Non-Profit Organization under The Income Tax Ordinance, 2001---A Lecture

NON-PROFIT ORGANIZATION UNDER THE INCOME TAX ORDINANCE, 2001---A LECTURE <!--[if gte mso 10]> NON-PROFIT ORGANIZATION UNDER THE INCOME TAX ORDINANCE, 2001---A LECTURE By Tahir Mehmood Butt, Advocate, Lahore Respected President Lahore Tax Bar Association, Chairman Education Committee, Office Bearers of Lahore Tax Bar Association, my Seniors and Fellow Colleagues. Aslam-o-Alakim First of all I would like to say thanks to the Allah Almighty who has made me capable to address this august house. I am also greatful to the President, Chairman Education Committee, and office bearers of Lahore Tax Bar Association for honouring me by providing this opportunity to express my point of view before this august House on the topic which is:-‑ Respected, members before I take you to the main subject of today lecture it would be important to give a brief idea about Non Profit Organizations. NON PROFIT ORGANIZATION An organization that conducts business for the benefit of the general public without shareholders and without, a profit motive is normally called as a non-profit organization. Non-profit organizations are created according to law of the land. Like for profit organizations, non-profit organizations must file a statement of affairs, create articles of incorporation, conduct regular meetings, and fulfil other obligations to achieve and maintain assigned status. Non-profit organizations differ from profit-driven organizations in several respects. The most basic difference is that nonprofit organizations cannot operate for profit. That is, they cannot distribute income to shareholders. The funds acquired by nonprofit organizations must stay within the organization accounts to pay for reasonable salaries, expenses, and the activities of the Organization. If the income of an organization is used to the personal benefit of any individual, the organization is considered to be profit driven. Salaries are not considered personal benefits because they are necessary for the operation of the organization. An excessive salary, however, may cause an organization to lose its nonprofit status. Nonprofit organizations are generally exempt from the Income Tax that affect other organizations but only if they conduct business exclusively for the benefit of the general public. State laws on organizations vary from case to case, but generally State gives Tax breaks and exemptions to nonprofit organizations that are organized and operated exclusively for either a religious, charitable, scientific, public safety, literary, or educational purpose, or for the purpose of fostering international sports. The number of nonprofit organizations in Pakistan has increased in the last couple of years particularly after the earthquake disaster of 8th of October, 2005. Although nonprofit organizations cannot produce dividends for investors, they provide income for the employees, and they foster work that benefits the public. The activities of nonprofit organizations are regulated more strictly than the activities of other organizations. Nonprofit organizations cannot contribute to political campaigns, and they cannot engage in a substantial amount of legislative lobbying. Now the question arises that what are the necessary steps in general to be taken before formation of a Non-Profit Organization. FORMATION OF NONPROFIT ORGANIZATION Being enthusiastic, imaginative and creative about establishing a nonprofit organization is one thing. Actually forming the entity and making it operational is another. For better or worse, the exercise is much like establishing one's own business. It is a big and important undertaking and it should be done carefully and properly. The label `nonprofit' does not mean `No planning'. Forming a nonprofit organization is as serious as starting up a new company. Individuals interested in forming a non-profit organization begin by determining the organization's main purpose and functions. The next step involves choosing a category of tax-exempt status to match its functions. From there, would-be founders need to study a wide range of issues, many of which are also basic considerations for small business owners and other individuals involved in for-profit endeavors. Often, the counsel of a good attorney and/or accountant can be valuable at this stage. For formation of a N.P.O. primary issues which require consideration of the founders can be summarized as:-‑ ISSUES REQUIRE CONSIDERATION BEFORE FORMATION OF N.P.O. * Decide what legal form the organization will take (public charity or private foundation, incorporated or unincorporated, etc.). * If incorporating, take necessary legal steps to make that decision a reality (devise bylaws, submit articles of incorporation, etc.). * Investigate options and decide on .principal organization programs. * Determine the leadership of organization (directors, officers, primary staff positions). * Define compensation for such positions. * Find a physical location for the organization. * Put together a strategic plan for achieving organization goals at both community and larger levels. * Decide how to go about funding those goals (gifts, grants, unrelated income, etc.). * Determine which media avenues will be best for publicizing the organization's goals and securing volunteers. EFFECTIVE SOLICITATION AND REVENUE MANAGEMENT Nonprofit institutions can turn to several different modes and mediums to raise funds designed to support their mission. In order to prosper, nonprofit institutions not only need to know where the sources of funding are, they also need to know how to solicit those funds and how to effectively manage that revenue when it comes into their possession. Certainly, solicitation of donors (whether they take the form of individuals, corporations, or foundations) is a vital component of many organizations' operations. After all, most activities can only be executed with funding. But many non-profit institutions are not accomplished in this area, either because they do not allocate adequate resources or because of problems with execution. We can list the following as common solicitation errors that non-profit groups make: -‑ SOLICITATION ERRORS * Not listening to donor expectations * Unwarranted assumption of a donor's willingness to contribute * Lack of follow-up after initial contract * Inadequate research on potential donors and their ability to contribute * Inability to close presentation with donor commitment * Neglecting to establish rapport with potential donors prior to solicitation * Framing solicitation as "begging" rather than as a reasonable request for help with a worthy cause * Neglecting to tailor solicitation to individual donors Of course, even the most effective solicitation campaigns will wither if the organization proves unable to allocate its financial and other resources wisely. "Fund raising begins by determining exactly what financial and human resources are needed to accomplish the mission of theC organization. In the short run, money can be raised on the organization's vision and the promises it makes to help its clients and community. It will not take long, though, for contributors to want to see results Performance is what counts." Indeed, an organization may be devoted to addressing a perfectly wroth while cause, and its membership may be enthusiastic and dedicated, but most non-profit organizations---and especially charitable ones rely on funds from outside sources. And poorly run non-profits will find that their revenue streams will dry up quickly if they do not leverage their funds wisely. TRENDS IN THE NONPROFIT WORLD Observers have pointed to several trends in the nonprofit community that are expected to continue or develop in the next few years. These range from changes in fund raising targets to expanded competition between nonprofit organizations to regulatory developments. The following is a listing of some issues that nonprofit organizations will be tracking in the coming years:-‑ 1. Increased emphasis on retaining donors---According to Robert F. Hartsook of Fund Raising Management, "Non-profit organizations will focus on the renewal of donors rather than on the acquisition of new ones. As our country's population growth begins to plateau, it will be necessary for non-profits to more keenly target their marketing efforts." 2. Corporate giving---Corporate giving to philanthropic causes has emerged as a major marketing tool for corporations in recent years, and this source of funds is expected to assume even greater importance as Federal and State Governments pare back their spending on various social programs. 3. Increased reliance on volunteerism---Reduced government expenditures on social programs is also expected to spur increased demand for volunteers who can meet the expected growth in organization activity. This need will be especially acute for nonprofit organizations primarily involved in charitable activities. 4. Competition with for-profit enterprises---Many analysts believe that this issue could have tremendous implications for nonprofit organizations in the future. Spurred by representatives of the for-profit small business community, regulatory agencies have undertaken more extensive reviews of ways in which some activities of tax-exempt groups allegedly damage the fortunes of for-profit business (who, of course, are subject to local, Provincial, and Federal Taxes). Much of the controversy in this area centers around the definition and treatment of unrelated business income (income generated by tax-exempt organizations from ventures that are unrelated to their primary mission). "There is a potential that all of this will lead to nothing, or it could bring an in-depth inquiry into the Provincial and Federal law distinctions between for-profit and nonprofit organizations, the rationale for the tax exemption of certain types of nonprofit organizations, and whether some existing tax exemptions are outmoded and some new forms of tax exemption are required." 5. Continued emphasis on planned giving--"Nonprofit organizations will enjoy a significant increase in realized bequests. "This will happen as a result of planned giving programs put in place 10 to 15 years ago. With the evidence at hand of how successful planned giving can be, many institutions will increase their dependence on this methodology." 6. Continued dominance of women in the nonprofit community---According to Fund Raising Management, women occupied approximately two-thirds of all staff positions in nonprofit organizations in the recent past and this percentage may increase in the coming years. 7. Increase in government regulation among nonprofits--‑Government oversight of fund raising activities may continue to increase at both the Provincial and Federal levels, at least in part because of the solicitation practices of some "fringe philanthropic groups. Unfortunately, telemarketing for nonprofit organizations has received a bad name because of fringe philanthropic organizations that solicit and collect large sums of money while dedicating most of those funds to the costs of fund raising and salaries. This increase in government regulation may be especially evident at the State level: Government that have formerly foregone the desire for a fund-raising law have suddenly decided that their citizens now need one. Respected members now to start with the main topic which is N.P.O. UNDER THE INCOME TAX ORDINANCE, 2001 it would be important to note that the term NON-PROFIT ORGANIZATION has been introduced in the statute for the first time vide clause (36) of section 2 of the Income Tax Ordinance, 2001 while under the repealed Ordinance, 1979 such term was never placed in the statute. However, clause 62 of Part-I of IInd Schedule to the Income Tax Ordinance, 1979 was there to deal with the exemption available to the trust or welfare institution which were approved for exemption by the Central Board of Revenue. Originally at the time of proclamation of the Income Tax Ordinance, 2001 the term NON-PROFIT ORGANIZATION was inserted vide section 2(36) in the following words:-‑ SECTION 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 non-profit organization and in respect of which the Commissioner has issued a ruling certifying that the person is a non-profit organization for the purposes of this Ordinance; and (c) none of income or assets of the person confers, or may confer a private benefit on any other person. Subsequently vide Finance Ordinance, 2002, dated 15-6-2002 clause (36) of section 2 was substituted with' the, following:-‑ SECTION 2. (36) "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 an amateur sport; (b) formed and registered under any law as