One Day Workshop on Comparison of PF, GF, Pension Funds & VPS under the Income Tax Ordinance, 2001

Transcription

1 One Day Workshop on Comparison of PF, GF, Pension Funds & VPS under the Income Tax Ordinance, 2001 BY Z A F A R A H M E D S H E K H A & M U F T I C H A R T E R E D A C C O U N T A N T S M A R C H 2 7, , K A R A C H I

2 Welcome Note You all are welcome here today in this presentation. This workshop has been planned based on the comparative and competitive tax laws between PF, GF Pension Fund & VPS under the ITO, 2001 & ITR, PF is the most common benefit paid in Pakistan. Being contributory in nature, it yields a feeling of participation in employees as they can see their PF balance growing month by month. Gratuity has the greatest charm of being rewarded at the latest monthly salary. Pension has the charm of being rewarded at double the rate of PF. Voluntary Pension provides an ultimate mobility and flexibility which can be opted at the employee own risk appetite. The matter of choice of one from among the four above is becoming increasingly vital both for employees and employers. This workshop is merely for a fact sheet for each for the four in terms of their tax implications. Your very active participation is needed to achieve this very objective. We welcome you all once again. 2

3 Norms Participation; is what differentiates our workshop from a seminar. It is not a one way traffic. Adding ideas; Every bright idea is welcome. Listening; is where wisdom lies. No personal attacks; I hope this is self explanatory Cell phones; Silent mode; This will be a big help Thank you for not smoking; Yes this is a no smoking workshop 3

4 Yours Introduction Please share with us your: Name ; Zafar Ahmed Organization ; Shekha & Mufti, Chartered Accountants Functional title ; Director Taxes (Department/Division) 4

5 Course Contents 5 1- CATEGORIES OF RETIREMENT PLANS 2- BASIC MECHANISM of the 4 RETIREMENT PLANS 3- COMPARISON; i. Formation & Registration of the Fund ii. Tax Approval of the Fund iii. Exemption to the Income of the Fund iv. Contribution to the Fund v. Distribution of Profits from the Fund vi. Withdrawals & Loans from the Fund vii. Final Settlement from the Fund viii. Investments of the Funds ix. Borrowing by & from the Funds x. Auditors and Actuary for the Fund xi. Bookkeeping & Accounting of the Fund xii. NTN, Tax Returns of the Fund xiii. Withholding of Tax by the Fund 4- OTHER POINTS

6 1- Category of Retirement Plans 6 There are 03 broad categories of Retirement Plans; i. Government or State provided Plans ii. iii. Company provided Plans Personal Plans

7 1- Category of Retirement Plans 7 Government or State Provided Plans This consists of SESSI (Social Security), EOBI (Old age Pension), Pension under 1925 Act (only to government employees). Company provided Plans This consists of PF, GF, Pension, Benevolent Fund, ESOP, Commutation of Pension, Annuity of Pension, DC Pension, Leave encashment only on leaves, Post retirement Medical Fund, Group Lie Insurance. Personal Plans This consists of Life Insurance Policy, Insurance cum with Investment Policy, Medical Insurance Plans, Education & Other Insurance Plan, Mutual Fund Units, Shares, VPS etc. This workshop is about only 4 Plans. PF, GF, Job Pension & VPS

8 2- Basic Mechanism of 4 Retirement Plans 8 i. Nature and Definition of Plan ii. iii. Basic Scheme under the Ordinance Types and Kinds of PF, GF, Pension and VPS

9 2- Basic Mechanism of 4 Retirement Plans 9 NATURE AND DEFINITION OF PLAN Retirement Plans can broadly be divided into two groups; Defined Benefits (DB) Plan is where the retirement amount is calculated and limited on the basis of multiple of amount of salary and years of service. Defined Contribution (DC) Plan is where the retirement amount is calculated on the basis of contribution to the retirement fund together with the income earned thereupon. The contribution may be from the employee or employer or both.

