Questions, Questions

1. REGISTRATION AND APPROVAL OF NPO AND OBLIGATIONS UNDER THE LABOUR LAWS OF PAKISTAN(EOBI, SESSI, EDUCATION CESS, WWF & CPWP)Jawad A. SarwanaAdvocate, High Court

2. Questions, Questions • What is a NPO? • What is the legal regime which governs, controls or regulates the existence and operations of NPO? • Under what conditions can an organization be eligible to call itself NPO? • Which legislation should one apply under? • How does one register a NPO? • What are the obligations of and benefits from registration? • How to obtain tax exemption status? • What should I do first: apply for Registration or Exemption?

3. NPO defined Obligations under Labor Laws for NPOs Benefits of NPO Types of NPO’s acceptable to The Commissioner of Income Tax EOBI A Road Map Public Charitable Trusts SESSI Societies / Vol. Soc. Welfare Soc. CESS Company Limited by Guarantee Legal Requirements for setting up the 3 types of NPO WWF CPWP Application process for registration and obtaining approval from CIT - PCP On-going regulatory requirements to maintain NPO status

4. NPO • The definition of “non-profit organization” is contained in Clause 36 of Section 2 of the IT Ordinance, 2001: “2(36) “non profit organization” means any person: a) established for religious, charitable or educational purposes or for the promotion of amateur sport; b) which is registered under any law as a nonprofit organization and in respect of which the Commissioner has issued a ruling certifying that the person is a nonprofit organization for the purposes of this Ordinance; and c) none of the income or assets of the person confers, or may confer a private benefit on any other person.”

5. Benefits of NPO • (a) Tax Exemption for all activities under Income Tax Ordinance 2001 and Income Tax Rules 2002. • (b) Tax Exemption for the donors vis a vis donations made to such a foundation/NPO. • (c) Some of the various laws that deal with the issue confer the status of artificial legal person to the organization and hence the assets owned by such an organization shall be held in perpetuity and recognition as a bona fide foundation. • These are in addition to the benefits gained from Corporate Social Responsibility (e.g. good public relations, competitive edge, good reputation, employee participation and retainership).

6. Types of NPOs Nonprofit Organizations in Pakistan may be registered or incorporated by adopting any one of four forms, namely: Trust Act, 1882 trust society Societies Registration Act, 1860 voluntary social welfare agencies Voluntary Social Welfare Agencies (Registration and Control Ordinance), 1961 nonprofit company with limited liability Companies, Ordinance, 1984

8. NPO’s can be involved in several broad categories • those involved in advocacy and lobbying for example: Association of Human Rights, PAWLA (PakistanWomen Lawyers Association) • those involved in policy issues and debates for example: PIIA (Pakistan Institute of International Affairs, etc.) • emergency, rehabilitation and relief organizations, e.g. Eidhi Foundation, LRBT, etc.

9. The VSWA regulates grass-roots level organizations providing welfare services to those in need. Voluntary Social Welfare Agencies Registration and Control Ordinance, 1961 The Ordinance requires that ALL organizations engaged in social welfare or Charitable works must be registered with the Social Welfare Departments of the Province. Registration does not confer legal personality on the entity. • a) Child, Youth and Women’s Welfare • Welfare of the physically and mentally challenged • Family Planning • Social Education, i.e. Education aimed at adults for developing a sense of civic • Responsibility • Rehabilitation and welfare of patients • Welfare of juvenile delinquents • Rehabilitation and welfare of released prisoners • Welfare of socially handicapped • Welfare for the elderly and destitute • Recreational programmes to ward of people form anti-social activities • Training in social work • Co-ordination of social welfare agencies

10. ORGANIZATIONS are required to maintain accounts and submit an annual report and audit report to District Officers. The report must detail the management of the Agency, its activities and plans for the next year. Accounts and reports are made publicly available Registered societies must submit a copy of the membership list annually. Voluntary Social Welfare Agencies Registration and Control Ordinance, 1961 Names containing Foundation, Trust, Federation or Forums not registrable Registration can be within City or Province. If Provincial Registration is sought by the the Organization it must show addresses of offices located in four different districts of the Province OFFICE ADDRESS: BOARD OF REVENUE OFFICE (BEHIND HIGH COURT), FIRST FLOOR

