The Securities and Exchange Commission of Pakistan (SECP) has requested the National Assembly to recommend granting tax exemption to Audit Oversight Board (AOB) by including it into the Second Schedule to the Income Tax Ordinance, 2001 as a part of budget proposals for 2018-19.
According to a communication of the SECP Audit Oversight Board with Qaiser Ahmad Sheikh (chairman) and members of the National Assembly Standing Committee on Finance, the AOB is a regulatory body established by the Parliament in August 2016 to oversee the audit firms. Now it needs the support of the Parliament to be exempted from income tax for its financial sustainability.
AOB's governance: The AOB's members are appointed by the federal government on the recommendation of the nominating committee which includes the secretary finance, governor State Bank of Pakistan, chairman Securities and Exchange Commission of Pakistan, president of the ICAP and one member co-opted by the ex-officio members.
AOB's Financial Resources: The AOB is a small organization with only 10 employees. It has very limited financial resources. Sources of funding of AOB as specified in the SECP Act are grants from the federal government (no grant or its commitment thereof received so far); voluntary contribution by the stakeholders (AOB was established by initial contributions from SBP and SECP) and supervision fee from public interest companies (fee from majority of companies is only Rs 35,000 per annum); and fee for registration of the audit firms (cannot be the main source of receipts for AOB in any case due to only 44 registered audit firms and the fact that International Forum of Independent Audit Regulators requires that regulator should not depend on income from regulated entities).
The rationale for tax exemption is that the core rationale for providing tax exemption to AOB is that AOB's objective is to improve quality of audit of financial statements of public interest companies (PICs) in the public interest. The AOB is not a profit-seeking business enterprise and has no income from business. No money is distributed to any member.
To carry out its functions and meet expenses, the AOB receive money from audit firms registered with ICAP and other stakeholders. The money received is only used for meeting its expenses, obligations and for discharging its duties.
Providing tax exemption to AOB will help reduce need for budgetary support from the federal government. Under Section 36P(2)a of Part IXC of the SECP Act, 1997, the fund for AOB 'shall consist of such sums as the federal government may from time to time grant."
The ICAP, which licenses the auditor, is exempted from tax. The SECP estimates show that because of this tax exemption, the total tax saving to AOB in FY 2018-19 shall be no more than Rs 5 million. This is an extremely small amount for the national exchequer, but an extremely significant amount for the AOB.
In view of the above, the committee is hereby requested to kindly consider and recommend inclusion of the Audit Oversight Board in the Second Schedule to the Income Tax Ordinance, 2001 as a part of budget proposals for 2018-19, the SECP added.