10 2- Basic Mechanism of 4 Retirement Plans 10 BASIC SCHEME; Provident Fund PF scheme is a retirement benefit scheme PF scheme is contributory in nature and definition Employee and Employer, both make contribution to PF Employee and Employer make equal contribution to PF The contributions from both are invested in profitable schemes. Investment Income is credited to member s account. At resignation, total of er and ees contribution and its interest is paid to the employee free of income tax. The fundamental liability to pay the PF stem from the SO Ordinance, (Industrial Undertaking with > 50 employees and Commercial Undertaking with > 20 employees) Income Tax Ordinance & Rules only explain about the taxation and exemption of P Funds.

11 2- Basic Mechanism of 4 Retirement Plans 11 BASIC SCHEME; Gratuity Fund GF scheme is a retirement benefit scheme GF scheme is a Defined Benefit in nature and definition Only Employer make contribution to GF The contribution is invested in profitable schemes Investment Income is not credited to member s account. Investment Income is used to reduced the Employer cost At resignation, amount equal to each year last month salary is paid to the employee free of income tax. This is maximum tax free Gratuity. Gratuity is essentially a lump sum benefit and not an Annuity The fundamental liability to pay the GF stem from the SO Ordinance, (Industrial Undertaking with > 50 employees and Commercial Undertaking with > 20 employees. It says for a GF amount equal to multiple of his final Salary and years of services to be paid to the employee.) Income Tax Ordinance & Rules only explain about the taxation and exemption of G Funds.

12 2- Basic Mechanism of 4 Retirement Plans 12 BASIC SCHEME; Pension Fund PF scheme is a retirement benefit scheme PF scheme is a Defined Benefit in nature and definition Only Employer make contribution to PF The contribution is invested in profitable schemes Investment Income is not credited to member s account. Investment Income is used to reduced the Employer cost At retirement/resignation, amount equal to 20% of each year salary is paid to the employee free of income tax. This is maximum tax free Pension. Pension can be lump sum or Annuity both

13 2- Basic Mechanism of 4 Retirement Plans 13 BASIC SCHEME; VPS VP Scheme is a Retirement Benefit Scheme operated outside the company VP scheme is contributory in nature and definition Employee and Employer, both make equal contribution to VPS Only Employee can also make contribution to VPS In that case it will become a Personal Retirement Plan The contribution is invested in profitable schemes by VPS Manager Investment Income is credited to member s account. The VPS Account remain ON even if the job changes At retirement, 50% of the VPS value can be withdrawn and an Insurance annuity or a monthly plan can be opted with the other 50%. This is maximum tax free VPS can taken out.

14 2- Basic Mechanism of 4 Retirement Plans 14 TYPES AND KINDS OF PF, GF, PENSION AND VPS Types of Provident Fund; Statutory Provident Fund Statutory Provident Fund is setup under the Provident Fund Act, 1925 and is maintained by Government, Semi Government Organization, Local authorities, railways and recognized educational institutions. Payment from such fund does not need Commissioner recognition separately and are exempted from income tax. Recognized Provident Fund Recognized Provident Fund is the PF, which is recognized by the Commissioner under Part l of the 6th schedule of ITO, This type of PF is maintained by private sector organizations. Payment from such fund gets exempt from income tax after recognition Unrecognized Provident Fund Un-recognized Provident Fund is actually not a separate type. It is a fund, which is neither a recognized Fund (as it has not been approved) nor it is a Statutory Fund. No exemption is available but there is no yearly taxability either. Employer s contribution and interest thereon will be fully taxable at the time of payment to the employee only.

15 2- Basic Mechanism of 4 Retirement Plans 15 TYPES AND KINDS OF PF, GF, PENSION AND VPS Types of Gratuities; Approved Gratuity Fund Approved Gratuity are funded gratuity approved by the Commissioner of Income Tax under part-iii of the sixth Schedule to the Income Tax Ordinance, Full amount as the per the limits are 100 % tax free. Approved Gratuity Schemes Approved Gratuity Schemes are unfunded scheme but which have been approved by the FBR. No separate fund is required to be maintained and merely provision for the unfunded liability are made from year to year which are not tax deductible until it is paid. Total exemption here is not more than 200k. Unapproved Gratuity Unapproved Gratuity are those which are neither approved by the Commissioner nor by the FBR. Total exemption is up to the lower of 75k or the 50% of the gratuity amount.

