KARACHI: Pakistan Banks Association (PBA), demanding a level playing field, has proposed to the Federal Board of Revenue (FBR) for a phase-wise reduction in the tax rate for banks, ie, from 39 percent to 29 percent, as is applicable for the other sectors of the economy.
According to PBA proposals for federal budget 2023-24, the tax rate of 39 percent 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 financial service sector, such as mutual funds, DFIs, leasing companies and insurance companies, which are taxable at the rate of 29 percent.
The government had taken a very positive step by gradually reducing income tax rates for business income of corporate sector, starting from 35 percent to 34 percent for tax year 2014 and down to 29 percent for tax year 2019 onwards.
Budget proposals: PBC asks FBR to discourage use of cash in economy
Unfortunately, no such reduction has been provided for the banking sector. In fact, the tax rate for banks was further increased to 39 percent in the federal budget 2022-23, PBA maintained.
Therefore, to provide a level playing field, PBA has proposed that the banks should also be taxed at a gradually reducing tax rate of 29 percent, as is applicable for the other sectors of the economy. “In the first year, tax rate should be restored at 35 percent and then reduced by 1 percent every year till it reaches 29 percent, as was done for the corporate sector in the past,” it added.
PBA proposals have been sent by Tawfiq A Hussain CEO and Secretary General PBA to Asim Ahmed, Chairman, Federal Board of Revenue (FBR).
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 sales tax on services and in 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 Dec 31, 2022, the banking sector contributed Rs 587 billion to the exchequer including Rs. 318 billion tax and withholding tax of over Rs. 269 collected and paid to the FBR.
PBA, in its budget proposals also highlighted difference in the tax rate of bank deposits and investment and urged for 15 percent tax rate on profit on debt
The tax incentives available to an individual who invests in shares listed on stock market and in units of mutual funds are very attractive and have a huge advantage, over those available to a person who invests funds in bank deposits.
A profit from bank deposit received by an individual is classified as “profit on debt” and taxed at a rate of 15 percent to 35 percent, depending on the amount of profit earned, whereas return on investment by same individual in shares or units of mutual funds is taxable at 15 percent for dividend and capital gains up to 15 percent, irrespective of the amount of return or gain earned.
PBA has mentioned that the tax rate should not be a deciding factor for preferring placements of cash in bank or purchase of units in mutual funds or in shares. “This disparity in tax treatment serves as a disincentive for placing funds in bank deposits over investments in mutual funds or in shares, which is hurting the banking industry. Therefore, this disparity needs to be corrected and tax rate on profit on debt should be restricted at 15 percent,” PBA said.
Regarding, Rule 5 (1) of Seventh Schedule-Compensation on monthly advance tax payment, the PBA mentioned that the banks incur heavy cost for such advance payments on monthly basis. For example, for advance tax monthly installment paid in January 2023 (tax year 2024), credit shall be given at the time of filing return in September 2024. Banks can invest these funds to earn considerable return, which in turn, will be subject to tax and thus the FBR will also be a beneficiary.
Therefore, PBA has recommended that banks should be given Kibor-based compensation on utilization of banks’ money in the form of monthly advance tax.
According to budget proposals, a new rule be added to Rule (3) of the Seventh Schedule specifically mentioning Musharakah, Modaraba, Murabaha, Musawama, Ijarah, Istisna and Salam and any other Shariah-compliant transaction as a financing transaction and not trading activity, ie, sale/purchase transactions.
The introduction of new clause in Seventh Schedule, explaining or mentioning the transactions under Islamic mode of financing, will remove ambiguity so as not to treat such transaction as a trading activity i.e., sale/ purchase transaction which can attract withholding of income tax.
The Islamic Financial Accounting Standard-II Ijarah, issued by the Securities and Exchange Commission of Pakistan (SECP) also confirms that such transactions are financing transactions. The addition of this new sub rule to Rule 3 is, therefore, recommended by PBA.
Currently, income tax rate of 29 percent is applicable on Microfinance Banks. The rate of tax may be reduced to 20 percent, since Microfinance Banking sector is supporting and providing micro loans to the poor and needy customers. Also, Microfinance Banks are playing an important role in financial inclusion.
PBA said while presenting these recommendations, it is aware of the fiscal challenges confronting the government and have, therefore, factored this in these recommendations. PBA has also assured that 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.
Copyright Business Recorder, 2023
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