The Chairman of Securities and Exchange Commission of Pakistan (SECP), Dr Tariq Hassan in a statement the other day emphasised the need for appropriate fiscal reforms with a view to facilitating the investment banks and other non-banking financial institutions to play an effective role in the promotion of investment activity in the country.
Speaking at a luncheon hosted by Escorts Investment Bank Limited in Lahore, he described the present incidence of equal tax on the profits of commercial banks and investment banks as an anomaly. In his view the relatively high rate of taxation faced by investment banks and non-banking financial institutions was a problem for them that needs to be resolved.
He expected that necessary fiscal reforms would be made in the forthcoming budget in order to provide relief to these institutions.
Dr Hassan also informed his audience that quite a number of non-banking financial institutions have forwarded their suggestions to the finance ministry through the SECP, pointing out their problems with particular reference to the relatively to high levies and taxes faced by them.
The SECP has endorsed most of these suggestions, advising the finance ministry/CBR to give a favourable consideration to the matter while formulating the budget proposals.
There can be no two opinions that the rates of taxation in respect of commercial banks and non-banking financial institutions and the investment banks should not be kept far apart.
As the tax rate on commercial banks has been brought down over the last two years, there is reason to lower the tax rate for the non-banking institutions also to such a level as could make it possible for these institutions to maintain the viability of their operations and improve their financial position.
Investment banks do not perform commercial banking as they cannot accept deposits from the general public with the exception of deposits which are at times made mandatory for investors taking advantage of loan financing from these banks.
Since they do not operate as commercial banks, they are not supposed to offer working capital loan financing on a short-term basis. As a result their profit earning potential remains restricted to the volume of their long-term loan financing to support capital formation in the economy.
Their resource base consists of mainly paid-up capital and free reserves, while lines of credit from foreign institutions also serve as a source of financial inflows.
In this context, they deserve support or encouragement in the form of a relatively lower rate of tax incidence as compared with commercial banks, so that they may pursue their objective of promoting capital formation with greater confidence.
Other non-banking financial institutions like the leasing companies and Modarabas depend mainly on their borrowings from commercial banks in order to supplement their financing capability.
Under these circumstance they are usually beset with resource constraints in their efforts to expand their operations.
The cost of financing projects for them is relatively on the higher side but other terms and conditions such as the repayment period and the mode of repayment are more favourable to their clients, which explains the popularity of lease financing in the country.
In the absence of DFIs with comparatively large capital base, the role of investment banks, leasing companies and Modarabas has registered significant progress over the last two decades.
These institutions have been contributing significantly to the process of long-term financing of industrial projects.
The importance of non-banking financial institutions is undoubtedly on the increase in the sphere of fixed capital investment activity, and hence the need for rationalizing the taxation incidence for them.
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