The State Bank of Pakistan (SBP) has proposed that the rate of Super Tax be reduced from 4 to 3 percent through Finance Act 2015 for providing level playing field to all corporate entities including the banking sector. It is learnt that the SBP has submitted its comments on the Finance Bill (2015), seeking change in the rate of Super Tax proposed for banking sector.
The central bank also proposed that the Super Tax may be applied form the current accounting year. The suggestion of the banking specific tax in Finance Bill 2015 are expected to be taken in a positive manner by the FBR, so as to ensure the viable and positive contribution of banking sector towards the revenue collection and economy of Pakistan, the SBP said.
According to the SBP, a onetime super tax is being proposed to be imposed for Tax Year 2015 for rehabilitation of displaced person (Section 4B of Income Tax Ordinance). This tax is to be paid by banking companies at the rate of 4 percent of income and by all other taxpayers at 3 percent of income; the latter being required to pay only if income is equal to or in excess of Rs 500 million. The applicability of this super tax is from the previous year which closed on Dec 31, 2014. The differential treatment of banking industry vis-à-vis other corporate entities have always been a subject of altercation. The other issue is that this super tax is applicable from the previous year for which books have already been closed.
The Rs 500 million thresholds would also be applied to the banking industry too and the imposition of super tax @ 4 percent be reduced to 3 percent to bring level playing field for all corporate entities including the banking sector. Further, super tax may be applied form the current accounting year.
The SBP stated that the banking industry plays an instrumental role in the collection of revenue as well as the overall economic growth. The sector has shown remarkable operating performance and resilience in the face of strenuous economic conditions. This sound state of banking system has come through a lengthy process of sectoral reforms and joint efforts of the stakeholders to create an enabling environment. Attentions has been drawn to a few amendments in the Income Tax Ordinance 2001 (ITO), brought through the Finance Bill 2015, that raised some concerns among the banking industry, which has also been communicated to the Federal Board of Revenue (FBR) vide Pakistan Banks Association's letter dated 12th June 2015.
The SBP is of the view that the amendments regarding flat tax rate of 35 percent for bank's all incomes, 0.6 percent withholding tax on account to account transfer, and discrimination in super tax would be having negative bearing on both the banking industry as well as the government's initiative to promote financial inclusion in the country. SBP's views and recommendations in this regard are as under.
Firstly, the Finance Bill proposes to amend the scheme of taxation of banking companies whereby all incomes are subjected to a flat rate of tax at 35% as compared to the other corporate entities, which are subject to standard tax rate which discrete tax rates for various income streams. This imposition of higher and flat tax rate will discourage the investors from banking industry and raise financial fragility issue in the coming years. In addition to this, it would also dampen the banks' investment activities and support they provide to the capital market, thus affecting the capital formation process in the economy. An outflow of capital from banking industry could also occur due to this differential tax regime for banks.
It is recommended that the imposition of flat tax may be withdrawn from the Finance Bill 2015 and the tax rate for banking companies be brought down to the similar rate which is applicable to other companies.
The Bill proposes every banking company be required to withhold tax at the rate of 0.6 percent of the value of transactions from a non-filer on all account to account transfers or transfers through banking instruments where the sum of total payments exceeds Rs 50,000 in a day except cash withdrawals. This new proposal is in addition to existing withholding tax (WHT) on cash withdrawals, which are already subject to WHT at 0.3 percent for filers and 0.5 for non-filers, where exceeding Rs.50,000 in a day. The proposed and the existing WHT in a way dissuade to customers away from banks and encourage the cash based transactions, thereby promoting informal economy and financial exclusion. Incidentally, it may be mentioned that according to World Bank Global index, only 13 percent of the Pakistan population has access to formal financial services that is quite low as compared to global standards and neighbouring countries.
It has been recommended that the new WHT may also be removed from Finance Bill 2015 as it would be detrimental to documented economy and may result in financial exclusion. SBP believe that instead of over reliance on inefficient mode of WHT, there is an earnest need to widen the tax net.
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