Provident fund is a very common retirement plan to benefit the employees, which is contributory in nature and yields a feeling of participation in employees. The establishment settles the provident fund in form of Trust, required to be registered with the concerned sub-registrar for getting the status of an independent body.
There are three types of Provident funds, which are known as:
Statutory Provident Funds, which are set up under the Provident Fund Act, 1925 and is maintained by the Government, semi-Government organizations, local authorities and other such institutions. Payments from such funds does not need recognitions from the Commissioner Inland Revenue and are exempted from Income Tax.
Recognized Provident Fund, which is recognized by the Commissioner Inland Revenue under the Sixth Schedule of Income Tax Ordinance, 2001. This type of Provident Fund is maintained by private sector or organizations. Payments from such Provident fund are exempted from Income Tax.
Unrecognized Provident Fund No exemptions are available but there is no yearly taxability. Employer's contributions and interest thereon will be taxable at the time of payments to the employees only.
The Trust is responsible for collection of contribution from employers and employees on monthly basis and to invest the same in various permissible schemes and securities.
The Provident fund is created by the employer in the form of irrevocable Trust, with the name, reflecting the name of the Company and containing the term Employees' Contributory Provident Fund. At least three to five trustees are appointed for the management of the Trust who are named in the Trust Deed. The Provident Fund Trust Rules are separately prepared / drafted. The Trust Deed is written on the Stamp Paper. The Trust Deed and the Rules specify the terms and conditions pertaining to responsibilities, duties, rights and the liabilities of the company, employees, trustees, auditors, bankers, actuaries etc.
The Trust Deed must broadly contain the information regarding administration and management of the Fund. The eligibility of the membership and companies roles and power in the administration of the fund should also be given. Apart from it the contributions and investments of the fund's money should also be mentioned. The distributions of the profit among members and the terms regarding the dispute and arbitrations methods may be specified.
The Trust Deed should be registered with the Registrar of the Trust which is a mandatory requirement. One trustee can be authorized to appear before the Registrar and the copies of ID cards of all the trustees and 2 Passport sized photographs of each trustee have to be filed before the Registrar along with original Trust Deed and copy of the Rules. After its registration the Trust has to get its National Tax Number and all the trustees have also to get their NTNs.
Once, the above process is done, the Trust has to apply for its recognition before the Commissioner Inland Revenue in order to get the tax exemptions available under the law. After registration is done the application for tax exemption approval is to be filed under Part I of the Sixth Schedule of the Income Tax Ordinance, 2001 before the Commissioner Inland Revenue. Tax exemption's approval is granted for lifetime of the Provident Fund. The conditions for the approval are also given in Part I of the Sixth Schedule of the Income Tax Ordinance, 2001.
The conditions for recognition are that all the employees should be employed in Pakistan or being employed by the resident employer. However, the tax exemption's approval can be given to non-resident employer if the total ratio of employees employed outside Pakistan is not more than 10%. The contribution of employer shall not be more than the employee's contributions.
Profit is distributed at the year-end on the closing accumulated balance of the employees. It is advisable that the calculation is based on the average balance. The members of the Provident fund can have the facility of loan / temporary withdrawal. They can also have the facility of permanent withdrawal on certain grounds. Interest free loans can also be availed, however, they are certain limits to loans as given in the Rules. The guidelines for Provident fund and moneys are also given in the Rules.
Where the employer is not a company, the employee's contributions only and its interest shall be invested in the Securities according to the Section 20 of the Trust Act, 1882, Post Office Savings, Bank Account, National Savings, Federal Government Securities, deposits in NCB and NBP. Other Government securities or in other established financial institutions. On the contrary where the employer is a company, both employer and employee's contributions and interest shall be invested in accordance with the provision of Section 218 of the Companies Act, 2017. SECP has notified Employee’s Contributory Funds (Investment in Listed Securities) Regulations, 2018 which specifies the discipline for investment in the listed Securities. Every company, constituting the Trust shall, within 1 month of the close of every 6 months of the financial year of such Trust, submit to the SECP financial information of the Trust. This should be endorsed by the head of trustees. Apart from it, The Provident Fund Trust have to file its annual Tax Return each year treating itself as a company.
It is significant to mention here in Punjab, a new Punjab Trust Act, 2020 has been enforced and promulgated on Sep 10, 2020. The sub-sec (4) of Sec. 112 of this Punjab Trust Act, 2020 has mandated all the trusts registered in the Punjab under the previously enforced Trust Act, 1882 to be freshly registered under this Act within a period of six months of the commencement of this Act.
Mahboob Rizvi Law Associates…. can help to write Trust Deed to create Provident Fund and Rules to administer it. We can also get it registered and further apply for Tax exemption. We can also get it registered and further apply for its recognition with FBR.