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ISLAMABAD: Pakistan Banks Association (PBA) has proposed to the Federal Board of Revenue (FBR) to apply a uniform tax rate of 29 percent on banks; abolish four percent Super Tax and reduction in the income tax rate from 29 to 20 percent for microfinance banks in budget (2022-23).

According to the budget proposals of the PBA for 2022-23, received at the FBR Headquarters on Thursday, the banking sector is one of the largest contributors to the exchequer in the form of payment of taxes, including income tax, federal excise duty, provincial sale tax on services and in the collection of withholding tax, and is playing a vital role in the economic development of the country and supporting major initiatives of the government, the FBR and the SBP.

For the year ended December 31, 2021, the banking sector paid total taxes of about Rs178 billion and collected, and paid to FBR, withholding tax of over Rs162 billion. Therefore, the total contribution to the exchequer from the members of PBA was over Rs340 billion for that year.

One of the key recommendations of the PBA is that the government has taken a very positive step by gradually/progressively reducing income tax rates for business income of corporate sector, starting from 35 per cent to 34 per cent for tax year 2014 and down to 29 per cent for tax year 2019 onwards. Unfortunately, no such reduction has been provided for the banking sector.

The PBA stated that the tax rate of 35per cent for banks is not only one of the highest in the region, but also very high when compared to other business sectors in Pakistan, including the financial service sector, like mutual funds, the DFIs, leasing companies, insurance companies etc. which are taxable at the rate of 29 per cent.

It is therefore proposed that in order to provide a level playing field, the banks should also be taxed at a uniform tax rate of 29 percent as is applicable for the other sectors of the economy, it proposed.

The PBA has also proposed that the super tax was introduced in the tax year 2015 at four percent for banks and at three percent of persons other than banking companies having an income of Rs500 million or more. It was only a one time levy to cater to the specific needs for rehabilitation of temporarily displaced persons. However, it was extended each year for both banking and non-banking sectors and abolished for non-banking sector in the tax year 2020.

Now super tax at four percent has been made a permanent feature for the banking sector with the promulgation of the “Tax Laws (Amendment) Ordinance 2021.”

This super tax is discriminatory, as not only the rate was one per cent higher for the banking sector as compared to the non-banking sector, but now with recent amendment, only the banking sector has been singled out for levy of Super Tax. This means all other sectors of economy including financial institutions and insurance companies have been exempted from Super Tax.

It is therefore, proposed that Super Tax at four per cent for banks, being discriminatory, should be abolished.

Another proposal is related to the Micro Finance Banks (MFBs) - Division II (i) of Part I of First Schedule of Income Tax Ordinance, 2001.

Currently, the income tax rate of 29 percent is applicable on Microfinance Banks. The rate of tax may be reduced to 20 per cent, since Microfinance Banking sector is supporting and providing microloans to the poor and needy customers. Also, Microfinance Banks are playing an important role in financial inclusion.

As always in the past, the banking sector stands ready to support the FBR in its efforts to grow the taxation base and revenue in fair and equitable manner, the PBA added.

Copyright Business Recorder, 2022

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