NOC and compliance: struggles of retirement funds

Dispute over NOCs for funds threatens to adversely impact net savings of employees

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KARACHI:

The challenges faced by the salaried class in Pakistan are intensifying with each passing day. From the overall economic conditions affecting the lives of ordinary citizens to measures aimed at addressing deficits in tax revenue targets, the burden continues to grow.

In the Finance Act 2024, amendments to the Income Tax Ordinance, 2001 have further increased tax rates, including those for the salaried individuals, as part of efforts to achieve the projected tax revenue of Rs450 billion for the current fiscal year. A significant portion of this revenue is expected to come from tax collection at source.

Previously, several tax benefits, including tax credits and deductible allowances, which directly or indirectly eased the burden on the salaried class, were withdrawn, leading to higher tax liabilities for this segment.

Additionally, they are now grappling with sharp increases in indirect taxes on essential consumer goods, further straining their financial situation. To compound matters, the ongoing dispute over the Federal Board of Revenue's (FBR) issuance of no-objection certificates (NOCs) for employee retirement funds threatens to adversely impact their net savings. To better understand the current issue, it is essential to explore its background. Before the enactment of provincial and Islamabad Capital Territory (ICT) trust laws, all trusts, including employee retirement funds, were governed by the now-repealed Trust Act, 1882.

Trusts registered under this Act enjoyed exemptions from income and withholding taxes on dividends, profits on debt, and other sources, provided they obtained recognition under the Sixth Schedule of the ordinance. Similarly, employees, as beneficiaries of recognised funds, were eligible for tax concessions on amounts received from these funds. Following the repeal of the Trust Act, 1882, and the implementation of new provincial and ICT trust laws, all existing trusts were required to undergo a re-registration process under the updated legal framework. These new laws also introduced several amendments, incorporating various new concepts, including specialised trusts.

A specialised trust is defined as one created for specific purposes, such as collective investment schemes, collective investment vehicles, private funds, pension funds, real estate investment trusts, exchange-traded funds, private equity and venture capital funds, debt securities' trusts, government securities' trusts, provident funds, gratuity funds, employee benefit trusts, or any other trust managed by a regulator as notified by the government.

It was further mandated that these specialised trusts could only be registered or re-registered upon obtaining NOC from the relevant regulator, as outlined in Schedule IV of the Anti-Money Laundering Act, 2010.

Primarily, two issues were in front of the FBR. Firstly, whether it is liable to issue the exemption from withholding tax certificates to funds subject to re-registration under the new trust laws. Secondly, whether it is liable to issue NOC as a regulator for the purpose of registration or re-registration of funds.

Previously, the process was straightforward: funds would approach the FBR for recognition under the Sixth Schedule of the ordinance to secure income tax exemptions. Once recognised, these funds were entitled to claim exemptions from withholding taxes on dividends, profits on debt, and other income sources. However, the FBR later altered this practice.

To enforce the re-registration requirement, the FBR made the grant of withholding tax exemptions conditional upon proof of registration or re-registration under the new trust laws. This directive overlooked the fact that no corresponding amendments had been made to the ordinance to mandate such a requirement for issuing the exemption certificates. Consequently, the FBR's enforcement lacked a legal basis.

Although the FBR granted temporary waivers to allow funds time to complete the re-registration process, it continued to issue withholding tax exemptions without requiring re-registration certificates for some time. However, the FBR eventually ceased the grant of exemptions altogether, leading to legal challenges.

The matter was brought before the Sindh High Court, which gave its judgement in favour of petitioners. The court held that the FBR lacked authority to deny exemptions to funds already approved or recognised, as the new conditions introduced by the trust laws had not been incorporated into the ordinance. A similar decision had been issued earlier by the Lahore High Court.

Following these judgements, it has been observed that funds with prior recognition were granted withholding tax exemptions without the need for re-registration under the new laws.

Regarding the FBR's role in issuing NOCs for the registration or re-registration of trusts as a regulator, it was noted that the FBR, in a directive issued to chief commissioners on July 30, 2021, stated its agreement to act as a regulator for provident funds, gratuity funds, and superannuation funds. It was also acknowledged that amendments to the newly introduced trust laws would be necessary. The FBR observed inconsistencies in tax treatment across different field formations for funds already recognised, while the trust laws of various provinces and the ICT could not be amended.

To address this legal ambiguity and protect the interests of employees contributing to these funds, the FBR directed its field formations to issue NOCs to all recognised funds that had filed returns for tax year 2020. These funds were instructed to provide evidence of re-registration by December 31, 2021. The FBR continued issuing NOCs for registration or re-registration as a regulator until the beginning of last quarter of 2023, after which the process was abruptly halted without clear justification.

Subsequently, the relevant Trust Department, responsible for processing registrations or re-registrations based on the FBR-issued NOCs, also stopped issuing them. Reports from the Trust Department indicated that only a few NOCs had been received from the FBR in 2024, though hundreds of applications were pending. This has left both new and existing funds requiring registration or re-registration in a state of limbo.

As pressure mounted on the FBR to resume the grant of NOCs, a directive dated December 16, 2024 categorically instructed field formations to stop issuing NOCs for all specialised trusts, including the employee retirement funds.

The directive justified this decision by stating that the FBR is not recognised as a regulator under the relevant laws and has neither been authorised nor notified as a regulator in any ancillary legislation. Instead, the FBR recommended that applicants approach the federal government through the Finance Division for NOCs.

Given the critical nature of this issue, it is recommended that the matter of NOC issuance be addressed as a priority. This could involve either reinstating the long-standing process or amending the relevant laws to explicitly designate the authority responsible for issuing NOCs.

Clear guidance and streamlined procedures are essential to ensure swift compliance with legal requirements and safeguard the interests of all stakeholders, in particular those applying for new registration of the employee retirement funds for the benefit of their employees.

The writer is a member of the Institute of Chartered Accountants of Pakistan