The tax credit system for Non-Profit Organizations (NPOs) by the Revenue department has been significantly abused.
ISLAMABAD, [05/12/2023]: The Federal Board of Revenue (FBR) in Pakistan has come under scrutiny for the alleged misuse of tax credit provisions for Non-Profit Organizations (NPOs), as highlighted in Section 100C of the Income Tax Ordinance 2001. A special investigation report by the Federal Tax Ombudsman (FTO) has exposed significant irregularities in the application of Section 100C and Section 2(36) of the Income Tax Ordinance, 2001.
The NPO sector in Pakistan is currently grappling with a multitude of issues, prompting numerous complaints to the FTO. The persistent influx of complaints underscores the challenges in the FBR’s oversight of this sector, raising concerns about its efficiency and effectiveness.
The investigation, initiated by the FTO in response to complaints filed by NPOs across various regional FTO offices, falls under the jurisdiction provided by Section 9(1) of the Federal Tax Ombudsman Ordinance, 2000 (FTO Ordinance). The complaints mainly revolve around delays, denials, and irregularities, creating unjust obstacles for compliant NPOs. As a result, the FTO Secretariat has decided to comprehensively review the entire statutory, regulatory, and procedural framework governing the NPO sector in Pakistan.
Key issues plaguing Pakistan’s NPO sector include blatant tax evasion, non-filing of tax returns and withholding statements, misuse of approval processes at Inland Revenue field formations, unregulated certification processes by external signatories, and extensive misuse of the provisions under Section 2(36) and Tax Credit Regime under Section 100C of the Income Tax Ordinance, 2001.
According to Section 2(36) of the Income Tax Ordinance, 2001, NPOs operating in Pakistan are required to obtain approval from the Commissioner Inland Revenue to be recognized as not-for-profit entities. This entails a comprehensive procedural and regulatory regime specified under the Income Tax Rules, 2002.
Furthermore, only NPOs holding approval under Section 2(36) are eligible for a 100% tax credit under Section 100C of the Income Tax Ordinance, 2001. Since 2003, the FBR has also entered into an MOU with the Pakistan Centre for Philanthropy (PCP), designating it as a Certification Agency for Section 2(36) purposes.
The FTO’s report highlights the FBR’s laxity and ineptitude in overseeing the NPO sector, while the PCP has allegedly expanded its scope beyond its authorized regulatory boundaries. The report emphasizes that conditional approval is solely the Commissioner’s prerogative, and the PCP has been granting conditional approval without proper authority for many years. The certification process has also not been adequately monitored, reviewed, or updated, leading to a lack of attention to the NPO sector.
The report calls for a comprehensive review of the NPO regime by the IR-Policy Wing of the FBR in light of Section 2(36), Section 100C of the Income Tax Ordinance, 2001, and Income Tax Rules 211 to Rule 220B of Income Tax Rules, 2002. It notes the absence of periodic reviews, as required by Sub-Rule 11 of Rule 220B of Income Tax Rules 2002, and the failure to constitute the Review Committee mandated under Rule 220B(11) even after 20 years of the PCP’s existence.
Despite valid queries raised by the PCP and changes in Section 100C of the Income Tax Ordinance, 2001, in recent years, relevant rules have not been updated since 2016. The report also highlights discrepancies in the FBR’s monitoring and regulatory regime for the NPO sector, particularly in relation to the PCP.
In conclusion, the report calls for compassionate intervention by the FBR to address the issues faced by genuine NPOs operating in Pakistan. The findings emphasize the need for a comprehensive overhaul of the regulatory framework governing the sector to ensure transparency, accountability, and effective utilization of tax credits.