Income Tax Bar Association Karachi
WORKSHOP ON INCOME TAX
Hotel Sheraton, Karachi
29 – 30 August, 2005
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
NON PROFIT
ORGANISATION
By
Salman Haq
Hotel Sheraton
29-30 August 2005
2
CONTENTS
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
Hotel Sheraton
29-30 August 2005
NON PROFIT ORGANISATION
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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
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Income Tax Bar
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“NON PROFIT ORGANISATION” –
DEFINED GENERALLY
Under normal parlance, a “Non Profit Organization” is
one, which is established and operated with a “not for
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profit motive” such as the advancement of religion,
education, relief of the poor, social development etc.
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“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;
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“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.
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APPLICATION PROCEDURE
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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.
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APPLICATION PROCEDURE
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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.
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APPLICATION PROCEDURE
LIST OF DOCUMENTS :
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Documents to be accompanied along with the application
For 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.
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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).
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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.
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APPLICATION PROCEDURE
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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.
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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.
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CONDITIONS UNDER WHICH APPROVAL
IS NOT GRANTED
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Rule 213 of the Rules prescribe the conditions under which
the Commissioner may refuse to grant approval to an
organization these includes :
(a)
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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;
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CONDITIONS UNDER WHICH APPROVAL
IS NOT GRANTED
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(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;
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CONDITIONS UNDER WHICH APPROVAL
IS NOT GRANTED
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(viii)
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(b)
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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;
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;
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CONDITIONS UNDER WHICH APPROVAL
IS NOT GRANTED
Income Tax Bar
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(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.
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APPLICATION FOR RENEWAL OF APPROVAL
Income Tax Bar
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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.
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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.
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REFUSAL / WITHDRAWAL OF APPROVAL
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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.
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16
VALUATION OF DONATED PROPERTY
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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.
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VALUATION OF DONATED PROPERTY
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(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.
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(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)
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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.
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VALUATION OF DONATED PROPERTY
(v)
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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
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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
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(e)
Other items: Fair market value as determined by
the Commissioner
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CONTENTS
Income Tax Bar
Association
Karachi
Workshop
on Income Tax
PRESENTATION – INSURANCE BUSINESS
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•
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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
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20
Income Tax Bar
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OPERATING LAW
The Insurance Ordinance, 2000 and the Rules made
there under is the governing law for Insurance companies
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in Pakistan. Insurance companies are administered by the
Securities & Exchange Commission of Pakistan.
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21
TYPES OF INSURANCE BUSINESS
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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.
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SPECIAL PROVISIONS RELATING TO
INSURANCE BUSINESS:
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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.
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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.
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ONE BASKET INCOME:
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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.
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EXEMPTION OF GAIN FROM SALE OF SHARES
Income Tax Bar
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Karachi
The Finance Act, 2005 has introduced Rule (6A) to the Fourth
Schedule to the Ordinance whereby gain from the sale of:
(a)
(b)
(c)
(d)
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Modaraba certificates;
Listed redeemable capital;
Shares of a public company; and
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”.
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DIVIDEND INCOME – FINAL TAX REGIME
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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.
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27
INCOME OF LIFE INSURANCE BUSINESS
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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.
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INCOME OF LIFE INSURANCE BUSINESS
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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.
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INCOME OF LIFE INSURANCE BUSINESS
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(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.
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Income Tax Bar
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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.
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INCOME OF GENERAL INSURANCE
BUSINESS
Income Tax Bar
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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”.
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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.
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33
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Thank you
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