a non-profit organization; (c) approved by the Commissioner for specified period, on an application made by such person in the prescribed form and manner, accompanied by the prescribed documents and, on requisition, such other documents as may be required by the Commissioner; and none of the assets of such person confers, or may confer, a private benefit to any other person. Dear members in my humble opinion the substitution took place to extend the scope of the Non-Profit Organizations to some further activities of welfare and development nature as well. Prior to the substitution the non-profit organization could only form for religious, charitable, educational purposes, or for the promotion of amateur sport. However, after substitution they have also been granted permission to carry on welfare and development activities as well, but of course the said activities must be for the betterment and welfare of general public and not for special community. I must say that the Non-Profit Organizations have played a vital role in the disaster of 8th October, 2005 and we must admit that the Government alone could not have been so effective without the contribution made by so many organizations for the rehabilitation of the victims of earthquake. The other aspect in the substituted clause is that it has been made clear that any individual cannot form any N.P.O. rather there must be body of individuals. From the bare reading of the above definition of N.P.O. we can summarise the requirements for formation and declaration of any organization as N.P.O. 'in the following manners:-‑ REQUIREMENTS FOR FORMATION OF N.P.O (a) The organization must be formed by body of Individuals. (b) It should be established for religious, educational, charitable, welfare or development purposes. It can also form for an amateur sports. (c) It must be registered under any law of the land as a non-profit organization. (d) It must be approved by the concerned Commissioner as a non-profit organization for a specified period. (e) Any Assets owned by the N.P.O. cannot be used or utilized for any private benefit of the members or any other person. Now I will try to explain the above requirements in some details one by one. The first requirement is that:‑ (a) The organization must be formed by body of Individuals. It would be important to note that before substitution of clause (36) of section 2 to the Income Tax Ordinance, 2001 there was no restriction for the Individual to form an N.P.O. but after substitution thereof any N.P.O. cannot be formed by Individual rather there should be a body of Individuals in any shape or status. (b) It should be established for religious, educational, charitable, welfare or development purposes. It can also form for an amateur sports. Dear members in my humble opinion the N.P.O. can only be formed\ for the purpose narrated above and any object not mentioning therein cannot be adopted by any N.P.O. However, the scope of above mentioned purposes is so vast that every object can be covered therein. (c) It must be registered under any law of the land is a non-profit organization: Respected members as per my information there are three enactments under which any N.P.O. can get registered. These are:-‑ (1) under the Companies Ordinance, 1984 (vide section 42). (2) under the Societies Registration Act, 1860 and (3) under Voluntary Social Welfare Agencies (Registration and Control) Ordinance, 1961. Under Companies Ordinance, 1984 any organization can be got registered as provided under section 42 which says:-‑ ASSOCIATION NOT FOR PROFIT Section 42. Power to dispense with "Limited" in the name of charitable and other companies.---(1) Where it is proved to the satisfaction of the Commission that an association capable of being. formed as a limited company has been or is about to be formed for promoting commerce, art, science, religion, sports, social services, charity or any other useful object, and applies or intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members, the Commission may grant a licence and direct that the association be registered as a company with limited liability, without the addition of the words "Limited", "(Private) Limited" or "(Guarantee) Limited", as the case may be, to its name, and the association may be registered accordingly. (2) A licence under subsection (1) may be granted on such conditions and subject to such regulations as the Commission thinks fit and those conditions and regulations shall be binding on the association and shall, if the Commission so directs, be inserted in the memorandum and articles, or in one of those documents. (3) The association shall on registration enjoy all the privileges of a limited company and be subject to all its obligations, except those of using the word or words "Limited":, or "(Guarantee) Limited", as the case may be, as part of its name. (4) A licence under this section may at any time be revoked by the Commission, and upon its revocation the Registrar shall enter the word or words "Limited":, or "(Guarantee) Limited", as the case may be, at the end of the name of the association upon the register, the association shall cease to enjoy the exemptions and privileges granted by the preceding subsections: Provided that, before a licence is so revoked, the Commission shall give to the association notice in writing of its intention, and shall afford the association an opportunity of submitting a representation in opposition to the revocation. The mode/requirements for Registration of any N.P.O. under Companies Ordinance, 1984 is the same as is for the registration of any Company. Under Societies Registration Act, 1860 any organization established for specific purposes as provided vide section 20 of the Societies Registration Act, 1860 can also be got registered. SECTION 20. (20) To what Societies Act applies.