11. An organisation may wish to obtain certification for enhancing its credibility in the wider public (including donors) view or for obtaining tax benefits from the Central Board of Revenue (CBR[1]) or for both First Government authorized Certification Agency in Pakistan notified vide Central Board of Revenue’s SRO 1116 (1)/83 dated December 18, 2003 Pakistan Centre for Philanthropy • An organisation may wish to obtain certification for: • enhancing its credibility in the wider public (including donors) view; or • (ii) for obtaining tax benefits from the Central Board of Revenue (CBR); • (iii) or for both PCP’s certification focuses on the examination of structures, systems, procedures and processes put in place by an organisation to deliver the services it promises and to ensure sustainability of its programmes

12. ONE NPO could require as many as FOUR registrations/certifications to cover its operations: One registration under its charter / constitutional document as per its relevant law, i.e. Trust Act for a Trust, Societies Registration Act, 1860 for a society; and Companies Ordinance, 1984 for a Non-Profit Company Two requiring registration under the Voluntary Social Welfare Agencies (Registration and Control) Ordinance, 1961; and Third certification from the Pakistan Center for Philanthropy Four approval from CIT

13. If an NPO is involved in fund-raising activity, say a mela or a play to raise funds, say the Arts Council, the NPO will also require: THAT’S NOT ALL: To obtain permission from the Office of the Local Deputy Commissioner under the Charitable Fund (Regulations of Collection Act, 1953 now Permission from the Town Nazim / Local Government and after obtaining the above-mentioned Permission proceed to Apply and obtain a waiver of Entertainment Duty on the sale of tickets from the Provincial Excise Department

14. International NPO’s Int’l NPO’s are required to register and agree to a Memorandum of Understanding (MoU) with the Economic Affairs Division. E.g. British Council, PACC, Alliance Francaise, Goethe, etc. The NPO will also require registration with the Ministry of Interior, which is responsible for vetting foreign staff before registration is approved and permission is granted to Operate in particular areas.

15. Trust Act, 1882 A trust is an obligation annexed to the ownership of property. It is a “gift” of property to a person or institution providing benefit to both parties. Conditions for creation of a trust: Creator or author of the trust Trustee, a person, in whom confidence is reposed Beneficiary, person(s) for whose benefit the trust is created – Cannot be specific individuals but must be society generally or section or class of society Trust property whether in cash or capital assets (land or buildings) Objectives of the trust must be charitable or for benefit of society

16. Trust Act, 1882 The Application for Registration of Trust requires the following • Particulars of documents creating the trust. • Particulars of the trustees and the beneficiaries. • Details of what the trust property is going to be. There is no minimum value of property for starting a trust. If the property is an immovable property then the transfer deed shall be on a Rs.150 non-judicial stamp paper on the value of the property and it shall be registered. • Preparation of the trust deed, that is, i.e. declaration of having created a public or private charitable trust, as case may be.

17. Trust Act, 1882 • Fulfill the purpose of the trust and obey the directions of the author (i.e the person who reposes the confidence). • Inform themselves about the state of the trust property. This may enable the trustee to obtain, when required, the transfer of the trust property to himself, and to obtain for the trust, the funds that are invested on insufficient or hazardous security. • Protect the title to trust property and defend all suits that are required for the preservation of the trust property, and therefore, the protection of the title. Duties and Liabilities of a Trustee

18. Trust Act, 1882 • Take care of the trust property. However, in the absence of a contract, a trustee managing such property is not answerable for any loss or deterioration of the trust property. • Prevent wastage. If the trust property is prone to be wasted, or is of future or reversionary interest, then the trustee shall convert the property to a permanent and profitable nature. • Invest trust money which cannot be applied immediately. Further, proper accounts of the trust property must be maintained, and all information in this regard kept available at the request of any beneficiary. Duties and Liabilities of a Trustee (Cont’d)

19. Trust Act, 1882 Discharge of Trustee • the extinction of the trust, • b) the completion of the duties under the trust, • c) appointment of a new trustee in his place, • d) by a voluntary consent, and • e) on account of a petition for his discharge by the court.

