Taxation in INGOs

Some INGOs have submitted a zero return, while others have submitted it showing equal amount of income and expenditure. And there are some which have even shown surplus and have been taxed by the taxation authority. This has led to confusion

A debate is raging of late whether International Non-Government Organisations (INGOs) should be provided with Tax Exemption Certificate or not. Various tax offices seem to have different opinions. Some INGOs did receive their exemption certificate for the fiscal year 2017-18, while many others were denied.

Income Tax Act 2058 was first enacted on April 1, 2002. The debate started after some tax officials questioned the eligibility of INGOs for tax exemption.

INGOs have been contributing a huge amount of withholding tax and submitting financial statements to tax offices all these years. But why has this become an issue now? Why do INGOs need tax exemption certificate? If they are not provided with one, does this mean that they have to pay tax on whatever amount remain unspent in the year-end?

The Act has defined certain social organisations as tax-exempt organisations. Those organisations that meet the definition criteria should apply to their nearest Inland Revenue Office in order to obtain tax exemption certificate. According to Rule 5 of Income Tax Rule 2059, those organisations that have received tax exemption certificate should only submit their audited financial statements of a particular fiscal year within three months from the end of that fiscal year. They need not submit separate income tax return.

Earlier INGOs were receiving the “tax-exempt status” and it was just to submit audited financial statements each year. But if any organisation has not obtained tax exemption certificate, they are required to file separate income tax return with their tax office. And in doing so, many INGOs are facing issues. Because the existing tax return form (Schedule 5 of D 03 form) does not have a clear provision to include any grants income and related expenditure, some of them have submitted a zero return, others have submitted it showing equal amount of income and expenditure. And there are some which have even shown surplus and have been taxed by the taxation authority. Tax officers across various offices are not consistent and clear about the correct procedure to file a return, and taxpayers are confused.

Fundamentally speaking, tax is levied only when a person (natural person or entity) generates some sort of income. Income Tax Act 2058 provides facilities for reducing certain expenses that meet the defined criteria in accordance with Section 13 and Section 21 of the Act. Therefore income that is subject to tax will normally be a profit or residual income.

INGOs in their existing legal structures in Nepal as such should not have their own income with some exception. Whatever amount they receive from their headquarters for office operation or as grants from donors, it is either a liability towards their headquarters or towards their donors respectively.

Looking at this scenario, it appears they do not have any taxable income and INGOs’ demand to get the exemption certificate might seem logical. However, if we go through the definitions and legal provisions of Act, INGOs are not categorised under tax-exempt entity.  According to Section 2 (s) of the Act, “Organisation entitled to enjoy exemption” means a social, religious, educational or benevolent organisation of public nature established with non-profit motive.

This, however, excludes any amount given as benefit to any person from the assets of the entity, and any amount derived by the entity except in pursuit of the entity’s function as per its objectives. From the definition, it is clear that in order to get tax-exempt facility an entity should be registered as an organisation of either social or religious or educational or charitable nature without having a profit motive. Though it may be argued that INGOs are of course established with a non-profit motive in their home country, they do not have any legal registration status in Nepal.

All INGOs in Nepal run their activities based on “general agreement” (which normally runs for a period of five years and is renewable after that) and project-specific “project agreement” with the Social Welfare Council. Further, after the general agreement is concluded, they also get registered with the tax authority and obtain Permanent Account Number (PAN). Except for these, they do not have any other legal registration identity like NGOs that are registered at District Administration Offices and have a unique registration number. Because of this, they do not fall under the criteria of eligible organisation to obtain tax exemption certificate.

Recently the finance bill also provided waiver of all tax, fines, additional fees and interest of all previous fiscal years to all those social organisations registered under Institution Registration Act 2034 that shall submit their income tax return for fiscal year 2017-18 by January 14, 2019. This also does not include INGOs as they are not registered under Institution Registration Act 2034. This also adds to this discussion that even the government is trying to bring INGOs under tax net.

Now does this mean INGOs should pay tax irrespective of nature of their income? No.

However, some cases have been noted where some INGOs paid tax in the surplus amount in the fiscal year 2016-17. First of all it is necessary to understand how this surplus arises. If such INGOs are engaged in profit making activities, no doubt this will be taxable.

Luitel is a chartered accountant