Bank deposits, NSS, debt mutual funds: EAC group for withdrawal of WHT on cash

The working group on Banking sector reforms of the Economic Advisory Council (EAC) has recommended abolition of 0.3 percent withholding tax on cash withdrawal from banks and existing 10 percent withholding tax on bank deposits, National Saving Scheme (NSS) and debt mutual funds may be assessed under normal law.
In its recommendations submitted before the EAC meeting here on Saturday, the working group on Banking Sector Reforms recommended elimination of 0.3 percent withholding tax on cash transactions. In lieu, withholding tax of 10 percent on bank deposits, NSS and Debt Mutual Funds should not to be treated as 'Full and Final' tax liability. It has been further recommended that the provisions for bad debt should not be subject to FBR review, once the State Bank of Pakistan (SBP) has approved amounts.
However, the corresponding tax already charged by the FBR could be refunded via Bonds to mature over 3 years. The group has further recommended that revision of the Forced Sales Value (FSV) Rules would release capital for banks, aiding recovery in bank lending. It has been recommended that the financial regulators should encourage development of government and Private Debt Markets through integrated supervision of Debt Capital Markets.
As per banking committee recommendations, the institutional arrangements would be to create an authority namely Debt Management Authority (DMA) within the Ministry of Finance. The DMA should be set up as attached department in Finance Ministry under Finance Secretary. The specific authorities can be provided to CEO, DMA by administrative order from Finance Secretary, and FRDLA 2005 be correspondingly amended.
The independent Board for DMA should be established with Secretaries of Finance and EAD; DG SBP and 2/3 private sector representatives with expertise in Economics/Finance. The DMA should be given powers to hire professionals from market, covering Research, Product development, Sales, and Risk Management and salary scales in line with treasury professionals at SBP, the working group on Banking Sector Reforms added.
Banking sector recommendations also include duties to be invested in Debt Management Authority (DMA) function. It covered preparation of annual debt plan, to accompany budget; decision for cut-offs in market debt instruments; finalisation of annual Foreign Currency Borrowing (FCY), both programme and project; rate setting for NSS instruments; introduction of new financial products and instruments and approval of public financing terms where these will be covered by sovereign guarantees.
According to the banking sector recommendations, the centralised and efficient management of GOP debt could reduce sharply rising interest costs, aiding both GOP and the economy. It said that the debt management process is fragmented. Based on the PSBR, different entities (mainly EAD, NSS, Finance Ministry) contract debt in line with their own targets along their own timetable. The mandate of the Debt Policy Co-ordination office is to ensure compliance with statutory directives that apply to rules for Reporting of all debt.
It said that national debt, at $125 billion, is multi-currency/multi tenor with diversified investor/lender groups; volatility added by very short-term nature of domestic Debt and uncertainties re external flows. The size and volatility have fundamental implications for national investment and growth. For sustainable cost and risk optimisation, Debt Management Authority has to be centralised.
It must be handed specific, strategic responsibilities: It included ownership of Computerised National Debt data base; production of central business plan for the PSBR, contemporaneous with annual budget; advance portfolio guidelines for allocation of debt between currencies; maturities; and type; timetable for different debt issues; targets for differing investor groups; market interface, via professional research and via dialogue with intermediaries; risk management, with pre-emptive strategies for typical portfolio issues, as a discrete and independent function and orderly development of Government Bond markets.