---The following societies may be registered under this Act:-‑ Charitable Societies, Societies established for the promotion of Science, Literature, or Fine Arts, for instruction, the diffusion of useful knowledge, the diffusion of political education, the foundation or maintenance of libraries or reading-rooms for general use among the members or open to the public, or public museums and galleries of paintings and other work of art, collection of natural history, mechanical and philosophical inventions, instruments or designs. MODE OF REGISTRATION UNDER SOCIETIES REGISTRATION ACT, 1860 Let me point out here that for registration of any N.P.O. under the Societies Registration Act, 1860 following requirements are to be fulfilled with application for registration:-‑ (1) Conformation of Name is to be made. (2) Copies of memorandum and Article, Bye-laws of the N.P.O. to submit. (3) Copies of CNIC of all founder members are required. (4) Documentary evidence with regard to registered office. (5) Deposit of Registration Fee of Rs.5.20. It is also important to point out that the limit of minimum number of members is 7 and out of total members only 2/3rd of the members can be the blood relative. Only after fulfilment of all the necessary formalities and on submission of relevant documents the Registrar shall issue the certificate of incorporation under section 3. MODE OF REGISTRATION UNDER VOLUNTARY SOCIAL WELFARE AGENCIES (REGISTRATION AND CONTROL) ORDINANCE, 1961 Another mode for registration of any N.P.O. is to get it registered under the Voluntary Social Welfare Agencies (Registration and Control) Ordinance, 1961. Section 4 of the said Ordinance deals with the registration of any agency. The requirements for registration under this Ordinance are almost the same as are required` far registration under the Societies Registration Act, 1860. Dear members although any N.P.O. can be got registered with the Registrar of Joint Stock Companies as provided under section 42 of the Companies Ordinance, 1984 or under the Societies Registration Act, 1860 or under Voluntary Social Welfare Agencies (Registration and Control) Ordinance, 1961 but in my opinion the better mode of registration of any N.P.O. is to get it registered under the Societies Registration Act, 1860. The reason behind this opinion is that if for any reason the N.P.O. registered with the Registrar of Joint Stock Companies could not get the status of an N.P.O. from the Commissioner, then it would be treated as a Company and all the provisions of Income Tax Ordinance, 2001 would apply accordingly. On the other hand being registered under the Societies Registration Act, 1860 it would be treated as an A.O.P. and the relevant provisions related to A.O.P. under the Income Tax Ordinance, 2001 would apply. Dear members now I will take you to the most important issue which deals with the approval/declaration of any Organization as N.P.O. by the Commissioner. (a) It must be approved by the concerned Commissioner as a non-profit organization for a specific period. It is important to note that any organization even if it has been got registered with any concerned authority under any law of the land would not attain the status of a non-profit organization for the purpose of Income Tax Ordinance, 2001 unless it is approved by the Commissioner of Income Tax. The procedure for Approval/Declaration of any Organization as N.P.O. is provided vide Rules 211 to 220 of the Income Tax Rules, 2002. For the purpose of Approval/Declaration of any Organization as an N.P.O. procedure has been prescribed under Rule 211 of the Income Tax Rules, 2002 whereby a prescribed application has to be submitted before the concerned Commissioner of Income Tax. The form of prescribed application with Schedule is provided in the said Rule. APPLICATION FOR APPROVAL FOR THE PURPOSES OF CLAUSE (36) OF SECTION 2 OF THE INCOME TAX ORDINANCE, 2001 To, The Commissioner of Income Tax, ____________________Zone, ____________________(City). 1. With reference to clause (36) of section 2 of the Income Tax Ordinance, 2001 (XLIX of 2001), I the undersigned, hereby apply, on behalf of --------- (name of the organization) for its approval for the purposes of the said clause for the tax year ending on ----------. 2. Necessary particulars are set out below, and in the schedule to this application. 3. The following documents required under sub-rule (2) of rule 211 of the Income Tax Rules, 2002, are enclosed. (i) ----------------- (ii) ----------------- (iii) ----------------- (iv) ----------------- (v) ----------------- Signature ________________ Name (in block letters) __________ Designation ___________________ Application must be signed either by the President or the Secretary of the organization or by a Trustee, of the trust. SCHEDULE PARTICULARS 1. Name of the organization (in block letters) __________________________ 2. Full address of the organization (in block letters) ________________________ 3. Date of registration of the organization __________________________ 4. Its aims and objects (a)__________________________ (b)__________________________ (c)__________________________ (d)__________________________ 5. Whether the organisation has been registered under the Societies Registration Act, 1860 (XXI of 1860), or the Voluntary Social Welfare Agencies (Registration and Control) Ordinance, 1961 (XLVI of 1961), or any other law in substitution thereof relating to the registration of welfare organization or established in pursuance of a Trust Deed. Please give/state the law and the number and date' of registration----------. 6. Whether constitution, memorandum and articles of association, trust deed, rules and regulations or bye-laws, as the case may be, conform(s) to the provisions of sub-rule (1) of rule 213. If so, please give the number of Article/Clause/Rule etc., for each provision. 7. Whether the organization ensures for the benefit of the general public or a particular community. or class of persons only (give full details). 8. The number of members/trustees of the organization on the date of application. 9. Accounting year of the organization commences on ------- and ends on --------------. 