Second Schedule of Income Tax Ordinance, 2001: NBFI & Modaraba Association oppose amendment

KARACHI: The NBFI & Modaraba Association of Pakistan has opposed any amendment in the Second Schedule of Income Tax Ordinance, 2001 to withdraw tax exemptions for Modarabas.

The Federal Board of Revenue (FBR) has submitted a bill to the National Assembly Secretariat proposing a string of amendments to withdraw around 36 tax exemptions including tax exemption available to Modaraba sector.

The NBFI & Modaraba Association has strongly protested and requested the Finance Minister Dr Abdul Hafeez Shaikh for his intervention for removing the proposed deletion in the Income Tax Ordinance, 2001.

In a letter to the Finance Minister Dr Abdul Hafeez Shaikh, the NBFI & Modaraba Association said that the proposed amendment shall not result in any material tax addition to the exchequer, which appears to be the primary objective of the proposed amendments. It is important to note that, in case there were no tax exemptions available to Modarabas during year 2020 thereby depriving Modarabas to make tax free dividend distributions, it would have added a nominal figure of Rs76 million to FBR’s tax collections. “Is it really worthwhile to destroy the entire sector and the benefits accruing to small investors to achieve only such an insignificant tax addition,” the Association asked.

The letter said that in case of the proposed withdrawal of tax exemptions, the business operations shall no more be feasible for Modaraba entities. Therefore, due to the closure or exiting from the present business of the Modarabas, the exchequer shall loose the 25 percent (or more) withholding tax which is contributed by the recipients of the tax exempt Modarabas’ dividends.

“The tax exemption has been granted in the very law in 1980 enabling incorporation of Modarabas and the relevant legal infrastructure and, therefore, constitutes a fundamental constitutional right of the Modarabas which, as per our understanding, cannot be over-ridden by any subsequent finance bill,” the letter said.

“We wish to respectfully submit that the proposed withdrawal of tax exemptions on Modarabas shall have a disastrous effect on the profitability and endanger the very survival of Modaraba sector which has been a fore-runner in the promotion of the Islamic financial system in the country,” the letter said.

There are 26 Modarabas, other than one manufacturing Modaraba, with equity of about Rs20 billion and assets base of over Rs40 billion. During the year ended on 30 June 2020, the Modarabas earned profits of Rs951 million of which dividends of Rs886 million were paid out to about 90,000 shareholders.

The said shareholders are mostly small to medium sized individuals, constituting almost one third of the total stock exchange investors, who benefited from 90 percent distribution of Modarabas’ income.

The proposed withdrawal shall seriously affect dividend distributions of the Modarabas and demonstrate a clear negation of the much-emphasised promotion of Islamic finance by the Government, the letter said.

“In view of the above, the NBFI and Modaraba Association of Pakistan seeks your urgent intervention for removing the proposed deletion of Clause 100 from the proposed amendments in the interest of safeguarding a successful Islamic financial sector serving small and medium sized investors and clients,” the letter sent to Dr Hafeez Shaikh said.

Copyright Business Recorder, 2021