Banking firms: SBP proposes abolishment of super tax

State Bank of Pakistan (SBP) has proposed budget makers to abolish super tax on banking companies in coming budget (2018-19). According to the budget proposals of the SBP for 2018-19, super tax has been charged for the last three years on banking sector at higher rate of four percent whereas for other sector the rate is three percent. It is proposed that the super tax should not be further extended.
The rationale of the proposal is that the super tax was introduced vide Finance Act 2015 with retrospective effect for one year. Although it was levied for one year, yet the levy has been extended every year. Further, this tax is being charged on banking sector at higher rate of four percent. With the levy of super tax @ 4%, total tax on banking sector has increased to 39%.
It is recommended that super tax should not be extended further, the SBP said.
The SBP has proposed that the banks are taxed at the rate of 35% of their taxable income. Tax rate should be reduced to 30% for tax year (TY) 2018-19 making it in line with other industries. Presently tax rates for business income of corporate sector have been reduced from 35% to 30% for tax year 2018 and onwards.
The banking industry is already contributing in government revenues higher than other industries. Despite this fact, the tax rate has been greater than the corporate sector of the economy, the SBP proposed.
The SBP has also submitted a proposal on the profit on non-performing debts of a banking or development finance institutions.
A new subsection (3) is proposed to be added in section 30 of the Income Tax Ordinance as follows:
"(3) Deduction shall not be allowed to the borrower for markup/interest (profit on debt) incurred on non-performing debts, if profit on debt is not paid within stipulated time and becomes overdue and is credited to suspense account by the banking company or development finance institution as per Prudential Regulations of the State Bank of Pakistan. However, borrower shall be allowed deduction for the amount paid in the year in which payment is made."
The rationale for proposal is that the proposed sub-section will specifically cover taxation of overdue profit on debt in the hands of borrower who is presently enjoying tax benefit by way of taxable deduction of financial charges and Government remains deprived from tax revenue.
Any benefit availed by way of waiver of markup/profit/interest on debts under any scheme issued by State Bank of Pakistan is taxable in hands of borrower as "Income from Business" under section 18 of the Ordinance. However, there is no treatment available in the Ordinance regarding overdue markup/interest/profit on debt, which remains unpaid by the borrower, who also claims this amount as tax-deductible expense. The amount of overdue markup/interest/ profit on debt should be taxed in the hand of borrower, the SBP added.