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Tax evasion rife in Pakistan’s nonprofit sector: report

Federal Tax Ombudsman identified significant gaps in the non-profit organisation (NPO) sector, grappling with various challenges

December 02, 2023
The logo of the Federal Tax Ombudsman (FTO) from its website.
The logo of the Federal Tax Ombudsman (FTO) from its website.

ISLAMABAD: The Federal Tax Ombudsman (FTO) has identified significant gaps in the non-profit organisation (NPO) sector, grappling with various challenges such as blatant tax evasion, non-filing of tax returns and withholding statements, and misuse of approval regimes.

The total turnover of the NPO sector runs into trillions of rupees, with data from return filers indicating a turnover of Rs 82 billion in the tax year 2021. According to the FTO’s detailed findings, there were a total of 4,509 registered NPOs in Pakistan in the tax year 2021, and their declared turnover stood at Rs82 billion. Out of these, only 1,733 were filers, while a total of 2,776 were non-filers, and 961 NPOs filed withholding statements.

These details reveal significant gaps in compliance with regulatory provisions, highlighting fragmented tax enforcement in Pakistan’s NPO sector.

The FTO report notes that Pakistan’s NPO sector is extensive and vibrant, comprising four segments concerning registration authorities: Over 1,100 SECP registered NPOs, over 3,000 FBR registered NPOs, over 50 ICT (Islamabad Capital Territory) registered NPOs, and over 10,000 provincial NPOs.

Pakistan’s NPO sector currently faces several challenges, including blatant tax evasion, non-filing of tax returns and withholding statements, misuse of approval regimes at IR field formations, unregulated certification processes by external signatories, and gross misuse of status u/s 2(36) and tax credit regime u/s 10CC of the Income Tax Ordinance, 2001.

Under Section 2(36) of the Income Tax Ordinance, 2001, non-profit organisations working in Pakistan must seek the approval of commissioner of Inland Revenue to be recognised as not-for-profit.

A comprehensive procedural and regulatory regime is provided under the Income Tax Rules, 2002. Furthermore, only NPOs with approval u/s 2(36) are entitled to a 100% tax credit u/s 100C of the Income Tax Ordinance, 2001.

Since 2003, FBR has also signed an MOU with the Pakistan Centre for Philanthropy (PCP), granting the latter NGO the status of a certification agency for Section 2(36).

The FTO initiated an investigation after receiving multiple complaints primarily concerning delays, denials, and delinquency, creating unjust hurdles for law-abiding entities. The secretariat decided to review the entire statutory, regulatory, and procedural regime covering the NPO sector in Pakistan.

The FTO contacted both the FBR and Pakistan Philanthropy Centre (PCP). After reviewing records and receiving clarificatory assistance from FBR, a specific notice u/s 10(4) of the FTO Ordinance, 2000, was issued to address major issues arising from case proceedings. After nearly 12 years, FBR, through letter C NO1(27) Secy (R&A)/2015/136966-R dated October 2015, nominated its members to the “Committee to review the certification standards of Pakistan Centre for Philanthropy.”

Although, the committee was supposed to provide findings within three months, FBR concurred with the committee’s findings on October 22, 2018, after three years. On October 10, 2019, POP had approached FBR with valid queries, explaining real-time situations necessitating changes in relevant rules.

However, to-date, no changes have been made to the rules, and POP has not been informed about FBR’s stance vis-à-vis queries raised by PCP. The FTO found that while FBR demonstrated sheer laxity and ineptitude, PCP unauthorisedly expanded its scope beyond mandated regulatory parameters. Besides systemic issues, the NPO regime faces serious enforcement challenges. In a recent case (OM/004312023) of Central Park Medical College Lahore Controlling Entity; Health and Education Foundation, it was observed that while approval granted u/s 2(36) had expired in 2018, renewal was neither granted nor denied until 2023, when this office initiated OM proceedings in the said case.

The FTO directed FBR to: (i) constitute the committee, as envisaged under Sub-Rule 11 of Rule 220B of Income Tax Rules 2002, to review and re-assess the capacity and evaluate the performance of PCPs functioning as a certification agency; (ii) ensure that the committee must complete such re-evaluation within three months, during which the certification agency shall continue to function as a legitimate certification agency; (iii) ensure that the IR Policy Wing conducts an overall review of internal and external certification processes, streamlining the constitution of certification panels, reviewing certification criteria, and ensuring complete compliance with relevant rules. This review will help the regulatory committee in its re-evaluation exercise. (iv) ensure that the IR Policy Wing scrutinises POP’s other services to NGOs and NPOs to see that no conflict of interest impacts the certification process and transparency; ensure that IR-Operations conducts an exhaustive withholding audit of all active NPOs to plug the current bleeding points; (vi) ensure that IR Operations implements the filing of tax returns and withholding statements by all NPOs; (vii) ensure that IR Operations issues a uniform SOP for the processing, approvals, and review of cases filed by NPOs at different field formations and reports compliance within 90 days.