20. Trust Act, 1882 • has a right to the rents and profits of the trust property, • II. is entitled to have ‘the intention of the author of the trust specifically executed to the extent of the beneficiaries interest’. • III. Has the right to inspect and take copies of the instrument of trust, accounts etc. • IV. The right to transfer ‘beneficial interest’, subject to law. • V. The beneficiary has a right to sue for the execution of the trust, if no trustees are appointed, or all trustees die, disclaim or are discharged. Rights and Liabilities of the Beneficiary

21. Trust Act, 1882 Rights and Liabilities of the Beneficiary (Cont’d) VI. Has the right to have a proper trustee who shall protect the trust properly. VII. Has the right to have the management of the trust in the right hands and by proper number of the trustees. VIII. Has the right to have the trustee compelled to execute any act of his duty and refrain from committing any breach of trust.

22. Trust Act, 1882 Dissolution of the Trust • Has the right to have a proper trustee who shall protect the trust properly. • When its purpose is fulfilled • When its purpose becomes unlawful • When the fulfilment of its purposes becomes impossible due to the destruction of trust property • When the trust, being revocable, is expressly revoked.

23. Societies Registration Act, 1860 This is considered to be one of the more lenient acts with respect to registration requirements of NPO and accounting and audit regulations. Registration • Requires seven or more persons join together of whom at least three must be the members of the Managing Committee. • Memorandum, Articles, Rules and Regulations of Association required in printed form • Memorandum must contain object clause whereas Articles must state how society will operate

24. Societies Registration Act, 1860 • The name and registered address of the society. • The names, addresses and occupation of each present member of the Managing Committee. • Rules and Regulations of the society or Articles of Association duly signed by all office bearers. • In the case of an educational society, the academic certificates of all the subscribers must be produced. • Photocopies of the CNIC Cards of the office bearers. • Rent agreement of the office premises. The Memo of Association must include:

25. Societies Registration Act, 1860 The Articles of Association must include obligatory clauses relating to: • Membership • General Body and Managing Committee • Meetings and quorum • Notices for meetings • The manner of elections and removal of officers • Procedures relating to accounting and audit • Dissolution

26. Societies Registration Act, 1860 Correspondence and Application addressed to: Provisional Assistance Registrar Joint Stock Companies Government of Sind Barrack No.25 Certificate of Registration Costs and Expenses: Official Fees: Rs.15,500 approx. Challan in NBP Bank, Hotel Jabees Branch Karachi Postal Address: Directorate of Industries Government of Sindh Barrack No.25 Shahrah e Liaquat Karachi

27. Societies Registration Act, 1860 So now you have a Certificate of Registration Enforce rules against Members Sued and be sued in its own name Maintain bank accounts in the name of the society If judgment is passed against a person on behalf of the society, the judgment can only be enforced against the property of the society not against the person. SINDH Benefit – It used to be that societies could apply for ‘amenity plots” at half of the rate for residential plots from KDA

28. Societies Registration Act, 1860 • Right to vote • Right to receive notices and reports • Right to resolve disputes • Liabilities are limited to be sued as a stranger (that is, a • person who is extraneous to the Society itself) • Members guilty of misapplication of funds will be • subjected to the same punishment as any other person • Recovery of penalty accumulating under bye laws Rights and Liabilities of Members

29. Societies Registration Act, 1860 Accounts and Audits • The Act does not provide for maintenance of accounts or their audit in any specific form or manner. However, every society needs to keep correct and updated books of • accounts containing information with respect to: • All sums of money received and all sums of money disbursed by the society • b) all sales and purchases of the society • c) all assets and liabilities of the society

30. Societies Registration Act, 1860 Accounts and Audits ( Cont’d) • Furthermore, it is in the interest of the society to maintain the following books of accounts: • Cash Book, showing daily income and expenditure. • ii. Vouchers for contingent and other expenditure incurred by the society. • iii. Ledger showing consolidated and separate accounts of • all items of receipts, expenditure member wise, as well • as item wise. • iv. Monthly register of receipts and disbursement.

31. Societies Registration Act, 1860 Auditing of Accounts Every society is required to get its accounts audited once a year by a qualified auditor. The report should indicate the exact financial affairs of the society.

32. Companies Ordinance, 1984 Company Limited by Guarantee A nonprofit company is registered under Section 42 of the Companies Ordinance, 1984as a public company with limited liability provided it meets the following criteria: It directs, or it intends to direct its profits, if any, or any other form of income from the business carried out, in advancing its objectives. It disallows the payment of any return to its members. Members are not allowed to be remunirated for services rendered.