10. The following books of accounts are being regularly maintained by the organization and are open for inspection without any hindrance to the general public. (i) ----------------- (ii) ----------------- (iii) ----------------- Signature ________________ Name (in block letters) __________ Designation ___________________ Dear members while applying for approval/declaration the application under Rule 211 must be accompanied by:-‑ (1) Attested copies of constitution, memorandum and article of association, rules and regulations or bye-laws of the organization specifying the aims and objects for which it is established. (2) A certified copy of Registration Certificate issued by the competent authority with whom the organization has been got registered. (3) Attested copies of the balance sheet and of revenue account of the organization duly audited by a qualified accountant for the year immediately preceding the year in which application is made. The statements/accounts can be got audited from a retired audit, accounts, treasury, taxation officer not below the rank of BPS-17, bank manager where annual receipts of the organization do not exceed Rs.0.5 million, or a Chartered accountant, Cost and Management Accountant or a firm of Chartered Accountants. (4) Complete particulars and details of the persons forming the organization. (5) A detailed report regarding performance of the organization during the preceding financial year for achieving the aims and object of the organization. The report must be evaluated and certified by any competent authority nominated by the Government of Pakistan for this purpose. At present such power has been delegated to the Zonal Committee consisting of Two Deputy Commissioners and One Additional Commissioner in the light of the provisions contained vide Rule 220B of the Income Tax Rules, 2002. The powers to grant approval to such organization is provided under Rule 212 of the Income Tax Rules, 2002. (212) Decision on application.---(1) On receipt of an application under rule 211, the Commissioner may make such inquiries or call for such further information as the Commissioner may deem necessary and after completion of formalities may approve the organization for the purpose of clause (36) of section 2 of the Ordinance. (2) An approval granted under sub-rule (1) shall be‑ (a) notified in the official Gazette; and (b) subject to such conditions as the Commissioner may specify in the approval. The concerned Commissioner of Income Tax on receipt of application and after making such enquiries as he deem fit can accord approval/declaration to the applicant organization for the purposes of clause (36) of section 2 to the Income Tax Ordinance, 2001. It would be important to note that vide Rule 215 of the Income Tax Ordinance, 2002 a period of two months from the date of receipt of application under Rule, 211 have been prescribed for finalization thereof. (215) Finalisation of applications.---The Commissioner shall finalise applications under rules 211 and 214 within two months of receipt of the application. Let me point out here that it is not necessary that in all cases the concerned Commissioner will accord the approval to the recipient organization. If for the reasons provided in Rule 213, the Commissioner .is not satisfied or the applicant organization does not comply with all the legal requirements, Commissioner has been granted powers to refuse the approval after recording reasoning for such refusal:-‑ (213) Refusal to grant approval.---(1) The approval shall not be granted if the constitution, memorandum and articles of association, trust deed, rules and regulations or bye-laws, as the case may be, specifying the aims and objects of the organization do (es) not provide--‑ (a) for the audit of the annual accounts of the organisation every year by a qualified accountant as specified in clause (f) of sub-rule (2) of rule 211; (b) where the organization is registered under the Societies Registration Act, 1860 (XXI of 1860), the Voluntary Social Welfare (Registration Control) Ordinance, 1961 (XLVI of 1961), or any other law in substitution thereof relating to the registration of welfare organisation, for the quorum of a meeting of the members of the body in which the control of the affairs of the organization vests, being not less than four or one-third of the total number of the members of such body, whichever is greater; (c) where the organization is a Trust as defined in the Trust Act, 1882 (II of 1882), for the quorum of a meeting of the members of the body in which the control of the affairs of the trust vests, being 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; (e) for the utilization 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 organization being kept in a scheduled bank or in a post office or national savings organization, National Bank of Pakistan or nationalized 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: Provided this clause will have effect only in cases where the approval is granted; and (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 purpose of this rule, "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. (2) The Commissioner may refuse to approve the organisation if the Commissioner is satisfied that the organization:-‑ (a) has been or is being used for personal gain of any particular person or a group persons; (b) has been propagating the view of a particular political party or a religious sect; (c) has been or is being managed in a manner calculated to personally benefit its members or their families; .or (d) has not been or will not be able to achieve its declared aims and objects in view of its set up, administration or otherwise as evaluated and certified by an independent certification agency. (3) The Commissioner shall notify the applicant, in writing, the decision to refuse the approval. (4) The notice referred to in sub-rule (3) shall include a statement of reasons for the refusal. The law has also provided that the declaration/approval of any non-profit organization accorded by the Commissioner shall be for a specified period. The motive of the law makers behind this restriction is to have a check on the working of such like organizations that weather they are functioning in the same manner and for the same purpose, they were formed. In my opinion it is a positive restriction. In this regard I will take you to Rule 214 of the Income Tax Rules, 2002 as substituted by Notification No.5.R.O 667(I)/2006, dated June 27, 2006 wherein it has been provided that the approval granted vide Rule 212 will remain in force for the subsequent years unless it is not withdrawn by the Commissioner by exercising his power as provided vide Rule 217 of the said Rules. 214. Validity of the approval.---The approval granted under Rule 212 will remain in force for the subsequent years unless withdrawn under Rule 217. The power to withdraw approval earlier accorded is provided to the Commissioner under Rule 217 on the basis provided therein. 217. Power to withdraw approval.