16 2- Basic Mechanism of 4 Retirement Plans 16 TYPES AND KINDS OF PF, GF, PENSION AND VPS Types of Pensions; Approved Pensions Fund Approved Pensions are funded pensions approved by the Commissioner of Income Tax under part-ii of the sixth Schedule to the Income Tax Ordinance, Full amount as the per the limits are 100 % tax free. Approved Pensions Schemes Approved Pension Schemes are unfunded scheme but which have been approved by the FBR. No separate fund is required to be maintained and merely book provision for the unfunded liability are made from year to year which are not tax deductible until it is paid. Unlike Gratuity, full amount of pension get exempted. Unapproved Pension Unapproved Pensions are those which are neither approved by the Commissioner nor by the FBR. Total exemption is up to the lower of 75k or the 50% of the pension amount.

17 2- Basic Mechanism of 4 Retirement Plans 17 TYPES AND KINDS OF PF, GF, PENSION AND VPS Types of VPS; Whether Equity Fund, Debt Fund, Money Market or any Balance Fund has been opted with any Asset Allocation or with Life Cycles, the tax treatment in terms of tax rebate and withholding at the time of withdrawal remains the same.

18 3- Comparison; Formation & Registration of the Fund 18 FORMATION OF THE FUND; PF; A fund is created by the employer titled as Employees Provident Fund. A fund can be a common fund for all the employees or separate for management and non management employees as well The fund needs to be vested in an irrevocable Trust. The management of the fund trust rests with the trustees of the fund consisting of members of staff of the company who are appointed by the company. Generally three or five trustees are appointed in the management of the trust. The trust is put into black and white containing the Trust Deed and the Trust Rules. The deed should be declared by a document on a stamp paper of Rupees 500/-. GF; the same set of exercise is undertaken Pension Fund; the same set of exercise in undertaken VPS; As it is operated outside the company, the VPS manager is responsible for it.

19 3- Comparison; Formation & Registration of the Fund 19 TRUST DEED & RULES; PF; The contents of the Deed and the Rules should be clearly defined in terms of responsibilities, duties, right and the liabilities of following concerned parties involved; Company (Author of the trust) Employees (Beneficiaries) Trustees Auditors, Bankers, Actuary etc. Income Tax Department Trust Registrar GF; No different than the PF Pension Fund; No different than PF & GF VPS; all this rests with the VPS manager

20 3- Comparison; Formation & Registration of the Fund 20 TRUST DEED & RULES; PF; Trust Deed must broadly contain the following; Administration of the fund Management of the fund Eligibility of the membership to the fund Company s role and power in the administration of the fund Contribution to the fund Investment of the fund s monies Distribution of the profits among members Dispute resolution and arbitration GF; The same requirements applies Pension Fund; The same requirements applies VPS; The choice of contents depends entirely on the VPS manager

21 3- Comparison; Formation & Registration of the Fund 21 REGISTRATION OF THE FUND TRUST; PF; The fund trust must be registered with the Registrar of the Trust. The registration is mandatory as without registration the trust would not be a valid trust and would not constitute a legal person. Since a Trust is a separate entity from the company, the registration gives it the desired legal status. The process of registration is time taking and the requisites for application for registration may include the original Deed and the Rules along with copies, Photos of the trustees and their CNIC. One of the trustees should be authorized appear before the Registrar for the purpose. GF; The same process applies Pension Fund; The same process applies VPS; It is the job the of the VPS manager

22 3- Comparison; Tax Approval of the Fund 22 National Tax Number (NTN); PF; The income tax approval will not be granted unless and until, Trust has obtained an TN. The trust will not be given unless all its trustees also have taken the NTN GF; The requirement is the same Pension Fund; The requirement is the same VPS; It is the duty of the VPS manager

