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WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi 29 – 30 August, 2005

WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi 29 – 30 August, 2005. NON PROFIT ORGANISATION By Salman Haq. C O N T E N T S. NON PROFIT ORGANISATION GENERAL DEFINITION DEFINITION UNDER THE ORDINANCE APPLICATION PROCEDURE APPLICATION PROCESS FOR NEWLY INCORPORATED ORGANIZATION

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WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi 29 – 30 August, 2005

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  1. WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi29 – 30 August,2005

  2. NON PROFIT ORGANISATION By Salman Haq

  3. C O N T E N T S NON PROFIT ORGANISATION • GENERAL DEFINITION • DEFINITION UNDER THE ORDINANCE • APPLICATION PROCEDURE • APPLICATION PROCESS FOR NEWLY INCORPORATED ORGANIZATION • LIST OF DOCUMENTS • APPROVAL • CONDITIONS UNDER WHICH APPROVAL IS NOT GRANTED • APPLICATION FOR RENEWAL OF APPROVAL • REFUSAL/WITHDRAWAL OF APPROVAL • VALUATION OF DONATED PROPERTY

  4. “NON PROFIT ORGANISATION” – DEFINED GENERALLY Under normal parlance, a “Non Profit Organization” is one, which is established and operated with a “not for profit motive” such as the advancement of religion, education, relief of the poor, social development etc.

  5. “NON PROFIT ORGANISATION” – • UNDER THE ORDINANCE : • Clause (36) of section 2 of the Income Tax Ordinance, 2001 (the Ordinance) defines a Non profit organization” to mean : • “non-profit organization” means any person, other than an individual, which is – • (a) established for religious, educational, charitable, welfare or development purposes or for the promotion of armature sports; • (b) formed and registered under any law as a non-profit organization;

  6. “NON PROFIT ORGANISATION” • UNDER THE ORDINANCE : • (c) approved by the Commissioner for specified period, on an application made in the prescribed form and manner, accompanied by the prescribed documents and, on requisition, such other documents as may be prescribed by the Commissioner; • and none of the assets of such person confers, or may confer, a private profit to any other person.

  7. APPLICATION PROCEDURE Rule 211 to 220A of the Income Tax Rules, 2002 (the Rules) lays down the general procedure for the application and grant of approval of a non profit organization as such by the Commissioner. It would be recalled that in terms of Rule 219 of the Rules, the approval granted to non profit organizations before 01 July, 2002 was deemed to have been withdrawn unless fresh approval was obtained from the taxation authorities by making an application on prescribed form in accordance with Rule 214 of the Rules.

  8. APPLICATION PROCEDURE NEWLY INCORPORATED ORGANISATIONS Newly incorporated non-profit organization are required to make an application in prescribed form under Rule 211 of the Rules for approval with the taxation authorities. Such form must be accompanied by such documents and information as are prescribed.

  9. APPLICATION PROCEDURELIST OF DOCUMENTS :Documents to be accompanied along with the applicationFor approval.Attested copy of the constitution, memorandum and articles of association, rules, regulations or bye-laws, as the case may be, specifying the aims and objects.Certified copy of the registered trust deed, where applicable.Certified copy of certificate of registration or incorporation etc., as the case may be, where applicable.Attested copy of the audited financial statements for the preceding year. (Balance sheet and revenue account/income statement/profit and loss account).A detailed report by an independent agency evaluating and certifying the performance of the qualifying ‘non-profit organization’ in achieving its aims and objects during the three preceding financial years, using the prescribed, standard parameters for performance evaluation.

  10. APPLICATION PROCEDURE APPROVAL: All applications must be perused and finalized by the Commissioner (whether approved or refused) within two months of the receipt of application. The Commissioner, after perusal of such application, may grant approval / renew approval to such an organization. Such an approval is required to be notified in the official Gazette and is subject to such conditions as the Commissioner may specify. The first approval is valid upto 30th day of June of the tax year next following the tax year in which the approval is granted.

  11. CONDITIONS UNDER WHICH APPROVAL • IS NOT GRANTED • Rule 213 of the Rules prescribe the conditions under which the Commissioner may refuse to grant approval to an organization these includes : • (a) if the constitution, memorandum and article of association, bye laws, deed etc. does not provide for: • (i) audit of financial statements; • (ii) for the required quorum of the meeting of the members of the organization; • (iii) in the event of its dissolution, for the transfer of its net assets to another similar organization within three months of dissolution under intimation to the Commissioner;

  12. CONDITIONS UNDER WHICH APPROVAL • IS NOT GRANTED • (iv) for utilization of its money, property or funds for the objects for which it is established; • (v) prohibiting any private benefit to a member or relative of such organization; • (vi) for maintaining its accounts with the Directorate of National Savings, post office, scheduled bank or nationalized commercial banks; • (vii) for prohibiting a change in the constitution, memorandum and article of association, deed, rules etc., as the case may be, without the prior approval of the Commissioner;

  13. CONDITIONS UNDER WHICH APPROVAL • IS NOT GRANTED • (viii) for restricting the money set apart or not utilized to twenty five percent of income. Excess funds, if any, must be invested in Government securities or scheduled banks or NIT units or mutual funds. However such investment or deposit must not exceed one third of the total surplus of the organization at the end of the year; • (b) if the Commissioner is satisfied that the organization: • (i) has been or is being used for personal benefit; • (ii) has been propagating the beliefs of a particular political party or religious sect;

  14. CONDITIONS UNDER WHICH APPROVAL • IS NOT GRANTED • (iii) has been or is being managed in a manner calculated to personally benefit the members of the organization; • (iv) has not or will not be able to achieve its objectives.

