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ISLAMABAD: The Federal Board of Revenue’s tax credit regime for Non-Profit Organisations (NPOs) has been massively misused (Section 100C of the Income Tax Ordinance 2001).

According to a special investigation report of the Federal Tax Ombudsman (FTO) on the NPO sector, the FTO has found major misuse of Section 100C and section 2(36) of the Income Tax Ordinance, 2001.

The NPOs are facing multiple problems and FTO has been receiving complaints. The steady flow of complaints further confirms that FBR’s handling of this sector is not smooth and satisfactory.

On the basis of various complaints filed by NPOs at different regional offices of the FTO Secretariat, the own motion (OM) investigation was initiated through exercise of jurisdiction under section 9(1)of the Federal Tax Ombudsman Ordinance, 2000 (FTO Ordinance) against visible maladministration, plaguing Pakistan’s NPO sector, with special reference to concessionary regime u/s 2(36) and Tax credit regime u/s 100C of Income Tax Ordinance, 2001.

The instant OM investigation owes its initiation to a series of complaints, mainly agitating incidence of delay, denial and delinquency, creating unjust hurdles for law-abiding entities, this Secretariat decided to review the whole statutory, regulatory and procedural regime, covering the NPO sector in Pakistan.

Pakistan’s NPO Sector is currently suffering from a range of pitfalls; blatant tax evasion by NPOs: non-filing of tax returns and withholding statements, misuse of approval regime at IR field formations, unregulated Certification Processes by an external signatory and gross misuse of status u/s 2(36) and Tax Credit Regime u/s 100C of Income Tax Ordinance, 2001, the report said.

In accordance with Section 2(36) of the Income Tax Ordinance, 2001, non-profit organisations working in Pakistan are required to seek approval of Commissioner Inland Revenue to be recognised as not for profit. For this purpose, exhaustive procedural/regulatory regime is provided under Income Tax Rules, 2002.

Furthermore, only NPOs having approval u/s 2(36) are entitled to 100 per cent tax credit u/s 100C of Income Tax Ordinance, 2001. In addition to the powers vested with the Commissioner Inland Revenue, since 2003 FBR has also signed an MOU with Pakistan Centre for Philanthropy (PCP), granting the later NGO, vide SRO 1116(1)/2003 dated December 18, 2003, the status of a Certification Agency for purposes of section 2(36).

The FTO’s report stated that while FBR has demonstrated sheer laxity and ineptitude, the PCP has unauthorizedly expanded its scope beyond mandated regulatory parameters.

Conditional Approval is solely Commissioner’s prerogative, whereas, since last so many years the PCP has been granting conditional approval without any authority. Fractured process of certification apart FBR’s neglect in handling, monitoring and tax management of NPO sector is far from satisfactory.

The most glaring instance of ineptitude is the fact that certification scheme envisages yet another agency but ever since 2003 neither other agency has been actualized nor certification process is being properly monitored, regularly reviewed and nor NPO sector is being paid the attention it rightly calls for.

In the wake of ground facts vis-à-vis legal and regulatory provisions the whole NPO regime needs serious review by IR- Policy Wing FBR in the light of section 2(36), section 100C of Income Tax Ordinance, 2001 and Income Tax Rules 211 to Rule 220B of Income Tax Rules, 2002.

Admittedly no periodical review as obligated under Sub-Rule 11 of Rule 220B of Income Tax Rules 2002 was conducted. Thus, approval granted in 2003 has yet not been reviewed, as obligated u/R 220B(11) of Income Tax Rules, 2002.

The Review Committee as obligated under Rule 220B to be constituted by the chairman, FBR, comprising of not less than three members; with a member designated to serve as its chairman of the committee, after every three years, in terms of Rule 220B(11) of Income Tax Rules 2002), has yet to be materialised even after 20 years of PCP’s existence.

Despite the fact that PCP had approached FBR raising certain valid queries, elaborating real-time situations which necessitated suitable changes in the relevant Rules but till date no changes in the Rules have been made. Similarly, there are frequent changes in section 100C of the Income Tax Ordinance, 2001, especially during the last 2-3 years but relevant Rules have not been updated since 2016.

The FBR’s NPOs sector monitoring and regulatory regime, with special reference to the PCP is not in line the core document i.e. MoU 31st May 2003.

Admittedly, the FBR has not taken cognizance of various services provided by PCP to NGOs/NPOs in addition to its certification role. Member-IR Operations agreed to ensure foolproof withholding audit of NPO sector with special reference to NPOs availing tax credit u/s 100C, entities running medical colleges and non-filers of tax returns and withholding statements.

The problems faced by genuine NPOs need compassionate intervention by the FBR, the FTO order added.

Copyright Business Recorder, 2023

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