The Counsel

Case Studies

Workers Welfare Fund: Taxing the Mutual Funds

by Our Correspondents

Pursuant to an amendment in the Workers Welfare Fund Ordinance, 1971 (“WWF Ordinance”) through the Finance Act, 2008 (hereinafter “Amendment”), the definition of “industrial establishment” has been widened by incorporating the definition of “establishment” as set out in the West Pakistan Shops and Establishment Ordinance, 1969 (“Establishment Ordinance”). The said definition of “establishment” in the Establishment Ordinance also includes therein the definition of “commercial establishment” also contained in the Establishment Ordinance. The effect of the Amendment is that now all “establishments” (including all “commercial establishments”) shall contribute 2% of their total income (“Contribution”) to the Workers’ Welfare Fund (“WWF”) in terms of the WWF Ordinance. One important implication of the Amendment is that since the definition of “commercial establishment” includes charitable or other trusts, it encompasses inter alia all mutual funds, collective investment schemes and voluntary pension funds (“Investment Funds”), which are now required to annually remit their Contribution to the WWF.

In light of this development, the Mutual Funds Association of Pakistan Limited (“MUFAP”) had filed a Constitution Petition No. D-2764 of 2009 (“Petition”) before the High Court of Sindh at Karachi challenging the application of the Amendment to Investment Funds and seeking the Court to, inter alia, declare that Investment Funds are not “industrial establishment[s]” under the WWF Ordinance and therefore not liable to pay the Contribution to WWF. In support of the relief sought by MUFAP, the following submissions were inter alia made to the Court:

(i) The Investment Companies do not employ any worker(s) and, therefore, the provisions of the WWF Ordinance are not applicable to them. In this regard, the MUFAP relied upon the preamble of the WWF Ordinance which states clearly the intent of the Legislature viz. that the WWF Ordinance is for the benefit and welfare of workers.

(ii) That MUFAP is an “aggrieved person” under Article 199 of the Constitution of Pakistan, 1973 (“Constitution”) as its membership comprises of Investment Funds who are aggrieved as a result of the Amendment and hence, MUFAP is entitled to the relief sought in the Petition. Further, it was submitted that MUFAP is a licensed ‘Trade Organisation’ and is a public company limited by guarantee, which has been formed to protect the interests of the Investment Funds.

(iii) That since the Investment Funds are registered as trusts, the Establishment Ordinance is not applicable to it by virtue of Section 5(1)(iii) thereof which, in effect, provides that the said Ordinance shall not apply to “a trust … which is not run for profit or in the course of its business does not make any profit or gain”.

In rebuttal, the Respondents (Federation of Pakistan through Ministry of Finance and Secretary Workers Welfare Fund Division, Ministry of Labour) contended, inter alia, that the Petitioner is not an “aggrieved person” within the meaning of Article 199 of the Constitution due to the fact that it is not directly affected by the Amendment and is a legal entity distinct from its members.

The Court dismissed the Petition in terms of its Judgment dated May 12, 2010 (“Judgment”) (reported at 2010 Pakistan Labour Cases 306) and held that MUFAP is not an “aggrieved person” since the grievance complained of does not directly affect the Petitioner and even otherwise, given that the Investment Funds were not parties to the Petition, any judgment rendered in the Petition would not be binding on them. Moreover, in relation to MUFAP’s contention that it does not employ any worker and hence, the provisions of the WWF Ordinance are not applicable to it, the Court rejected same by observing that there is no such condition mentioned in the WWF Ordinance, as has been provided in other laws such as the Industrial and Commercial Employment (Standing Orders) Ordinance, 1968, wherein it is specifically provided that the said Ordinance does not apply to “establishments” where less than twenty workers are employed. In this regard, the Court observed that:

“It is also no one’s case that separate accounts for benefit of workers is maintained and the amount paid to the Workers Welfare Fund by an establishment is utilized for the benefit of workers of that establishment by which a particular amount is collected. Therefore, purpose of this Ordinance appears to be to collect funds from all industrial establishments (as defined at a given time) and then to utilize them for benefit of workers employed wherever they may be.”

