Accounting for income tax in religious bodies can be regressive.

Accounting for income tax in religious bodies can be regressive.

The Order of exemption by the Finance Minister in February, 2017 to allow religious bodies from Income tax stated that “a religious institution or organisation” means a religious institution or organisation which is established in Malaysia exclusively for the purpose of religious worship or the advancement of religion and is not operated or conducted primarily for profit.

That order was in place after the non Muslim religious bodies complained about the amendment in the Income Act 1967 in late 2016 to tax all religious bodies in 2017 hence  departure from the privilege of no tax scenario for all religious bodies since 1963 and earlier.

With the Order of Exemption, the religious bodies have felt contented with the new status.

But we need to be beware of anything that can come from the Inland Revenue Board (IRB) as how the Order of Exemption is to be viewed especially the Income Tax Act 1967 was amended and empower IRB to act on all or any religious bodies to verify if any such bodies are qualified for exemption if there are profits in such mutual organisations.  The Order of Exemption is not automatic for any  religious organisations and it is conditional as to how such organisation operate themselves as far as revenue from various sources are obtained although all such organisations are largely financed by donations.  Any donations or the resultant amount of donations after expenses should not be taxable.  Even any investment income such as rental and operational profit from such fund as donated should not be taxable.  Such investment incomes would be utilised for the daily operation of such organisations.  So the long time exemption of religious bodies is therefore in order.

The temporary new Order of Exemption in February, 2017 may bring temporary relief for religious bodies properly registered. The real scenario is not over yet. There may be some problem to be addressed for certain bodies since the British colonial time.  What would be the attitude of the IRB on such very religious bodies?

With the new Exemption Order and the amended Income Tax Act 1967, would the IRB still proceed in its power to call for certain returns of certain religious bodies to establish if such bodies qualify for exemption order as the order is still conditional on “profits”as in (and is not operated or conducted primarily for profit) ?

Who knows one fine day IRB in its desk or field audit decide to call up some well-to-do religious bodies to show the records?  What would happen if such religious bodies do not maintain anything like what the IRB would require to be examined?  Would such religious bodies be penalised if such bodies make much profits/surplus in their “draft final accounts” likely not suitable for the tax purpose?  Business corporations would know what to do but religious bodies would have shortcoming in this aspect.

Is IRB really happy with the recent Exemption Order as it has “defeated” IRB’s intention to resolve any anomaly faced by IRB in its effort to boost tax collection?  The amendment was a normal strategy of IRB to put all grey areas in order for tax jurisdiction.

Was it that there was a report that some people in the religious bodies earning very good income of up to RM200,000 annually did not report such income to the IRB?  Please do not let such violation by bad apples to destroy a well intended tradition for decades religious bodies had enjoyed to cement the harmony in multi racial and multi religious society.

Some view the change as affecting non Islamic religious bodies only although exemption order mentioned “religious bodies” meaning all such bodies.  These people do miss the point. It all depend on how IRB view such changes and we do not have any say in how IRB deal with the religious bodies. But one thing is for sure that Islamic bodies are largely financed by the Government and if such bodies do have to pay any income tax, such taxes would very likely come from the Government too.  For the non Islamic bodies, it is a burden solely to be borne by such bodies possibly with devastating impacts financially indisposed.   Many such religious bodies do operate with shoe string budget and yet have to find additional donation to take care of the accounting, auditing and taxation services in line with complications of tax matters.

Unless the amended section in the Income Tax Act 1967 is repealed as the Order of Exemption can be withdrawn too (nothing to stop the Finance Minister), I would advise all religious bodies leaders to take cognisant of the fact that IRB still have the power to do its operations on religious bodies.  Since it is effective from 2017, I would advise the religious bodies to make sure they have all the records and the financial statements (in tax compliance format) be prepared ready in the file for any eventuality of IRB acting according to its power.  As submission of annual returns is now dispensed with, and IRB may not act so soon but maybe with 6 years or nothing at all, it is still wiser to be prepared for such eventuality to avoid any tax on “estimated” income when such incomes do not exist.

Perfectly right for IRB to act but how IRB would act is beyond all the taxpayers including religious bodies. Some may appeal but the process of appeal can be very expensive not affordable for most religious bodies.  In good faith, would IRB come out with their good intention?

Joshua Y C Kong  10 April, 2017