In a seismic policy shift, the Federal Board of Revenue (FBR) has proposed the imposition of tax on the income of various funds including service, pension and military regimental and on the business income of non-profit organisations and trusts in the new budget.
In its budget proposals, the tax authorities have proposed to Finance Minister Ishaq Dar to withdraw the tax exemption facility and impose income tax on these institutions at half the standard tax rates, said sources in the tax machinery.
The proposals are aimed at generating over Rs5 billion in additional revenues along with – what the tax authority calls – ending discriminatory treatments. For the next fiscal year 2016-17, the government may set the FBR’s annual tax collection target at Rs3,601 billion, which is Rs134 billion less than the target approved by the federal cabinet while approving the Budget Strategy Paper.
If Prime Minister Nawaz Sharif accepts the proposal of bringing the incomes of various funds under the tax net, it will also be a departure from the government’s policy of encouraging savings. The FBR has proposed that the funds and institutions that are currently exempted from paying income tax under clause 54(3) of Income Tax Ordinance should be taxed at half of the standard rates from fiscal year 2016-17.
According to its initial estimates, the move to tax these funds would help generate over Rs3 billion of tax revenue. However, the FBR has proposed that incomes of Employees Old Age Benefit Institution (EOBI) should not be brought under the tax net.
The institutions that are currently enjoying income tax exemptions but could be brought into the tax net include: Provident funds to which the Provident Funds Act (1925) applies; Trustees on behalf of a recognised provident fund or an approved superannuation fund or an approved gratuity fund; Benevolent funds or group insurance schemes; Service funds; Regimental units, stations or institutes; and recognised regimental thrift and savings funds.
The FBR has also proposed to charge half of the standard income tax rate on: Income of a pension fund approved by the Securities and Exchange Commission of Pakistan under the Voluntary Pension System Rules (2005); Any profit or gain or benefit derived by a pension fund manager from a pension fund approved under the Voluntary Pension System Rules (2005); On redemption of the seed capital invested in pension fund as specified in the Voluntary Pension System Rules (2005).
According to another budget proposal, the FBR has also proposed that the income of non-profit organisations (NPOs) should be brought under the tax net. Presently, these non-profit organisations are entitled to 100% income tax credit under section 100C of the Income Tax Ordinance (2001). They also enjoy exemption from levy of minimum tax.
The FBR has proposed that the business income of these non-profit organisations and trusts should be taxed at half of the standard income tax rates aimed at generating at least Rs1.5 billion in the first year of their taxation.
However, it has proposed that these organisations and trusts should keep enjoying exemption from levy of minimum tax.
The FBR is of the view that majority of doctors, engineers, lawyers and other professionals are non-filers of income tax returns but their organisations enjoy benefit of 100% exemption from income tax. The FBR has proposed that tax credit should be available to only those organisations and trusts, where at least 90% members file their income tax returns.