23 3- Comparison; Tax Approval of the Fund 23 Application for Approval; PF; Application for tax approval is filed only after the registration is done from the Registrar. Application is filed on prescribed format along with certain details and information notably the Original Trust Deed and Trust Rules. Under the current setup of the FBR, the application is to be filed before the Commissioner with the jurisdiction of the company Tax Approval is granted for lifetime of the fund and not on yearly basis. There are certain conditions prescribed from the recognition apart form the registration. GF; Same as above Pension Fund; Same as above VPS; N/A

24 3- Comparison; Tax Approval of the Fund 24 Conditions for Tax Approval; PF; 1- All employees are employed in Pakistan or be employed by a resident employer. 2- The Commissioner may give the tax approval to non resident employer if the total ratio of employees employed outside Pakistan is not more than 10%. 3- The contributions from an employee shall be a fix proportion of his annual salary and shall be deducted from his monthly salary and credited to his individual Fund Account. 4- Employer contributions shall not be more than the employee contributions. 5- Employer shall credit the employee's individual account at intervals not more than 1 year. 6- The Commissioner may relax the requirement of this clause - (i) so as to allow the payment of larger contributions by an employer to the employee accounts whose salaries do not exceed 500/- pm (ii) so as to permit the crediting to the employee accounts of periodical bonuses or other contributions of a contingent nature, where the calculation and payment of such bonuses or other contributions is provided for on definite principles by the regulations of the fund;

25 3- Comparison; Tax Approval of the Fund 25 Conditions for Tax Approval; PF; 7- the employer shall not be entitled to recover any sum whatsoever from the fund except in cases of employee dismissal on mis conduct. In such av case the recoveries shall be limited to the contributions made by company to the individual account of the employee, and to its interest 8- the fund shall be vested in two or more trustees or in the Official Trustees under a trust which shall not be revocable except with the consent of all the employees. 9- the fund shall consist of contributions, its interest and of securities purchased therewith and of any capital gains arising from the transfer of capital assets of the fund, and of no other sums. 10- the accumulated balance due to an employee shall be payable on the day he ceases to be an employee of the employer 11- At the request of the employee who ceases to be an employee, the trustees of the fund may consent to retain his whole or part of the PF balance to be drawn by him at any time on demand; 12- In such a case where the accumulated balance due to an employee who has ceased to be an employee is retained in the fund in accordance with the preceding clause, the fund may consist also of interest in respect of such accumulated balance; 13- the fund may also consist of any amount transferred from the individual account of an employee in any recognised provident fund maintained by his former employer and the interest in respect thereof;

26 3- Comparison; Tax Approval of the Fund Conditions for Tax Approval; GF; Fund is established under an irrevocable trust and not less than 90% employees shall be employed in Pakistan 2- The sole purpose of the fund is to give gratuity to employees on their retirement at or after a specified age or on their becoming incapacitated prior to such retirement, or on termination of their employment after a minimum period of service specified in the regulations of the fund or to the widows, children or dependents of such employees on their death 3- the employer shall be a contributor to the fund; and 4- all benefits granted by the fund shall be payable only in Pakistan.

27 3- Comparison; Tax Approval of the Fund Conditions for Tax Approval; Pension Fund; Fund is established under an irrevocable trust and not less than 90% employees shall be employed in Pakistan; 2- The sole purpose of the fund is to give annuities to employees on their retirement at or after a specified age or on their becoming incapacitated prior to such retirement, or to widows, children or dependents of such employees on their death 3- The employer shall be a contributor to the fund; and 4- All annuities, pensions and other benefits granted from the fund shall be payable only in Pakistan.

28 3- Comparison; Refusal and Appeal PF, GF & Pension Funds The Commissioner has the power to refuse the application of tax approval. The Commissioner has the power to withdraw the tax approval. In both of the cases the Commissioner will show cause for his action. 28 An employer objecting to an order of Commissioner refusing to the tax approval or to an order of withdrawal of tax approval from a fund can appeal to the FBR within 60 days of the service of such order. The FBR may admit an appeal after the expiration of the period, if it is satisfied that the appellant was prevented by sufficient cause from presenting it within that period. The appeal shall be in such form and shall be verified in such manner and shall be accompanied by such fee as may be prescribed.

