ISLAMABAD: The budget proposals of the State Bank of Pakistan (SBP) for 2020-2021 are under consideration of the Federal Board of Revenue (FBR) for resolving tax-related issues of the banking industry and proposal to abolish withholding tax on cash withdrawals from banks due to increase in cash-based transactions in the country.
Sources told Business Recorder that the Ministry of Finance and the FBR were seriously considering the budget proposals of the State Bank of Pakistan (SBP) for 2020-2021.
SBP Governor Dr Reza Baqir has shared few proposals with the Ministry of Finance/FBR for consideration and their possible inclusion in the upcoming Federal Budget 2020-2021.
The proposals focus on: (i) the size and composition of the stimulus that the budget should target; and (ii) the resolution of taxation issues faced by the banking industry as well as provision of tax incentives to small businesses enabling them to sustain their business during the Covid-19 pandemic situation.
The proposals on the size of the budget state, we strongly believe that the level of fiscal stimulus announced so far falls short of what is needed to support the economy during this critical time.
The economy is expected to contract for much of the rest of calendar year 2020, and any recovery in the first half of 2021 is likely to be tepid at best.
Viewed in an international context, our recovery is projected to be weaker than most other countries but our fiscal stimulus at 1.2 percent of the GDP in terms of genuinely new measures, has so far been among the lowest globally, the governor SBP has said.
In our view, at least a tripling of the fiscal stimulus to around four percent of the GDP of new measures is needed to support the economy during these difficult times.
To achieve this, we would recommend targeting a primary fiscal deficit that is at least as large as the one projected for FY20, to ensure that there is a significant positive fiscal impulse rather than a contraction that would further damage the already weak economy.
More aggressive fiscal action would also complement the recent historic easing of monetary policy undertaken by the State Bank (which has cut interest rates more than any other country), helping to provide support to households and businesses during the temporary phase of economic disruption due to the Covid-l9.
In this context, we would urge the government to undertake large-scale public investment projects that generate sustained output gains and provide income and jobs support, especially to daily wagers and informal workers.
There is significant appetite for government paper in the highly liquid banking industry, as evidenced by secondary market yields being below the policy rate, such that financing a larger deficit in FY21 should be achievable.
In addition, given the high multipliers typically associated with public-sector development projects, the returns should be high, translating into higher growth in the future that will help reduce public debt levels once the pandemic subsides, he said.
We feel that this inter-temporal trade off a higher fiscal deficit and debt this year in return for higher economic growth in the years ahead is the right one to be striking during this time of exceptional economic weakness and uncertainty.
Being overly prudent now risks undermining growth further, which would hurt debt sustainability much more than a temporarily higher deficit focused on high-quality spending.
More generally, at elevated levels of public debt such as those in Pakistan, higher growth becomes much more effective in bringing debt dynamics down than austerity, Governor SBP said.
With regard to the specific tax proposals for the banking industry, our recommendations have been divided into three parts and are summarized as under:
The First Part proposes a few amendments in the tax laws for rationalizing various tax provisions concerning the financial sector such as corporate tax rate, super tax, profit on debt, withholding tax on cash withdrawals etc.
The Second Part recommends provision of rebates/concessions to Micro Finance Banks (MFBs), Small and Medium Enterprises (SMEs) and Sharia compliant businesses to promote financial inclusion and to encourage the growth of Sharia compliant businesses.
The Third Part suggests certain amendments in the Income Tax Ordinance 2001 enabling the State Bank of Pakistan (SBP) and its subsidiaries to capture the entire scope of tax exemptions, which are already available to them under their relevant laws.
While the details of subject tax proposals may be perused, the SBP would like to emphasize upon the following aspects of a few tax proposals for consideration in the Federal Budget 2020-2021.
Income Tax Exemption for Corporate Restructuring Company: Of late, the SBP in collaboration with the Ministry of Finance (MoF) helped the establishment of Corporate Restructuring Company (CRC).
The primary objective of the CRC is to transform the financially distressed companies into economically and operationally viable companies and also resolve the issue of non-performing loans (NPLs) of financial institutions.
The establishment of CRC will help in enhancing business growth and support in creating employment opportunities.
However, in order to facilitate its growth and operations, there is a dire need for provision of an economic incentive to CRCs in the shape of tax exemption.
Therefore, the SBP has proposed a tax exemption for the CRCs for initial period of five years from starting its operations.
In the past, to encourage the NEFBs sector, a similar tax exemption was provided to MFBs.
Withholding Tax on Cash Withdrawals: It may be appreciated that the primary object of the withholding taxes on cash withdrawal from financial institutional was to discourage the cash economy and encourage documentation for economy; however, on the contrary, it is actually encouraging cash-based transactions in the country and resulting into increase in currency in circulation due to this operational tax the small depositors avoid keeping their money in the financial institutions that leads to financial disinter-mediation in the country; whereby, individuals and businesses reduce the use of banking channels for meeting their day-to-day financial needs and prefer to keep the cash in hand. This is also evident from the currency in circulation to deposit ratio, which has increased from 29.3 percent in June-15 to 41.1 percent in January-20.
It is, therefore, suggested that the WHTs on cash withdrawals may be removed that will help to improve the deposit mobilization and growth of financial inclusion.
Rate of Corporate Tax and Super Tax for Banks: The banking industry is playing a vital role in implementing the various relief measures and initiatives taken by the government and the SBP to dampen the impact of the Covid-19 pandemic.
It is a fact that the existing Covid-19 situation has negatively affected every segment of the economy, which may lead to a surge in the NPLs of banking sector.
Therefore, it is equally important that the banking sector may also be given some incentives, so as to ensure the continuity of much-needed banking support during these difficult times.
The SBP has therefore, proposed to align the corporate tax rate applicable on banks with that of other companies by reducing it from 35 percent to 29 percent.
In the similar context, the super tax of four percent, in addition to the corporate tax rate, may also be abolished this year to enhance the lending and loss absorption capacity of banks in these challenging times.
"I hope that the SBP's proposals will be considered favourably for incorporation in the forthcoming budget.
These proposals will help support growth and employment amid the Covid-19 situation and to rationalise the tax burden on the banking sector, which will consequently enhance the stability of our financial sector and its ability to support the recovery once the pandemic subsides," the Governor SBP added.
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