  15. APPLICATION FOR RENEWAL OF APPROVAL An application for renewal of approval must be furnished within six months after the expiry of the validity of the approval last given. It must be accompanied by such documents and information as are prescribed and applicable at the time of making original application for approval. The first renewal of approval is valid upto 30th day of June of the second tax year following the tax year in which the renewal approval is granted. Example renewal of approval granted on any date between the 01 July 2003 and 30 June 2004 is valid upto 30 June 2006. Subsequent renewals will be valid upto 3 years depending on the audited financial statements and the performance report duly verified and certified by the authorized agency.

  16. REFUSAL / WITHDRAWAL OF APPROVAL The Commissioner may refuse / withdraw the approval of the organization by duly intimating to it and the authorized agency, certifying the performance report the reason for its withdrawal. The order of the Commissioner refusing or withdrawing an approval is appellable before the Regional Commissioner of Income Tax under Rule 218 of the Rules.

  17. VALUATION OF DONATED PROPERTY For the purpose of claiming tax credit / rebate in respect of donation given by a donor to a non profit organization in terms of section 61 of the Ordinance, sub rule (4) of Rule 228 prescribes the following values to be adopted for donated property: (a) Imported items: value for the purpose of custom duty along with all duties and charges paid by the donor (b) Items manufactured in Pakistan: purchase price along with duties and charges paid by the donor (c) Used depreciable items: Tax Written Down Value.

  18. VALUATION OF DONATED PROPERTY (d) Motor vehicles: (i) New cars and jeeps imported by the donor shall be valued at CIF value plus all duties and charges till their registration. (ii) New cars and jeeps locally purchased shall be valued at price paid by the donor plus all duties and charges till their registration. (iii) Used cars and jeeps imported by the donor shall be valued at the import price adopted by the Custom Authorities plus all charges and duties till their registration. (iv) Value adopted in the first year shall be reduced by 10% of the said value (i.e. on straight line basis) for each successive year up to a maximum of 5 years.

  19. VALUATION OF DONATED PROPERTY • (v) Used cars and jeeps locally purchased shall be valued as: If cars and jeeps are up to 5 years old, value shall be the original cost as reduced by 10% for every year following the year in which it was imported or purchased • If cars and jeeps are more than 5 years old, value shall be the purchase price paid by the donor for the used car or 50% of the original value whichever is higher • (e) Other items: Fair market value as determined by the Commissioner

  20. C O N T E N T S PRESENTATION – INSURANCE BUSINESS • OPERATING LAW • TYPES OF INSURANCE BUSINESS • SPECIAL PROVISIONS RELATING TO INSURANCE BUSINESS • DEEMED PROVISIONS NOT APPLICABLE ON INSURANCE BUSINESS • ONE BASKET INCOME • EXEMPTIONOF GAIN ON SALE OF SHARES • DIVIDEND INCOME – FINAL TAX REGIME • INCOME OF LIFE INSURANCE BUSINESS • INCOME OF GENERAL INSURANCE BUSINESS

  21. OPERATING LAW The Insurance Ordinance, 2000 and the Rules made there under is the governing law for Insurance companies in Pakistan. Insurance companies are administered by the Securities & Exchange Commission of Pakistan.

  22. TYPES OF INSURANCE BUSINESS In terms of the Insurance Ordinance, insurance business is broadly classified into “life insurance” and “non life insurance”. Adopting the same classification, the Fourth Schedule to the Income Tax Ordinance, 2001 also lays down the principles for taxation of each class of insurance business i.e. life insurance and general insurance.

  23. SPECIAL PROVISIONS RELATING TO INSURANCE BUSINESS: Section 99 read with section 4 and the Fourth Schedule to the Ordinance prescribes the basis for computing income, profits and gains arising to an insurer from conducting insurance business. Even though section 99 of the Ordinance, being pari materia to section 26(a) of the Income Tax Ordinance, 1979 (the repealed Ordinance) do not specifically regard the provisions as “non obstantia”; being “special provisions”, the position has not changed and the Fourth Schedule has an overriding effect to all other provisions, including the Second Schedule to the Ordinance. The dictum, generalia specialibus non dergant i.e. special provisions of law would prevail over general provisions, would therefore apply.

