Micro-finance institutions (MFIs) will have to pay taxes equal to the tax rate of companies if they do not keep the income from service charges of micro-credit operations in a revolving fund, according to the changes in the income tax law passed yesterday by parliament.

The move is opposed by MFIs and non-government organisations (NGOs), who say there is no need to add this provision in the law as they pay income tax and value-added tax during the acquisition of assets.

This will create confusion, said the NGOs in a filing to the NBR, seeking to remove the rule in the law.

NGOs also urged the government to include the provision of foreign and local grants in the list of tax benefits taken by voluntary organisations as the new income tax law, which replaces the Income Tax Ordinance 1984, provides a tax benefit to donations received by religious and charitable organisations.

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

The NBR through a clarification in October 2022 included NGOs in the definition of the company saying that "any body-corporate established or constituted by or under any law in force" be treated as a company.

NBR officials said they defined NGOs as companies as there was no clarity at the field levels, and field offices used to collect taxes based on their own judgement.

In the new income tax, the NBR has incorporated the definition that NGOs would be considered as companies.

As such, the tax rate on the income of NGOs becomes equal to the tax rate of companies which is 27.5 per cent in case the business fails to comply with certain rules.

However, officials said not all the NGOs will face increased tax equal to the tax rate of companies.

Officials said though the NBR has included NGOs in the category of companies, it has not removed tax exemptions on the income from micro-credit operations.

But the NBR imposed a condition that income from micro-credit operations must be kept in a revolving fund to avail of the tax exemption.

Any MFI that diverts micro credit's income to other businesses will face tax equal to the tax rate a company pays.