---(1) The Commissioner may, at any time, withdraw approval granted under rule 212; if he is satisfied that--‑ (a) the constitution, memorandum and articles of association, trust deed, rules and regulations or bye-laws, as the case may be, specifying the aims and objects of the organization do (es) not provide for prohibiting the making of any changes in the constitution, memorandum and articles of association, trust deed, rules, regulations and bye-laws without prior approval of the Commissioner; (b) the organization has-- . (i) been or is being used for personal gain of any particular person or a group of persons as specified in clause (a) of sub-rule (2) of rule 213; (ii) been propagating the view of a particular political party or a religious sect as specified in clause (b) of sub-rule (2) of rule 213; (iii) been or is being managed in a manner calculated to personally benefit its members or their families as specified in clause (c) of sub-rule (2) of rule 213; or (iv) not been or will not be able to achieve its declared aims and objects in view of its set up, administration or otherwise as evaluated and certified by an independent certification agency as specified in clause (d) of sub-rule (2) of rule 213; (v) failed to give valid reasons for setting apart, or not utilizing, or accumulating surpluses, excluding unrestricted funds, in excess of twenty five percent of the income for the year. (vi) failed to file the return of income supported with following documents; (a) the statement of audited balance sheet and statement of accounts as mentioned in clause (d) of sub-rule (2) of rule 211; (b) statement showing names and addresses of the persons from whom donations, contributions, subscriptions etc. exceeding Rs.5,000 have been received during the tax year; (c) statement showing the names and addresses of donees and beneficiaries etc. to whom payments, services etc. exceeding Rs.5,000 have been made during the tax year; and (d) statement showing the money set apart or kept un-utilized with reasons thereof; (vii) failed to provide a detailed performance evaluation report in terms of clause (g) of sub-.rule (2) of rule 211, after every three years. (2) Approval shall not be withdrawn under sub-rule (1) unless the organization has had an opportunity to show cause against the action proposed to be taken. (3) Where the Commissioner decides to withdraw approval under sub-rule (1), he shall intimate the organization,. in writing, of the decision including a statement of reasons for the decision. The law makers have also taken care of the situation that refusal to grant exemption under rule 211 or any exemption earlier granted under rule 212 must not be withdrawn by the Commissioner under rule 217 unjustifiably that is why the applicant has been provided right of appeal before Regional Commissioner of Income Tax under Rule 218. 218. Appeal against of decision of Commissioner.---An organisation dissatisfied with a decision to refuse an application made under rule 211 or 214; or (a) a decision to withdraw an approval under rule 217, (b) may lodge an appeal in the following form with the Regional Commissioner of Income Tax concerned, namely:-‑ GROUNDS OF APPEAL (i) ____________________________________ (ii) ____________________________________ (iii) ____________________________________ (iv) ____________________________________ (v) ____________________________________ We/I _____the appellant(s) named in the above appeal do declare that what is stated therein is true to the best of our/my information and belief. Dated 20____ Signature ___________ Name ___________ Address___________ PARTICULARS (1) Name of the organization (in block letters). ______________________ (2) Full address of the organization (in block letters) ______________________ (3) Date of establishment of the organization______________________ (4) Its aims and objects (a) ______________________ (b) ______________________ (c) ______________________ (d) ______________________ (5) Whether the organisation has been registered under the Societies Registration Act, 1860 (XXI of 1860), or the Voluntary Social Welfare Agencies (Registration and Control) Ordinance, 1961 (XLVI of 1961), or any other law in substitution thereof relating to the registration of welfare organization or established in pursuance of a Trust Deed. Please give/state the law and the number and date of registrations _____. (6) Whether constitution, memorandum and articles of association, trust deed, rules and regulations or bye-laws, as the case may be, conform(s) to the provisions of sub-rule (1) of rule 213. If so, please give the number of Article/Clause/Rule etc., for each provision. (7) Whether the organization ensures for the benefit of the general public or a particular community or class of persons only (give full details). (8) The number of members/trustees of the organization on the date of application. Signature ________________ Name (in block letters) __________ Designation ___________________ It would also be important to point out here that if any organization was earlier granted any approval before the commencement of these rules for and upto the period ended 30-6-2002 the same stand withdrawn and the N.P.O. were required to file fresh applications as required under rule 211. 219. Organisation granted approval before commencement of these rules.---The approval granted prior to the commencement of these rules to an organisation shall be deemed to have been withdrawn unless an application in the manner laid down in rule 214 is made on behalf of such organisation for 5[and upto. calendar year, 2003 by the 30th day of June, 2004]. However, rule 220 of the Income Tax Rules; 2002 also provides discretion to the Commissioner to wave of certain requirements regarding submissions of relevant documents for the purpose of rule 211 under suitable cases on the basis of valid reasoning. 220. Relaxation or requirements or conditions.