Finance Bill proposes 10 percent income tax on NPOs

The federal government through Finance Bill 2017 has proposed income tax at the rate of 10 percent for all Non-Profit Organisations (NPOs) where there is surplus funds available with the NPO or in case administrative expenses claimed by NPO exceed 15 percent of the total receipts.
When contacted, tax lawyer Waheed Shahzad Butt told BR that proposed amendment by the federal government through Finance Bill 2017-18 does not appear to be in line with the present government''''s polices to promote NPO activities which provide free of cost relief to the ordinary citizens of the country as the amount of surplus funds will now be taxed in almost all cases. The proposed amendment needs to be withdrawn as it results in taxation of an NPO which is quite illogical rather confiscation of funds available for poor masses. The NPOs by their very nature are not taxable entities like ordinary business enterprises as such income is available only for welfare of ordinary citizens and charitable purposes.
The restriction on the quantum of expenditure on administration activities may be justified in certain cases; however, tax on surplus funds is not desirable as the same funds will ultimately be used only for charity works, welfare of ordinary masses and not for earning profits, the lawyer opined.
Prior to Finance Act, 2014, NPO(s) were exempted from tax under the Second Schedule to the Income Tax Ordinance, 2001, however, through Finance Act, 2014 a special regime was introduced by inserting Section 100C in the Income Tax Ordinance, 2001 whereby exemption was substituted by 100% income tax credit. This income tax credit is available to NPO on fulfilling certain conditions prescribed under the law. In the Finance Bill 2017, it is proposed that in case of all NPOs, the administrative expenses will not exceed 15 percent of total receipts, the surplus funds as defined in the said section will be taxed at 10 percent. The term ''''surplus funds'''' has been defined in the Finance Bill as under:
"Surplus funds mean funds or monies: (i) not spent on charitable and welfare activities during the tax year; (ii) received during the tax year as donations, voluntary contributions subscriptions and other incomes (iii) or more than 25 percent of the total receipts of the NPO received during the tax year; (iv) are not part of the restricted funds. Explanation: For the purposes of this sub-section, "restricted funds" means any fund received by the organisation but could not be spent and treated as revenue during the year due to any obligation placed by the donor."
The proposed amendment through Finance Bill 2017 does not appear to be in line with the rationale in the government policy to promote NPO activities to provide relief to the ordinary citizens as the amount of surplus funds will now be taxed in almost all cases. The proposed amendment needs to be withdrawn as it results in taxation of a non-profit organisation which is neither correct nor in line with the government policies, the lawyer added.