29 3- Comparison; Exemption to the Income of the Fund PF, GF & Pension Fund; The income of these fund are exempt under Clause 57 of Part I of the 2nd Schedule. Despite the exemption it is necessary to care for withholding exemption on income of the Fund. There must not be any withholding on the following and there is not need for any extra Exemption Certificate from any Tax Commissioner after June 2008 under Clause 47 B of Part IV. Dividend Income Interest Income/Profit on Debt Interest on National Savings Schemes Interest on Bank Deposits Interest on security of FG, PF and LG Interest on inter company loans, If PF gives the loan to Company or to other fund Commission Income Capital Gain on listed Securities (by Mutual Funds) 29 VPS; The income of Pension Fund is also exempt under Clause 57 of Part I of 2 nd Schedule. The VPS is also exempt from 1% minimum tax under Clause 11A of Part IV of 2 nd Schedule The VPS is also exempt from any withholding of income tax on its above 4 incomes

30 3- Comparison; Contribution to the Fund 30 PF; PF is a contributory benefit plan in which the Employee and the Employer both X % of salary. Either basic or gross can be constituted as salary for the purpose. The maximum limit of tax free contribution is the lower of 10% of 100k pa. PF is deducted and contributed monthly on the given monthly salary. Tax and practical difficulties makes it is impractical to meet past service cost. GF; Contribution to Gratuity Fund is made by the Employer only, as it is a defined benefit plan. Both basic or gross can be used for determination of gratuity. The exemption is limited to Basic Salary GF is calculated on the salary drawn for the last month of the year. The exemption however is limited to last Salary of each year. Past service can be remunerated in GF.

31 3- Comparison; Contribution to the Fund 31 Pension; Contribution to Pension Fund is made by the Employer only, as it is a defined benefit plan. Both basic or gross can be used for determination of Pension. Pension is 20% of each year Salary. Past service can be remunerated in Pension. VPS; VPS is a contributory benefit plan in which the Employee and the Employer both X % of salary. Either basic or gross can be constituted as salary for the purpose. Contribution can be made every month or in lump sum as well. The maximum limit of tax free contribution is 20% of income. Catch up contribution and catch rebate is also available for employees over 40 years of age.

32 3- Comparison; Distribution of Profit from the Fund 32 PF; Profit is distributed at the year-end on the closing accumulated balance of the employee. It is advisable that the calculation is based on the average balance. Interest if exceeds the 16% or the 1/3 of Salary, exposes the employee to tax. It remains advisable to restrict the distribution upto the limit. Profits (based on market value of securities) credited, if exceeds 16%or the 1/3 of salary exposes the employee to tax. It remains advisable to defer the distribution upto the limit as the value of securities may always be reversed down in the next year. Rule does not prescribe as to whether higher or lower of 16% or 1/3 would be taxable. Interest or profits credited shall be included in total income and not to Salary income. Therefore the withholding of tax shall not lie on the trust under the head salary. Accordingly the salary certificates will also not be effected. GF, Pension & VPS; No taxability in the hands of employee

33 3- Comparison; Withdrawals & Loans from the Fund 33 PF; The members of funds can have the facility of loans / temporarary withdrawals. The members can also have the facility of Permanent withdrawals on certain grounds. Loan can carry fixed and as well as variable rate as well. Interest free loans can also be availed.

34 3- Comparison; Withdrawals & Loans from the Fund 34 PF; PF Loans; Kinds & Limits; (the 1 st, 3 rd to 6 th & the 10 th are loans) 1. Illness (6 mos. Salary) 2. VPS; whole or part 3. Bike or Scooter (6 mos. Salary) 4. Foreign traveling for education or illness (6 mos. Salary) 5. Marriage, funerals or any other religious ceremonies (6 mos. Salary) 6. Hajj (lower of 6 mos. Salary or 25,000/-) 7. Building of a house; with documents (36 mos. salary) 8. Purchasing of a house; with documents (36 mos. salary) 9. Purchasing of site/plot for a house; with documents (36 mos. salary) 10. Repairs/renovation/extension of house (36 mos. salary) 11. Premium of life insurance policies (18 mos. Salary in case of each withdrawal) 12. Purchase of shares of Public limited company (lower of 6 mos. Salary or 10,000/-)

