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Many non-profit organisations in Pakistan often face complex tax-related issues.
The predicament of small non-profit organisations (NPOs) working in geographically remote areas and having funding constraints is more critical as compared to large and resource rich NPOs which can afford the services of expensive tax practitioners or chartered accountants.
Failure to comply with tax laws, whether advertently or inadvertently, often leads to legal action and heavy fines imposed as penalties by tax authorities.
The many reasons for non-compliance include funding constraints, the frequency of amendments and complexity of tax laws and lack of education, understanding and capacity on the part of the NPO.
The primary objective of a non-profit organisation is not to make profit. NPOs usually work for the promotion of a particular social cause.
The existing provisions in the income tax law and related rules do not take into consideration the ground realities and functioning of non-profit organisations across a wide range of thematic areas
The Income Tax Ordinance, 2001 and the Income Tax Rules, 2002 treat NPOs as companies.
Various requirements for fulfilling the criteria to be recognised as non-profit under the tax law include (a) purpose for establishment to be religious, educational, charitable, welfare or development, or the promotion of an amateur sport (b) registration under any law as a non-profit organisation (c) approval by the Commissioner Inland Revenue (d) non-conferment of private benefit to any other person by the assets of the NPO.
As part of the procedure, an NPO has to provide certain records and information including audited accounts, details of directors, donors, beneficiaries, offices etc. Moreover, the governing document of NPOs should also contain various clauses as required by the income tax rules including quorum requirements, restriction on surplus funds, books of accounts, bank accounts, audit, distribution of profit etc.
Furthermore, the approval granted for the NPO status can also be revoked on various grounds including the use of an NPO for personal gain or benefit of members or their families; propagation of views of a particular political party or a religious sect; failure to achieve the declared aims and objects; salary expenditures exceeding by 50pc of the total receipts excluding restricted donations, etc.
Once an NPO has been granted approval by the Commissioner Inland Revenue, it can avail various tax benefits including tax credit and exemption. Moreover, anyone intending to make donations to an approved NPO can also reduce his/her tax liability by claiming tax credit under section 61 of the Income Tax Ordinance, 2001.
The NPOs are allowed a tax credit equal to 100pc of the tax payable subject to fulfilment of certain conditions including (i) filing of annual income tax return (ii)) deduction or collection of tax as required by tax law and deposit the same in government treasury and (iii) filing monthly withholding tax statements.
However, in case the NPO generates part of its income from business or commercial activities and the same is expended for carrying out welfare activities, a proportional credit is allowed against such income.
NPOs can also be granted exemption from withholding of income tax under section 159 if the commissioner is satisfied that all income of the NPO is entitled to 100pc tax credit.
Before tax year 2015, all NPOs were directly allowed exemption under clause 58 of the second schedule to the income tax ordinance. However, from tax year 2015 onwards, exemption under clause 58 was withdrawn and the concept of tax credit was introduced under a new section 100C.
Nonetheless, various NPOs still enjoy direct exemption status under the second schedule of the Income Tax Ordinance, 2001.
The existing provisions in the income tax law and related rules are at times very stringent and do not take into consideration the ground realities and functioning of NPOs across a wide range of thematic areas.
For example, imposing a maximum salary limit of 50pc of the total receipts excluding restricted donations is very harsh in case of NPOs involved in research, advocacy or even education. In such instances, the main expenditure is salary and it is very difficult to comply with the prescribed limit.
With regards to the provision of certain clauses in the governing documents of NPOs, there exist clear disparities between the requirements of various registration laws and the Income Tax Rules, 2002.
It is very common that the governing document registered under section 42 of Companies Ordinance, 2001 provides for the quorum to be minimum 2 or 25pc of the total members, whichever is higher. Whereas, the Income Tax Rules 2002 quorum requirement is a minimum four or one-third of the total members, whichever is higher.
Such inconsistencies lead to confusion and result in delays on part of the NPOs as they are required to amend their governing documents to bring those in compliance with the tax law.
There is a clear case for policy intervention to bridge gaps vis-à-vis the conflicting requirements of several NPO registration laws and the Income Tax Rules, 2002.
In addition to the above, there is a strong need for clarifying several concepts in the Income Tax Ordinance, 2001.
For example, within the definition of an NPO as given in section 2(36), the terms ‘welfare’ and ‘development’ are not defined and elaborated. Moreover, the concept of ‘public benefit’ is not provided in the tax law.
Similarly, Income Tax Rule 213(1) regarding restriction on surplus funds needs clarification whether the restriction is applicable on accumulated surplus funds or only on the current year’s surplus funds.
Given the above snapshot, there is an immediate need for the government to amend, update and insert several provisions in the income tax law and related rules to clarify certain concepts, reduce disparities and take into account the ground realities with regards to NPOs.
— The writer is a manager (certifications) at Pakistan Centre for Philanthropy
Published in Dawn, Business & Finance weekly, January 9th, 2017