  24. DEEMING PROVISIONS NOT APPLICABLE TO INSURANCE BUSINESS: The deeming provisions of the Ordinance, such as those contained in section 34(5) relating to unpaid liabilities outstanding for more than three years or section 39(3) relating to cash loans are not applicable to insurance business.

  25. ONE BASKET INCOME: The most significant feature of the Fourth Schedule is that there is no specific distinction between the various heads of income vis-à-vis, income from property, income from business, capital gains and income from other sources and the profit and gains derived by an insurer from carrying on insurance business is regarded as “income from business”. This emanates from the principle that the surplus/profit disclosed by the insurer in its books of accounts constitute the basis for computing “Income from Business”. Hence, any “profit on debt” or “capital gain” earned by the insurer in the normal course of its business activity would be regarded as its “income from business” and not otherwise.

  26. EXEMPTION OF GAIN FROM SALE OF SHARES The Finance Act, 2005 has introduced Rule (6A) to the Fourth Schedule to the Ordinance whereby gain from the sale of: (a) Modaraba certificates; (b) Listed redeemable capital; (c) Shares of a public company; and (d) Pakistan Telecommunications Corporation Vouchers is provided as exempt from charge of tax. upto 30th day of June 2007. Please appreciate that these provisions, in substance, correspond to Clause (110), Part I of the Second Schedule to the Ordinance. As such, except for the said provisions, gains on dealing in listed securities would have been subject to tax. Loss, if any, arising out of dealing in such securities would be regarded as a “Business loss” and not a “capital loss”. Hence the provisions of Section 56 and 57 of the Ordinance relating to “Set off” and “Carry forward of business loss” would apply instead of section 59 relating to “Carry forward of Capital losses”.

  27. DIVIDEND INCOME – FINAL TAX REGIME Dividend income earned by an insurance company is subject to tax at the rate of 5% as prescribed in the First Schedule. Further, the tax liability of the insurance company in respect of dividend income earned by it stands finally discharged when the tax is withheld by the payer of such dividend at the time of making payment in accordance with section 5 read with section 8 of the Ordinance.

  28. INCOME OF LIFE INSURANCE BUSINESS In terms of the Insurance Ordinance, life insurance companies are required to maintain separate statutory funds for “policy holders” and “shareholders”. It is only the surplus attributable to the shareholders’ fund, disclosed to profit and loss account for the year as per advice of the Appointed Actuary which constitute the basis for computing the taxable business income of an insurance company carrying on life insurance business. This means that all the provisions and reserves that are maintained under the Insurance Ordinance for the purpose of computing statutory surplus are allowable deductions and the taxation authorities cannot reinstate the same.

  29. INCOME OF LIFE INSURANCE BUSINESS From the amount of net surplus, the following deductions are allowable: (a) Deductible expenses as, attributable to the shareholders’ fund (b) Amount paid to or reserved for or expanded on behalf of policy holders. However no account shall be taken of the amount (i) paid out OR (ii) brought forward surplus from a previous inter valuation period. On the other hand, if the amount reserved for payment to policy holder ceases to be so reserved and is no longer payable, the sum previously allowed as a deduction is treated as part of the income for the tax year in which the amount ceases to be so paid.

  30. INCOME OF LIFE INSURANCE BUSINESS (c) Amount written off or reserved in the accounts through the actuarial valuation for (i) depreciation OR (ii) loss on realization of investment is allowed as a deduction. On the other hand, amount taken credit for in the accounts for (i) appreciation OR (ii) gain in the realization of investment is treated as part of surplus for the year, provided the Commissioner considers the amount of depreciation / appreciation , loss / gain as reasonable. (d) Profit on debt on securities issued by the Federal Government as “income tax free” shall not be excluded but shall be exempt from tax.

  31. INCOME OF GENERAL INSURANCE BUSINESS The amount of profit disclosed in the accounts prepared under the Insurance Ordinance and submitted to the Securities & Exchange Commission of Pakistan constitutes the basis for computing the taxable income from business of general insurance. This would mean that all the provisions and reserves mandatory created under the Insurance Ordinance for the purpose of computing such profits are allowable and the taxation authorities cannot dilate on them by invoking the general provisions of the Ordinance.

  32. INCOME OF GENERAL INSURANCE BUSINESS From the amount of such profit the following adjustments are permissible: (a) No deduction shall be allowed for any expenditure, provision, allowance or reserve in excess of the limit prescribed by the Insurance Ordinance, unless the excess is allowed by the Securities & Exchange Commission and is incurred in deriving income from business chargeable to tax. (b) Any expenditure, allowance, reserve or provision which is inadmissible in computing “income from business”, is also inadmissible for the purpose of general insurance business”.

  33. INCOME OF GENERAL INSURANCE BUSINESS (c) Amount written off or reserved in the accounts through the actuarial valuation for (i) depreciation OR (ii) loss on realization of investment is allowed as a deduction. On the other hand, amount taken credit for in the accounts for (i) appreciation OR (ii) gain in the realization of investment is treated as part of profits for the year, provided the Commissioner considers the amount of depreciation /appreciation, loss / gain as reasonable.

  34. Thank you

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