35 3- Comparison; Withdrawals & Loans from the Fund 35 PF; PF loans; Kinds & Limits; (the 1 st, 3 rd to 6 th & the 10 th are loans) 13. Purchase of a house by a 50 year old employee (lower of 24 mos. Salary or 80% of the Fund) 14. Constr. of a house by a 50-year-old employee (lower of 24 mos. Salary or 80% of the Fund) 15. Purchase of agricultural land from government by a 50 year old employee (lower of 24 mos. Salary or 80% of the Fund) Note; (on the condition that the full amount shall be spent on the purpose as earliest as possible and that if the full amount is not spent the balance shall be repaid. Moreover, if the property is sold during the service the total amount withdrawn shall have to be repaid) 16. Withdrawal by 50 years old employee to repay a personal loan from a financial institution (lower of 24 mos. Salary or 80% of the Fund) Note; (on the condition that the evidence for the repayment should be reproduce within 2 weeks otherwise the total and the interest will have to be repaid) 17. Withdrawal by 50-year-old employee without any reason (up to 60% of the Fund) 18. Withdrawal on leaving with balance of leaves before actual date of retirement (up to 90% of the Fund) Note; (if he rejoins the total amount and the interest will have to be repaid)

36 3- Comparison; Withdrawals & Loans from the Fund 36 PF; PF loans; 2nd loans and withdrawals General Rule; No second withdrawal until the first one is repaid Exceptions; Withdrawal can still be made for purchasing life insurance policies even if some other loan is payable Withdrawal can still be made for purchasing life insurance policies even if the first loan for life insurance is payable Any withdrawal (except for illness) can still be made even the loan taken for Hajj is payable Any withdrawal (except for house loan and life insurance) can still be made even if the loan taken for marriage, funeral or any other religious ceremony is payable.

37 3- Comparison; Withdrawals & Loans from the Fund PF; PF loans; Repayment of Loans; Period & Method of repayment months 16% in the form of one additional installment months16% in the form of two additional installments months16% in the form of three additional installments months16% in the form of four additional installments Alternatively instead of charging of 16% the charge can be made 1% over and above the rate payable by the fund to the employee. Where employee has elected not to take interest he will neither be charged for interest on loans Employer has the responsibility to deduct the installment The CIT may add back the default loan to the income of the employee

38 3- Comparison; Withdrawals & Loans from the Fund 38 GF; The Employer may use balance in the Fund to grant loans but that it would reduce the earning capacity of the Fund. Interest can be charged on loans, however. No permanent withdrawals can be made. Pension; The Employer may use balance in the Fund to grant loans but that it would reduce the earning capacity of the Fund. Interest can be charged on loans, however. No permanent withdrawals can be made. VPS; No loans allowed in VPS.

39 3- Comparison; Final Settlement from the Fund 39 PF; Employee and Employer Contribution plus any profit allocated on investment of funds or less any loss suffered by the Fund. Loss to the fund is borne by the employee Upon resignation, termination or death Self contribution is subject to Zakat, exemption can be applied for. GF; Gratuity is paid taking last drawn salary multiplied by number of service years. Employee receives the committed amount irrespective of the performance of the Fund. Upon resignation, termination or death. Exempt from Zakat

40 3- Comparison; Final Settlement from the Fund 40 Pension; Pension is paid taking the 20% of each year Salary. Employee receives the committed amount irrespective of the performance of the Fund. Either a lumpsum can be made or in shape of annuity is a mix of it. Upon resignation, termination or death. Exempt from Zakat VPS; 50% of the Employee and Employer Contribution plus the investment income or loss sufferred by the Fund, in case Investment Income will consist of Dividend, Interest & Capital Gains If more than 50% is asked for Final Settlement then tax withholding by VPS Manager Tax withholding will be made average tax rates of last 3 Tys tax rates Loss to the VPS is borne by the employee Upon resignation, disability or death Zakat!!!