33. Companies Ordinance, 1984 Registration is done through the SECP. Incorporation of a Non Profit Company is similar to that of incorporation of companies, including submission of Memorandum and Articles of Association. NPO’s registered with SECP can use their name without the suffix “Limited” “Private Limited” or “(Guarantee) Limited” Once a NPO is registered the legal status of the concerned association becomes that of a “body corporate having established succession and a common seal.

34. Commissioner of Income Tax Registration as a NPO • The documents required to be submitted along with the application form are as follows: • a duly attested copy of the constitution, memorandum and articles of association, rules and regulations or bye-laws; • (b) a certified copy of the registered trust deed, in case of a Trust; • (c) a certified copy of certificate of registration of welfare organisation; • (d) duly attested copies of the balance sheet and of revenue accounts of the organisation as audited by a qualified accountant for the year immediately preceding the year in which the application is made;

35. Commissioner of Income Tax Registration as a NPO (Cont’d) (e) the names and addresses of the promoters, directors, trustees, president, secretary, treasurer, manager and other office bearers, as the case may be, of the organisation, and indicating clearly their family relationships, if any, with each other; (f) an evaluated and certified report with regard to the performance of the organisation for achieving its aims and objects during the preceding financial year preceding the date on which application is made. This can be done by the Philanthropy Centre of Pakistan or the concerned Commissioner of Income Tax.

36. Commissioner of Income Tax Registration as a NPO – Constitution Docs of NPO must confirm to the provisions of sub-rule (1) of Rule 213. This requires the following: (a) for the audit of the annual accounts of the organisation every year by a qualified accountant; (b) for welfare organisations other than Trusts for the quorum of a meeting of the members of the body to be not less than four or one-third of the total number of the members of such body, whichever is greater; (c) where the organisation is a Trust as defined in the Trust Act, 1882, for the quorum of a meeting of the members to be not less than three or one-third of the total number of the members of such a body, whichever is greater; (d) for the transfer of its assets, in the event of its dissolution, after meeting all liabilities, if any, to another organisation which is an approved non-profit organisation, within three months of the dissolution under intimation to the Commissioner;

37. Commissioner of Income Tax Registration as a NPO – Constitution Docs of NPO to confirm to the provisions of sub-rule (1) of Rule 213 (Cont’d) : (e) for the utilisation of its money, property or income or any part thereof solely for promoting its objects; (f) for prohibiting any portion of its money, property or income being paid or transferred directly by way of dividend, bonus or profit to any of its members or the relative or relatives of a member or members; (g) for the maintenance of accounts of the organisation being kept in a scheduled bank or in a post office or national savings organisation, National Bank of Pakistan or nationalised commercial banks; (h) for prohibiting the making of any changes in the constitution, memorandum and articles of association, trust deed, rules and regulations or bye-laws, as the case may be, without the prior approval of the Commissioner; and

38. Commissioner of Income Tax Registration as a NPO – Constitution Docs of NPO to confirm to the provisions of sub-rule (1) of Rule 213 (Cont’d): (i) for restricting the surpluses or monies validly set apart, excluding restricted funds, upto twenty-five per cent of the total income of the year: Provided that such surpluses or monies set apart are invested in Government securities, NIT units, a collective investment scheme authorized or registered under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003, mutual fund, a real estate investment trust approved and authorized under the Real Estate Investment Trust Rules, 2006, or scheduled banks: Explanation: For the purposes of the Rules, “restricted funds” mean any fund received by the organization but could not be spent and treated as revenue during year due to any obligation placed by the donor.

39. Labour Laws and NPO Employees Old-Age Benefits Act, 1976 Provincial Employees Social Security Ordinance, 1965 The Workers’ Children Education Ordinance, 1972 Trusts under Trust Act, 1882; Societies under Society Registration Act, 1860 and Non-profit Companies under Section 42 of Companies Ordinance, 1984 are ALL REQD. TO PAY CONTRIBUTION UNDER THE ABOVE-MENTIONED LAWS.