As regards MUFAP’s contention pertaining to the Investment Funds being registered as trusts and hence falling within the exemption of Section 5 of the WWF Ordinance discussed above, the Court held that:

“It may however, be pointed out that while “charitable or other trusts, whether registered or not, which carried on, whether for the purpose of gain or not any business, trade or profession” has been included in the definition of Commercial Establishment as contained in the Ordinance of 1969 in Section 5 thereof [whereas] a trust which is not run for profit or in the course of its business does not make any profit is excluded from the applicability of Ordinance, 1969. Therefore, it will be a question which can only be decided when a trust approaches this Court and after considering peculiar facts and circumstances of that trust.”

The Court, on the basis of the aforementioned reasons, dismissed the Petition and held that the WWF Ordinance is applicable to the “establishment of the petitioner” although the applicability of the Amendment to the “establishment of the petitioner” was not in issue in the Petition as it related to liability of Investment Funds to make Contributions under the WWF Ordinance.

Subsequently, the Workers Welfare Fund, Ministry of Labour and Manpower, Government of Pakistan (“Ministry”) issued a letter dated July 8, 2010 to MUFAP, wherein it, inter alia, stated that the Contributions are not to be levied on the distributable profits of the Investment Funds, which are required to be disbursed pro rata to its members / investors. Thereafter, the Ministry in terms of another letter dated July 15, 2010 further clarified that “Mutual Fund(s) is a product which is being managed / sold by the Asset Management Companies which are liable to contribute towards Workers Welfare Fund under Section 4-WFF Ordinance 1971. However, the income on Mutual Fund(s), the product being sold, is exempted under the law ibid.” Therefore, it is apparent from a cumulative reading of the Ministry’s letters that the Investment Funds being operated by the Asset Management Companies are exempted from the provisions of the WWF Ordinance. However, it appears that the Ministry’s letters / clarifications have not taken cognizance of the Judgment especially in light of the fact that the Judgment is binding on the Ministry and MUFAP.

Notwithstanding the above, it appears that the Ministry and MUFAP agree to the extent that the Amendment should not apply to the Investment Funds managed by the Asset Management Companies as these are ‘pass-through’ investment vehicles for the benefit of the unit holders given that the profits flow through to the unit holders, which are also exempted from income tax under the Income Tax Ordinance, 2001 (See Clause 57(2) of Part I, Second Schedule of the Income Tax Ordinance, 2001 read with Regulation 63 of NBFC Regulations).

On the other hand, it could be argued that since the Funds are generating profits for the unit holders and do indeed make profits in the course of normal business, albeit to distribute the profits to the unit holders (being beneficial owners), the Investment Funds could still be considered in the strict sense as “industrial establishment[s]” for the purposes of the WWF Ordinance, which also appears to be the reasoning discussed above in the Judgment.

Given the far-reaching impact of the Judgment to individual investors, pensioners and corporate investors alike and keeping in view the Ministry’s abovementioned letters, it should be ascertained whether the Amendment is applicable to the Investment Funds. There are also serious concerns being raised with regard to whether the Amendment operates in a discriminatory manner in violation to certain fundamental rights enshrined in the Constitution (Article 25 of the Constitution). For instance, WWF would not apply to investors investing directly through the stock exchanges but will be applicable to investments made through Investment Funds. Further, another potential instance of discrimination may be “establishments” owned or controlled by the Government are exempt from making Contributions to the WWF (see the proviso to Section 2(f) of the WWF Ordinance). However, as a matter of industry practice, Government “establishments” (e.g. pension / employee funds of public sector corporations) invest alongside private investors through Investment Funds whose earnings form part of the “total earnings” of such Funds. Thus, a situation would arise where the portion of investment in a particular Investment Fund belonging to a Government “establishment” would have to be excluded while computing the Contribution payable by such Fund to the WWF.

Accordingly, it may be contended by some that the Amendment may lead to discrimination and be a source of further complication and litigation. In a recent development, several pension funds, mutual funds and private investors have filed fresh petitions before the High Court of Sindh, which will be heard by the Court in early 2011.

The author is Zohaib Ahmed, a Barrister and an Associate at Orr, Dignam & Co, at Karachi.

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