41 3- Comparison; Investments of the Fund 41 PF; Rule 102 of the PF Rules dictate the guideline for PF monies investment GF; Follows the guidelines given for PF monies Pension; Follows the guidelines given for PF monies VPS; Follows its own strategy for investment in the market. Largely depend on the choice of the Pension Fund Client/Individual or in some cases the companies/the employer. The next few slides show the PF investment Rules of 1996 and changes made therein thereafter.

42 3- Comparison; Investments of the Fund PF; 42 Where the employer is not a company Employees contributions only and its interest shall be invested. Investments can be made as follows; Securities of the nature specified in clause (2)(b),(c),(d) or (e) of section 20 of the Trusts Act, Post Office Savings Bank Account in Pakistan Deposited in National Savings Federal Government securities Deposits in NCBs Deposits in NBP Other government securities Any other established financial institutions including mutual funds (subject to maximum of 20% of such deposits or investment at any time in the year)

43 3- Comparison; Investments of the Fund PF; 43 Where the employer is a company Both employer and employee contribution and its interest shall be invested. Investments can be made as follows; In accordance with the provisions of section 227 of the Companies Ordinance, 1984 Deposited or invested in venues as is allowed in case of Non Company Purchase of shares of a public limited company offered for sale inviting public offer by the Federal Government (with the CIT approval)

44 3- Comparison; Investments of the Fund 44 PF Investment Rules, 1996; Investment rules for Provident Funds monies were issued in the year 1996, which specifies the discipline for investments in the listed securities. These are as follows; Total investment in listed securities shall not exceed 30% of the PF. Total investment in any single security or in any single company shall not exceed 5% of its paid up capital. In case of listed shares, only those companies shall be purchased who have a minimum operational record of 5 years, have paid not less than 15%dividend in last 3 consecutive years. In case of listed securities other than in shares only those instrument will be purchased which has been rated minimum BBB by an agency registered with the SECP and the rating is maintained at the time of purchase. Investment will not be made if it is known that the issuer has defaulted.

45 3- Comparison; Investments of the Fund 45 PF Investment Rules, 1996; SRO 261 of May 10, 2002 Investment were allowed in listed unit trusts schemes registered under Asset Management Companies Rules, 1995 subject to the following conditions: (i) Total investment in unit trust schemes registered under AMC Rules, 1995 shall not exceed 50% of the PF (ii) Total investment in any one unit trust scheme registered under AMC Rules, 1995 shall not exceed 20% of the PF (iii)the AMC shall ensure that investment in unit trusts schemes shall be in conformity with the above mentioned conditions and (iv)the unit trust schemes shall be subject to credit rating on annual basis by a Credit Rating Company registered with the SECP and the rating shall be disseminated to the public for information purposes.

46 3- Comparison; Investments of the Fund 46 PF Investment Rules, 2005; (Draft) Investment rules for Provident Funds monies were reissued in the year 2005, which specifies the discipline for investments in the following 3 categories; a) Investment in Listed Securities b) Investment in Listed Unit Trusts Schemes c) Investment in Closed end Fund Schemes.

47 3- Comparison; Investments of the Fund 47 PF Investment Rules, 2005; (Draft) Conditions for investments in Listed Securities are as follows; Maximum investment in listed securities shall not exceed 30% of the PF. Maximum investment in any single company shall not exceed 5% of the paid up capital of that company. Only those companies shall be purchased who have a minimum operational record of 5 years Only those companies shall be purchased who have shown return at least 25% more than the last 5 years period PIB. In case of investment other than in shares only those instrument will be purchased which has been rated minimum BBB by an agency registered with the SECP and the rating is maintained at the time of purchase.

48 3- Comparison; Investments of the Fund 48 PF Investment Rules, 2005; (Draft) Conditions for investments in Listed unit Trust Schemes are as follows; Maximum investment in listed unit trust scheme shall not exceed 50% of the PF. (including the 30% limit of Listed securities) Maximum investment in any single unit trust shall not exceed 20% of the PF money. Unit Trust Fund must be A rated by an agency registered with the SECP and the rating is maintained at the time of investment.