40. Employees Old-Age Benefits Act, 1976 “Section 4: It applies to every industry or establishment – (i) Wherein five or more persons are employed by the employer directly or through any other person. . . .” • Section 2(e) means – • an establishment to which the West Pakistan Shops and Establishment Ordinance, 1969 for the time being applies. . .and. . .includes clubs, hostels, organisations and messes, not maintained for profit or gain and establishments, including hospitals, for the treatment or care of sick, infirm, destitute or mentally unfit persons. . . .” • Section 2 (e) of WP Shops and Establishment Ordinance, 1969: • “commercial establishment” means an establishment which carries on any business. . ., and includes – • (i) a society registered under the Societies Registration Act, 1860 and a charitable or other trust whether registered or not which carries on, whether for purpose of gain or not, any business, trade or profession....”

41. Employees Old-Age Benefits Act, 1976 “Section 9. Rates and Assessments. – . . .contributions shall be payable every month by the employer to the Institution in respect of every person in his insurable employment at the rate of 5 percent of his wages in the prescribed manner. . . .” Contractor’s worker’s are also covered – Lahore Race Club 1998 SCMR 1571 Latest Development: In CP No. D-260 of 2008, Employees Federation of Pakistan v. Federation of Pakistan, the Hon’ble Division Bench of the Sindh High Court relying upon the Judgment of the Hon’ble Supreme Court in the SHCBA case (PLD 2009 SC 879) has held that the Legislature does not have power to amend general laws including labour laws through a money bill and consequently all amendments brought through the Finance Act 2007 are ultra vires of the Constitution. So what next: Check with your Labour Lawyer?

42. Provincial Employees Social Security Ordinance, 1965 Leading Judgment: Citizens Foundation v. Director, SESSI, 2010 SCMR1659 The Supreme Court held that NPO/NGO’s fall within the definition of “establishment under PESS Ordinance, 1965, hence establishments notified under Section 1(3) of PESS Ordinance, 1965 are liable to pay contribution. Hospitals are also liable to pay contribution even though the objectives of PESS Ordinance is to provide medical benefits to secured workers (Liaquat National Hospital case 2006, PLC 364). Contractor’s employees are also covered (Consolidated Sugar Mills case, 1989 SCMR 888)

43. Provincial Employees Social Security Ordinance, 1965 Section 20. Notified Establishment shall pay to the Institution a contribution not more than six percent of wages provided no contribution shall be payable on so much of an employee’s wages as in excess of 400 rupees per day or ten thousand rupees per month.

44. The Workers’ Children (Education) Ordinance, 1971 Section 3. Every employer of an establishment in which the number of workers employed at any time during a year is 10 or more shall pay an education cess at the rate of 100 rupees per worker per annum. Section 2(c) – “worker” means any person employed whether directly or indirectly through any person in any establishment to do any skilled or unskilled manual or clerical work. . .whose wages do not exceed Rs.3,000. . .” Section 2(b) “establishment” means any office, firm, industrial unit, undertaking, shop, or premises in which workers are employed for the purpose of carrying on any business, trade, manufacture, calling, service, employment or occupation.” Hospitals and NPO also liable to pay education cess to workers (Holy Family case, 1985 SCMR 593; and Liaquat National Hospital case, PLD 1977 Karachi 843). Contractor’s employees are also covered (Consolidated Sugar Mills case, 1989 SCMR 888)

45. Workers’ Welfare Fund Ordinance, 1971 Section 4(1) requires every industrial establishment, the total income of which in any year of account is not less than Rs.500,000 shall pay to the fund in respect of that year a sum equal to two percent of its total income. . . .” Section 2(f) – “Industrial establishment” means “(iv a) any establishment to which the West Pakistan Shops and Establishment Ordinance, 1969 for the time being applies” - Inserted by the Finance Act, 2008 Section 2 (e) of WP Shops and Establishment Ordinance, 1969: “commercial establishment” means an establishment which carries on any business. . ., and includes – (i) a society registered under the Societies Registration Act, 1860 and a charitable or other trust whether registered or not which carries on, whether for purpose of gain or not, any business, trade or profession....”

46. Workers’ Welfare Fund Ordinance, 1971 In the case of Mutual Funds Association of Pakistan v. Federation of Pakistan and Another, 2010 PLC 306, the Hon’ble Division Bench upheld the 2008 insertions made through the Finance Act. BUT recently in CP No.D-2753 to D-2756/2009 and other Petitions, the Hon’ble High Court constituted a larger bench to re-consider the points discussed in 2010 PLC 306. In March 2011, the larger bench completed hearing in the matter and judgment is now awaited on the legal validity of the 2008 insertion.