General is empowered to remit the income tax payable on any part of receipts, by a NGO for any year of assessment.

Funding flows – post-tsunami
The tsunami and the funds it brought into the country generated much scrutiny and debate and the attention of the tax assessor, said Mr Thiagarajah. He explained that in response to the tsunami, at least US$13.5 billion was pledged or donated for emergency relief and reconstruction, 44 percent from governments and 41 percent from private sources with the remainder from IFI's (these figures are based on the countries studied in the TEC Funding Response study). The general public provided the vast majority of the US$5.5 billion in private donations.

The TEC (Tsunami Evaluation Coalition) is an independent, learning and accountability initiative set up after the December 2004 tsunami. The total figure of US$13.5 billion excludes private donations in countries not covered by the TEC funding studies, private remittances and projects, private donations in the affected countries, cash and in-kind donations from within affected communities and spending pledges by the governments of the affected countries. He said that although there is a risk of some double counting, the total amount pledged and donated from all sources is likely to have been well in excess of US$13.5 billion. In emergency situations according to a report by TEC the following inadequacies were highlighted:

'In the immediate response phase of an emergency the most damaging mistake is to neglect and overlook the contribution of affected populations, local organizations and authorities as they are usually the ones who carry-out the most critical life-saving efforts immediately after an event. The relief efforts across the affected regions illustrated a lack of understanding of local contexts and reluctance on the part of some international agencies to consult and work through, and with, local communities, groups and organizations. This inevitably led to poor and ineffective programme planning, and even sought to undermine local initiatives. '

Given the unequal distribution of funds, cleavages appear between national, local agencies and internationals and likewise between sections of the government of Sri Lanka and the international donor/NGO community. Mr Thiagarajah said that forthcoming legislation for a new regulatory framework, while being very forward looking, has also tightened oversight considerably. It has also sought to put the brakes as they feel necessary on the manner of the use of resources and the physical nature of ones presence. He added that negative connotations do abound in a shrinking funding environment with the lines between donors, bilaterals, I/NGO's and issues for advocacy coalescing and government agencies stoutly defending national interests. The Select Committee which sat for awhile in Parliament had its share of detail and views on the work of NGO's, he said, but added that depending on which press article one is reading, either local or in other continents, the message is stark.

Image building for NGOs
The CHA has received a formal response from Inland Revenue and is due to clarify four points of exemption this week regarding IR guidelines issued on July 25, 2005. CHA’s Jeevan Thiagarajah said the Ministry of Finance has called for a review meeting scheduled for June 19. According to Thiagarajah, 95 percent of NGOs have not followed some of the basic features of the guidelines in reporting to the IR. "We are going to ensure that all the agencies who are willing to work with us will be satisfying the conditions of Section 4 of the guidelines," he said.

Mr Thiagarajah said the CHA is also seeking exemptions from the Finance Minister for areas that have not been looked at yet, specifically the current exemptions related to the events due to the war in the North East and the tsunami. The CHA is working towards rectifying the situation by the end of this month.

Another issue the CHA is taking up is in improving the image of NGOs.
"As a community, we communicate very badly but we are working towards a professional unit handling this work for us," Thiagarajah said, adding that for every positive story in the media, there are four negative stories that go unanswered and 'form public opinion against us.'

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