49 3- Comparison; Investments of the Fund 49 PF Investment Rules, 2005; (Draft) Conditions for investments in Closed End Fund Schemes are as follows; Maximum investment in Index Funds/Closed End Funds Schemes shall not exceed 10% of the PF. (within the above 50% limit) Maximum investment in any single fund shall not exceed 5% of the paid up capital of that fund. Only those fund shall be purchased who have shown return atleast 25% more than the last 5 years period PIB. Fund must be A rated by an agency registered with the SECP and the rating is maintained at the time of investment.

50 3- Comparison; Borrowing by and from the Fund 50 PF, GF & Pension Fund Can give the loan to the company Can take the loan from the company The loan has to be interest bearing so as not to jeopardize the investment returns of the PF. Borrowing powers from the Bank are subject to the Deed & Rules and the Company consent VPS; VPS cannot enter into any loan agreement with the company in connection with the benefits payable or receivables to the its employees

51 3- Comparison; Auditors & Actuary for the Fund 51 PF, GF & Pension Fund It is advisable that audit of the PF Trust should be conducted on Annualised basis. Auditor of the company and of the PF Trust need not to the same. Auditor of one Fund trust for e.g. GF or Pension Fund need not to be the same. Audit fee not necessarily from the company, it can also be borne by the Fund itself. Fund can appoint its Auditor itself Actuary is not necessary in case of PF The Actuarial Valuation fee should be borne by the Fund itself and not by the company Fund can appoint the respective Actuary itself VPS; The trustees do not have to deal with the Auditor and Actuary in this case. It is the choice VPS Manager to appoint a reputed firm of Auditors. An actuarial Valuation may not generally be necessary

52 3- Comparison; Bookkeeping & Accounting of the Funds 52 PF; Individual members account, cumulative position of both employer and employee contribution, Permanent withdrawals, Temporary withdrawals,investment valuation, profit calculations, mid period exit and entry of employees & distribution of profits etc. makes accounting cumbersome. In cases where both Islamic Fund and Non Islamic are used the whole exercise of the PF Accounting simply get doubled. Books and Accounting is the responsibility of the trustees and not of the company The trustees can appoint an accountant or can outsource GF & Pension Fund; Accounting is comparatively much convenient to handle. Books and Accounting is the responsibility of the trustees and not of the company VPS; Whole and complete Books of Accounts are maintained just like as in case of any company but this is the responsibility of the VPS Manager itself.

53 3- Comparison; NTN & Annual Tax Returns of the Funds PF, GF & Pension Fund; Annual Tax Return; The filing of Annual Tax Return is must on the Funds being a trust. Trust is considered as a company. 53 Extracts from the definition would assist (i) a company as defined in the Companies Ordinance, 1984 (XLVII of 1984); (ii) a body corporate formed by or under any law in force in Pakistan; (iii) a modaraba; (iv) a body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies; (v) a TRUST, a co-operative society or a finance society or any other society established or constituted by or under any law for the time being in force; (vi) a foreign association, whether incorporated or not, which the Federal Board of Revenue has, by general or special order, declared to be a company for the purposes of this Ordinance; (vii) a Provincial Government; (viii) a local authority in Pakistan; or (ix) a Small Company as defined in section 2; NTN; The Funds should also obtain National Tax Number (NTN) so as to enable it to file the return of income. Special TY; Where the Fund desire to have Tax Year-end different from June end it will have to apply to the CIT for the permission to use the December or any month end as its Tax Year.

54 3- Comparison; Withholding of Tax by Fund PF, GF & Pension Fund; WHT on Payments; All the three Funds are equally responsible Withholding of Income Tax while making payment to Accountant or Actuarial Professional Opinion Investment Manager Employee in certain cases 54 Filing of WHT Statements; Accordingly it is also liable to e file monthly & Annual Withholding Statement failing which the same harsh penalties can be imposed. Service Sales Tax WHT; Where the Fund is registered in LTU it also becomes liable to withheld 1% on the payment of services subject to Sindh Sales Tax

55 4- Other Points 55 PF; GF; Pension Fund; VPS;

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