Govt issues show-cause notice to mutual funds in sub judice WWF case

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KARACHI – The government has kept issuing show cause notice to the mutual funds for the sub judice matter of not making contributions to the Workers’ Welfare Fund (WWF). “There have been instances whereby show cause notices under Section 221 of the Income Tax Ordinance, 2001 have been issued to a number of mutual funds for the recovery of WWF,” Arif Habib Investments told its shareholders at Karachi Stock Exchange.
The government and Mutual Funds Association of Pakistan (MUFAP) have long been at loggerheads over the implementation of Section 2(f) of the WWF Ordinance, 1971 that requires the Funds to contribute at least two percent of their cumulative profits in the welfare fund. The government through Finance Act, 2008 had amended Section 2(f) of the WWF Ordinance, 1971 to make it mandatory for all the establishments to make the contributions.
The amended ordinance made applicable the definition of ‘Industrial Establishment’ to all the establishments that were working under West Pakistan Shops and Establishment Ordinance, 1969. The changes fell heavily on the Funds, 80 percent of which comprise institutional investors, who subsequently challenge it through filing a constitutional petition in the Sindh High Court.
The mutual funds, deeming themselves as non-establishments, prayed to the court that they be declared exempted from the payment of contribution. The judiciary, however, rejected the plea on technical grounds saying the MUFAP was not the aggrieved party. The court decreed that the aggrieved parties should approach the courts for the said petition.
As a fresh petition was filed in the court by the trustees of some mutual funds and investors, the Ministry of Labour and Manpower issued a letter declaring that mutual funds were not liable to contribute in the WWF. “Mutual Fund(s) is a product which is being managed or sold by asset management companies, which are liable to contribute towards Workers Welfare Fund under Section-4 of WWF Ordinance 1971,” the ministry clarified in a subsequent letter issued on July 5, 2010.
“However, the income of Mutual Fund(s), the product being sold, is exempted under the law ibid,” it added. Basing its stance on the ministry’s statement the management of Arif Habib Investment has decided not to pay its share of contribution in the WWF. “The management company is of the view that notwithstanding the show cause notices issued to a number of mutual funds, WWF is not applicable to the mutual funds,” the asset management firm told its shareholders at KSE.
Citing clarification of the ministry, the company management contended that “the Ministry… creates vested right, hence no provision of Rs 0.24 per unit has been made in respect of WWF.” It said legal proceedings in respect of the mutual funds’ petition were currently in progress after the ministry had filed its response contesting the said petition on December 14 last year.
In its recommendations for the Finance Bill 2010, the Securities and Exchange Commission of Pakistan has reportedly asked the Ministry of Finance to exempt the pooled-investment and open-ended mutual funds from WWF contributions.
The apex regulator argued that mutual funds, provident funds, approved pension funds, gratuity funds and superannuation funds were structured as trust in compliance with the commission’s regulatory framework and income tax rules.