Pakistan Banks Association (PBA) has proposed to the Federal Board of Revenue (FBR) to withdraw Super Tax, clear backlog of pending refunds of banking sector, reduce tax rate for banking sector to 29 percent for Tax Year 2019 and make uniform sales tax rates on services charged by provincial revenue authorities/boards. According to the budget proposals of the PBA for 2018-19, Super Tax was introduced vide Finance Act 2015 with retrospective effect for one year. Though it was introduced as a onetime levy, yet in successive years the levy had been extended for the third consecutive year with retrospective effect. Super Tax is being charged on banking industry at high rate of 4%. With the levy of Super Tax at 4%, total tax on banking sector has increased to 39%, which is highest among the corporate sector. To be noted is that companies other than banks have been exempt from super tax in the Supplementary Bill 2019. This is discriminatory against banks and needs to be corrected.
Furthermore, levy of super tax for tax year 2018 is highly unjustified as a rate of 0% was agreed with the banks and the same was reflected in the Finance Act 2018. As the result of revival of super tax for tax year 2018, the banks financial statements for accounting year 2019 would suffer a tax charge of 43%. This creates a big anomaly, is discriminatory and requires immediate relief.
The PBA proposed that 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 collection of withholding tax, and is playing a vital role in the economic development of the country & supporting major initiatives of the government, FBR and State Bank of Pakistan (SBP).
For the year ended Dec 31, 2018, the banking sector paid total taxes of about Rs 123 billion and collected, and paid to FBR, withholding tax of over Rs 129 billion. Therefore, the total contribution to the exchequer from the members of PBA was about Rs 252 billion for that year.
Pakistan Banks' Association has always played an active role in annual submission of proposals for the Federal Budget's taxation measures.
Some of the key recommendations, of our proposal, are presented here for immediate reference.
Section 111 (4) of Income Tax Ordinance 2001 provides immunity to a tax payer on the source of an amount which has been remitted from outside of Pakistan in foreign exchange (FX) through banking channels. The provisions are being misused, whereby some persons are remitting out undeclared income through unofficial channels & the same amount is brought into Pakistan in foreign exchange through banking channels. While no taxes are paid on such (undeclared) income, it is laundered into white money at a small cost of 3 percent to 4 percent.
PBA has recommended that the section m (4) of Income Tax Ordinance 2001 be deleted & PERA (1992) be amended, by excluding all persons resident in Pakistan and by disallowing deposit of cash dollars into the foreign currency accounts maintained by individuals with banks in Pakistan. This will help curb the rampant practice of whitening of money under the umbrella of PERA.
The PBA said 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% to 34% for tax year 2014 and down to 28% for tax year 2020 and which will further be reduced by 1% for each tax year to 25% for tax year 2023 and onwards. Unfortunately, no such reduction has been provided for the banking sector.
It is, therefore, proposed that tax rates for all sectors, including banks, be rationalised with uniformity. Accordingly, tax rates for banks should be reduced to 29% for tax year 2019, and gradually reduced to 25% by 2023, making it in line with other industries.
Through the Finance Act 2018, the commissioner has become empowered to use provisions in Chapters VII and VIII of the Income Tax Ordinance to their advantage, which previously did not form part of Seventh Schedule of the Ordinance. Scheduled Taxed Companies falling under fourth schedule (insurance companies) and fifth schedule (exploration and production companies for petroleum and other minerals) have not been subjected to similar amendments in their respective schedules. It appears that the banking companies have been singled out by enhancing powers of commissioners while assessing returns of banks. It is recommended that changes made in sub-section (3) of Section 100A be un-done, PBA recommended.
The PBA has recommend that the tax refunds of billions if rupees of banking industry are pending, causing a significant drag on banks' profitability. A timely settlement of determined refunds should, therefore, be made. The mechanics for Sales tax refunds have been introduced vide enactment of Finance Supplementary (second Amendment) Act, 2019 providing that refunds will be issued in the form of promissory notes. it is, therefore, proposed that similar mechanism should also be introduced for the banking industry in respect of income tax refunds due.
Presently, different rates of FED/Sales Tax are being applied by FBR and provincial revenue authorities/board for some type of services received in different territories. Furthermore, exemptions available u ider different laws are not uniform and a customer is enjoying exemption on same services vices in one territory, while the same are taxable in another territory.
Banks are operating all over Pakistan and, as a policy, have a uniform fee for customers originating from all provinces. Since a number of services are taxed at different rates in different provinces, this creates confusion for customers. It is, therefore, proposed that uniformity should be brought in FED/Sales Tax rates being charged and exemption' available under Federal/Provincial Laws.
Through the amendment in Sales Tax Rules 2006, additional sales tax at rate of 5% was imposed over and above the sales tax of 17% on electricity and gas bills on unregistered person. The Banks are registered persons under Sale Tax Act 1990/ Federal Excise Act 2005. However, branches are located across the country & most of the branches are on rented premises, where utility connections are in the name of the landlord. Accordingly, bank is treated as unregistered person for these premises and additional sales tax is charged. Therefore, banks are burdened with additional tax which is unjustified and calls for immediate removal.
For the promotion of Islamic Banks - Islamic modes of Financing - Rule 3(2) of the Seventh Schedule, the audited financial statements of Islamic Banks and Islamic Windows of Conventional Banks contain a separate discourse for Islamic Banking business including profits and loss statement. As such, the requirement of separate auditors certificate for the purposes of rule 3(2) of the Seventh Schedule has no relevance.
Accordingly, Sub-rule 2 of Rule 3 of Seventh Schedule needs to be replaced as follows: "The audited financial statements of Islamic Banks and disclosure related to Islamic window operations of the conventional banks, as contained in the audited financial statements submitted to the State Bank of Pakistan, shall form the basis for the calculation of income tax liability as provided in this Schedule."
This would save unnecessary cost and burden on the banks.
Micro Finance Banks (MFBs) - Section 233 of Income Tax Ordinance 2001 and Federal and Provincial indirect tax laws: These are presently high taxes on agents commission i.e. advance tax deduction on commission payments and Islamabad and Provincial sales taxes on commission. In order to promote branches banking in Pakistan, to bring the un-banked segments within the banking sector and help play a role in transition to a documented economy, it is proposed that direct and indirect taxes on agency commission in relation to branchless banking are reduced at an overall level and also harmonised.
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