---The Commis sioner may relax or modify any of the requirements or conditions of their chapter, in any individual case, if he is satisfied that the requirements or conditions could not be fulfilled by the applicant for reasonable cause. (e) Any Assets owned by the N.P.O. cannot be used or utilized for any private benefit of the members or any other persons. Respected members there is another restriction on every non-profit organization that the assets owned by it can only be used for the purpose of carrying out the activities for which it has been formed. No person directly or indirectly engaged in the affairs of the organization would have any right to use any asset for his personal affairs. If this condition is also not fulfilled the organization will either not obtain the status of N.P.O. or it will lose the same if has already granted. Respected members it would not be out of place to mention here that section 53 of the Income Tax Ordinance, 2001 provides the powers to the Federal Government to declare any Income as exempt from tax under any provision of the Second Schedule to the said Ordinance subject to such conditions and to that extent as are specified therein. 53. Exemptions and tax concessions in the Second Schedule.---(1) The income or classes of income, or persons or classes of persons specified in the Second Schedule shall be--‑ (a) exempt from tax under this Ordinance, subject to any conditions and to the extent specified therein; (b) subject to tax under this Ordinance at such rates, which are less than the rates specified in the First Schedule, as are specified therein; (c) allowed a reduction in tax liability under this. Ordinance, subject to any conditions and to the extent specified therein; or (d) exempted from the operation of any provision of this Ordinance, subject to any conditions and to the extent specified therein. (1A) Where any income which is exempt from tax under any provision of the Second Schedule, such income, as may be specified in the said Schedule and subject to such conditions as may be specified therein, shall be included in the total income, however the tax shall not be payable in respect of such income. (2) The Federal Government may, from time to time, by notification in the official Gazette, make such amendment in the Second Schedule by--‑ (a) adding any clause or condition therein; (b) omitting any clause or condition therein ;or (c) making any change in any clause or condition therein, as the Government may think fit, and all such amendments shall have effect in respect of any tax year beginning on any date before or after the commencement of the financial year in which the notification is issued. (3) The Federal Government shall place before the National Assembly all amendments made by it to the Second Schedule in a financial year. As I have submitted earlier that vide sub-clause (c) of clause (36) of section 2 of the Income Tax Ordinance, 2001 every Organization is required to obtain approval/declaration from the Commissioner to act as a non-profit organization for a specified period but that approval does not itself make the receipts, income, profit, donations of any sort or surplus of receipt and expenditure of the organization as exempt from tax. For the purposes of exemption of tax the non-profit organizations are required to approach to the Regional Commissioner of Income Tax of the concerned Region in accordance with the procedure laid down vide Rule 220A, of the Income Tax Rules, 2002, and only after obtaining approval from the R.C.I.T. concerned, the income of the Organization would be exempt in the light of the provisions contained vide sub-clause (3) of clause 58 of the IInd schedule to the Income Tax Ordinance, 2001 which read as follow:‑ (58)(1) Any income of a trust or welfare institution (or non-profit organization) specified in sub-clauses (2) and (3) from donations, voluntary contributions, subscriptions, house property, investments in the securities of the Federal Government and so much of the income chargeable under the head "Income from business" as is expended in Pakistan for the purposes of carrying out welfare activities: Provided that in the case of income under the head "Income from business", the exemption in respect of income under the said head shall not exceed an amount which bears to the income under the said head the same proportion as the said amount bears to the aggregate of the incomes from the aforesaid sources of income. (2) A trust administered under a scheme approved by the Federal Government in this behalf and established in Pakistan exclusively for the purposes of carrying out such activities as are for the benefit and welfare of-‑ (i) ex-servicemen and serving personnel, including civilian employees of the Armed Forces, and their dependents; or (ii) ex-employees and serving personnel of the Federal Government or a Provincial Government and their dependents, where the said trust is administered by a committee nominated by the Federal Government or, as the case may be, a Provincial Government. (3) A trust or welfare institution or non-profit organization approved by Regional Commissioner of Income Tax for the purpose of this sub-clause. Let me point out here that the words non-profit organization were inserted in above clause vide Finance Ordinance, 2002. The powers to grant exemption from tax has now been provided to the Regional Commissioner of Income Tax vide Finance Act, 2006 and prior to the said substitution the powers were available with the Central Board of Revenue. Complete procedure of the purpose of declaration of Income of the N.P.O. as exempt is provided in Rule 220A of the Income Tax Rules, 2002. Respected members from the formation of any non-profit organization by any body of individual three steps are required to be taken which are. (a) Registration with any competent authority under any law of the land. (b) Declaration/Approval from the Commissioner as a non-profit organization. (c) Declaration of income to be exempt from Tax by the Regional. Commissioner. It would be important to note that under the Income Tax Ordinance, 2001 the above referred three conditions are mandatory to be fulfilled otherwise the organization will not enjoy the status of non-profit organization. If after registration of any organization under any law of land the declaration/approval is not granted by the Commissioner or after declaration/approval by the Commissioner exemption from tax is not granted by the Regional Commissioner, the organization will be treated as A.Q.P. or Company as the case may be and would not be entitled for any benefit as provided under the Income Tax Ordinance, 2001 to such organizations. In this eventuality the income of the organization would be taxed in accordance with the rates provided in part 1 of First Schedule to the Income Tax Ordinance, 2001 for A.O.P. or Company: Now the question arises that how the Tax Department can have a check on the working and activities of such like organizations. For this purpose the law makers have also taken care of by inserting clause (ac) in subsection (1) of section 114 of the Income Tax Ordinance, 2001 vie Finance Act, 2006, dated 1-7-2006. 