Tax on religious organisations applies across the board, experts say

Most tax experts agreed that the Income Tax Act’s provisions did not distinguish between Muslim and non-Muslim bodies. — File pic
Most tax experts agreed that the Income Tax Act’s provisions did not distinguish between Muslim and non-Muslim bodies. — File pic

KUALA LUMPUR, Dec 27 — Tax experts said the amended law to tax religious organisations will affect both Muslim and non-Muslim groups, refuting a claim that Islamic bodies may be spared.

Aruljothi Kanagaretnam, president of Chartered Tax Institute of Malaysia, said the Income Tax Act’s provisions did not distinguish between Muslim and non-Muslim bodies.

“Tax law does not distinguish any religion. How organisations are formed and funded may have some implications,” he told Malay Mail Online when contacted yesterday.

Tax lawyer S. Saravana Kumar similarly noted that the amendment to paragraph 13(1)(b) of the Income Tax Act’s Schedule 6 — which includes non-profit religious organisations and institutions as being eligible for tax exemption — covers all religious bodies.

“The proposed amendment to paragraph [13(1)(b)] doesn’t discriminate between Islamic and non-Islamic bodies.

“However there is another exemption available under paragraph [13(1)(a)] where most Islamic bodies are exempted from income tax,” Saravana told Malay Mail Online when contacted yesterday.

Under paragraph 13(1)(a), institutions or organisations which are approved under the law’s Section 44(6) also enjoy tax exemption on their income.

The Inland Revenue Board’s website contains a list of organisations approved for tax exemption status under Section 44(6). A check by Malay Mail Online found that organisations linked to Islam, Hindu, Buddhism and Christianity were all similarly included in the list.

Parliament recently passed an amendment to paragraph 13(1)(b) to require “contributions” received by non-profit religious bodies to be for “charitable purposes” to qualify for exemption from tax.

Churches recently expressed concern that the amendment would only affect non-Muslim bodies.

Local daily The Borneo Post had last week reported that the new tax law change would allegedly only affect non-Muslim bodies in Sarawak, as mosques and Muslim welfare bodies there fall under a state Islamic law, the Majlis Islam Sarawak Ordinance 1984.

Tax consultant Veerinderjeet Singh also told Malay Mail Online that the tax exemption laws does not mention non-Muslim or Muslim bodies and would therefore apply to all bodies.

“Fact is the tax amendment does not discriminate between Muslim and non- Muslim religious bodies,” the executive chairman of Axcelasia Inc said when contacted yesterday.

“Fact is that any religious body that falls under the Income Tax Act will be subject to the new tax amendment. A Muslim body cannot be automatically eligible for S 44(6) treatment or be tax exempt unless the Muslim body is a government body in which case it is exempt as the government is not subject to income tax,” he added in his emailed response.

He said that organisations listed as being approved under Section 44(6) for tax exemption are charitable institutions that would enjoy full exemption on their income.

As for places of worship, they would not be able to go under the Section 44(6) tax exemption category, but can instead apply for the building funds that they receive to be tax-exempt under this category.

“A temple, mosque or church is not categorised as a charitable institution as Para 13 already granted them a tax exemption. So they are not eligible for S44(6) status.

“The only time these bodies get S44(6) status is for a building fund set up where they get donations from the public which is why they need the status so that donors get a tax deduction for their donations,” he said.

Addressing questions on whether mosques or Muslim bodies would be governed by state Islamic laws when it comes to matters of tax exemption, Veerinderjeet clarified that such matters fall under the Income Tax Act.

“State Islamic laws do not have the power to grant tax exemption — that can only be done under the Income Tax Act,” he said.

He also explained that whether or not mosques would be exempt from paying income tax would depend on the legal structure under which they are set up, with those coming directly under the federal government or state government as government entities not taxable.

“But if under the state or federal Islamic laws, all mosques are governed by a government body, then that could mean that no income tax applies as the government and ministries et cetera are not taxable,” he said.

“If it is owned by a statutory body, that statutory body is a separate entity which is taxable unless it has a tax exemption from the Minister of Finance under the Income Tax Act,” he said, adding that there is no specific provision for this but that the minister can grant tax exemption for statutory bodies based on the facts and circumstances.

“If a mosque is set up by a private organisation, then it is taxable but Para 13 of Schedule 6 grants an income tax exemption to such religious bodies,” he said.

The Income Tax Act’s Schedule 6, which lists income which is exempt from tax, includes under paragraph 13(1)(b) “a religious institution or organisation which is not operated or conducted primarily for profit and which is established in Malaysia exclusively for the purposes of religious worship or the advancement of religion”.

However, in the Finance Bill 2016 that was passed in the Dewan Rakyat on November 23 and by the Dewan Negara on December 15, an additional requirement that the income be meant for “charitable purposes” was introduced.

The explanatory note for the Bill says this amendment to the tax exemption requirement will take effect from the year of assessment 2017 and onwards.

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