MFIs, NGOs to face greater scrutiny from taxmen

Microfinance institutions (MFIs) will have to pay taxes from fiscal year 2023-24 if they do not keep their income from service charges in a revolving fund.

The provision has been brought under a new income tax law 2023 passed in parliament on Sunday.

The National Board of Revenue (NBR) has also incorporated a definition informing that non-governmental organisations (NGOs) would be considered companies in line with a clarification it issued in October last year.

There was no clarity at the field level and field offices used to collect taxes based on their own judgement, explained the NBR officials.

Taxmen, however, said NGOs will not face tax equal to the tax rate of companies as the NBR has not withdrawn tax exemptions on the income from micro-credit operations and donations obtained by the organisations to do social welfare and development activities.

In the new law, it imposed a condition that income from microcredit operations must be kept in a revolving fund to avail the tax exemptions.

And if any MFI diverts microcredit income to other businesses, it will have to pay tax.

Donations obtained by the NGOs to do social welfare and development activities are also not taxable, they said.

Rasheda K Choudhury, convenor of CSO Alliance, a top-level coalition of nearly 300 NGO/CSO organisations, said they were surprised to see that NGOs were defined as companies in the income tax law.

"To understand the issue, we contacted authorities and officials concerned and got clarification that there will be no tax on donations received by NGOs from the government, development partners or any other source," she said.

"But we think the income tax department should take steps to clarify the confusion that has been created among stakeholders following the change," she said.

"This will protect small and grassroot level NGOs from unnecessary bureaucratic hassles and rent seeking," said Rasheda, also executive director of the Campaign for Popular Education and a former caretaker government adviser.

There is no need to add the provision as the MFIs pay income tax and value added tax during the acquisition of assets, said NGOs in a recent recommendation to the NBR.

They also opposed a move to collect a 0.60 per cent tax on gross receipts or on turnover even after losses, as applied to companies.

"As a brand-new Act, it is normal that some provisions require greater clarity," said KAM Morshed, senior director of BRAC, yesterday.

"The assurance by the Chairman of NBR that donations, both internal and external sources, will not considered as taxable receipt and will not be subject to flat-rate 0.6% tax is one such clarification that we have received today," he said.