Karachi, March 12, 2024 – The Federal Tax Ombudsman (FTO) has directed the Federal Board of Revenue (FBR) to issue a clarification on the registration process for provident funds by employers.
The directive comes in response to a complaint filed by M/s. Agilosoft Pvt Limited, seeking recognition of their Provident Fund, which was initially refused by tax authorities.
The FTO, in its order dated June 14, 2023, directed the FBR to process the application for recognition of the Provident Fund filed by Agilosoft Pvt Limited as per the prescribed procedure. However, the company faced hurdles when the Department refused registration of NTN, citing non-registration of the Trust Deed under the Sindh Trust Act, 2020.
Agilosoft Pvt Limited argued that the Sindh Trust Act, 2020, was enacted to regulate ‘Not for Profit Organizations’ (NPOs), which operate as charitable organizations. The Act was not designed to cover Provident Funds, which are established for the benefit of employees. The company highlighted the undue delays caused by the requirement of security clearances and approvals from various departments, as observed by the Sindh High Court in a related order.
The complainant emphasized that the delay in recognizing the Provident Fund could adversely affect the taxability of the employer’s contribution in their income tax returns. Agilosoft Pvt Limited sought the FTO’s intervention to facilitate the creation of NTN and simultaneous recognition of the Provident Fund to avoid withholding of income tax.
The complaint was referred to the Secretary, Revenue Division, for comments, and the Department responded by stating that Provident Funds fall under the category of specialized trust funds as per the amended Sindh Trust Act, 2021. The Department argued that the taxpayer must register under the Sindh Trust Act, 2021, for the purpose of recognition and registration of Provident Funds.
During the hearing, the FTO observed a disagreement between the complainant and the Department regarding the legal requirements for registering Provident Funds under the Sindh Trust Act. The High Court’s judgment contradicted the Department’s position, suggesting that registration under the Sindh Trust Act, 2020, may not be mandatory for Provident Fund recognition.
In light of the conflicting perspectives, the FTO directed the FBR to take the following actions within 45 days: (i) Instruct the Chief Commissioner IR, CTO, Karachi, to expedite the processing of Agilosoft Pvt Limited’s application in accordance with existing law and on merit. (ii) Direct the Member-IR Policy to issue clarification on the issue raised by the complainant concerning the existing legal and regulatory provisions covering the registration of Provident Funds.
The outcome of these directives will shed light on the appropriate legal requirements for Provident Fund registration and recognition, providing clarity for employers navigating the complex regulatory landscape.