114. Return of income.---(1) subject to this Ordinance, the following persons are required to furnish a return of income for a tax year, namely:‑ (a) every company; (ab) every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance of the year; (ac) any none profit organization as defined in clause (36) of section 2; and (ad) any welfare institution approved under clause (58) of part I of the Second Schedule; (b) any person not covered by clauses (a), (ab), (ac), or (ad) who,-‑ (i) has been charged to tax in respect of any of the two preceding tax years; (ii) claims a loss carried forward under this Ordinance for a tax year; (iii) owns immovable property with a land area of two hundred and fifty square yards or more or owns any flat located in areas falling within the municipal limits existing immediately before the commencement of Local Government laws in the provinces; or areas in a Cantonment; or the Islamabad Capital Territory. (2) A return of income:-‑ (a) shall be in the prescribed form and shall be accompanied by such annexures, statements or documents as may be prescribed; (b) shall fully state all the relevant particulars or information as specified in the form of return, including a declaration of the records kept by the taxpayer; and (c) shall be signed by the person, being an individual, or the person's representative where section 172, applies. (2A) A return of income filed electrically on the web or any magnetic media or any other computer readable media as may be specified by the Board shall also be deemed to be a return for the purpose of subsection (1); and the Board may, by notification in the official Gazette, make rules for determining eligibility of the data of such returns and e-intermediaries who will digitize the data of such returns and transmit the same electronically to the Income Tax Department under their digital signatures. (3) The Commissioner may, by notice is writing, require a person, or a person's representative, as the case may be, to furnish a return of income by the date specified in the notice for a period of less than twelve months, where (a) the person has died; (b) the person has become bankrupt or gone into liquidation; (c) the person is about to leave Pakistan permanently; (d) the Commissioner otherwise considers it appropriate to require such a return to be furnished. (4) Subject to subsection (5), the Commissioner may, by notice in writing, require any person who, in the Commissioner's opinion, is required to file a return of income under this section for a tax year (or assessment year) but who has failed to do so to furnish a return of income for that year within thirty days from the date of service of such notice or such longer period as may be specified in such notice or as the Commissioner may allow. (5) A notice under subsection (4) may be issued (in respect of one or more) (of the) last five completed tax years (or assessment years). (6) Any person who, having furnished a return, discovers any omission or wrong statement therein, may furnish a revised return within five years of the date that the original return was furnished. (7) Every return purporting to be made or signed by, or on behalf of a person shall be treated as having been duly made by the person or with the person's authority until the person proves the contrary. After insertion of clause (ac) in subsection (1) of section 114 to the Income Tax Ordinance, 2001 the non-profit organizations are now specifically required to file their income tax returns from the Tax year, 2007 onward on regular basis. The submission of returns by such organizations are also necessary for the purpose of continuity of the approval/declaration granted by the Commissioner of Income Tax and exemption of Tax accorded by the Regional Commissioner as provided under the relevant provisions of the Income Tax Ordinance, 2001 and Income Tax Rules, 2002. Respected members it would also be important to keep into consideration that the obligation of Tax deductions as provided under relevant provisions of the Income Tax Ordinance, 2001 are fully applicable on every Non-Profit Organization for the reason that if any N.P.O. is got registered under the Companies Ordinance, 1984 then it would be obliged to fulfil all the conditions applicable on the Company under the Income Tax Ordinance, 2001 and if it assigned the status of A.O.P. on account of its registration under the Societies Registration Act, 1860 or Voluntary Social Welfare Agencies (Registration and Control) Ordinance, 1961 then it would be taken as Prescribed Person as explained in relevant provisions of Income Tax Ordinance, 2001 including section 153. In this connection you; attention is also invited to .C.No. 1(17) WHT/91-Pt, dated 23-1-2006 whereby it has been clarified that any N.P.O. constituted under any Law falls within the definition of prescribed person as provided vide section 153(9)(c) of Income Tax Ordinance, 2001. It is further submitted that after obtaining approval/declaration of a non profit organization from the Commissioner of Income Tax under Rule 212 and in particular after obtaining exemption from Tax certification from the Regional Commissioner as provided under Rule 220A for the purpose of sub-clause (3) of clause 58 of part I of 1st Schedule to the Income Tax Ordinance, 2001, the monetary transactions effected by any N.P.O. would not be entitled to exempt from deduction of Tax under relevant provisions of Income Tax Ordinance, 2001. For the purpose of exemption from deduction of Tax the N.P.O. will have to separately apply for exemption certificate as provided vide section 159 of the Income Tax Ordinance, 2001. Respected members I would end up my submissions now with a hope that my seniors would guide me on any point which either I could not brought to your notice or any of my submissions is not in accordance to the true spirit of Law. I once again thanks to the President, Chairman Education Committee, Office bearers and members for this opportunity as well as patience hearing. Thank you very much. Allah Hafiz.