The federal government is likely to exempt Non-Profit Organizations (NPOs) from taxes in the upcoming budget 2022-23.
Sources said that the Federal Board of Revenue (FBR) is considering exempting NPOs from taxes on the proposal of the Securities and Exchange Commission of Pakistan (SECP). Sources said that NPOs are not commercial institutions and depend on very limited sources of income to sustain and run their routine operations.
NPOs having rental income from properties other than houses are not exempt from tax. It is suggested that all NPOs be exempted from taxes on all rental income in the forthcoming Finance Bill. This will have a positive impact on the welfare of the general public. The tax revenue impact may be negative initially but the economic activity would be generated which is, later on, subject to various taxes.
SECP also recommended that tax-related to government bonds like levy of taxation on T-Bills should be staggered based on the duration of ownership. Currently, WHT is levied at maturity regardless of when the security was obtained which is unjustified for the last investor.
The SECP in its budget proposals also asked for documentation of CGT records. NCCPL has developed an automated CGT system to compute, determine, collect and deposit CGT on the disposal of listed securities.
On the inception of the CGT regime in 2012, certain classes of investors including foreign institutional investors, unit holders of collective investment schemes, and investors of future commodity contracts were excluded from the regime, however, subsequently, these classes of investors were included in NCCPL’s CGT regime.
To further extend the CGT regime, NCCPL has envisaged that Banks, NBFIs, and Insurance companies that are currently exempted from applicability of section 100B of the Ordinance, may be considered for inclusion in the NCCPL CGT regime. These entities determine CGT on their own and discharge their CGT obligation, if any, while filing their income tax returns.
Inclusion of these entities in the CGT regime will provide independent calculation and documentation of their CGT records besides the government will benefit from the increased documentation provided in a centralized and transparent manner by NCCPL and this improved documentation will have a positive impact on the overall economy of the country. It will further enhance CGT withholding.
SECP in its proposals also asked for an initial depreciation allowance in the next budget. The reduced depreciation charge during the first year of asset usage would not be applicable to leasing companies
Overall, tax depreciation expense would remain the same over the life of an asset, however, the impact on a leasing company’s current tax liability (and therefore cash outflow) would be much higher in the first year. The current proviso reduces market competitiveness against banks and decreases effective return on the leasing product.
The withdrawal of exemption available to the Modarabas by omitting clause 100 of Income Tax Ordinance 2001 may result in a marginal increase in tax revenue but will harm the entire sector manifold.
It is important to understand that Modarabas are a unique structure of Islamic collective investments, only prevalent in Pakistan, working for constitutional objective to achieve Islamization of the economy. Further, the other forms of collective investments i.e. Mutual Funds are still being allowed pass-through status creating a disadvantageous position for the Modarabas.
The subject withdrawal will also cause a material reduction in payouts/dividends which will disincentivize the Islamic investors. Resultantly, deposit mobilization would become comparatively difficult ensuing curtailment of economic activities, particularly in the SMEs sector.
It is, therefore, recommended to reinstate the pass-through status available to Modarabas upon distribution of 90 percent income. The withdrawal of Clause 100 of Income Tax Ordinance 2001 will result in a marginal increase in income Tax for National Exchequer but the harm to the sector will be multiple and manifold.
Further, the reduction in dividends will dis-incentivize the Investors and deposit mobilization would become comparatively difficult resulting in curtailment of economic activities, particularly in the SMEs sector.