The government would not provide any special treatment to 'Shariah Compliant Banking' approved by the State Bank of Pakistan (SBP) for any reduction or addition to income and tax liability under the new banking schedule of Income Tax Ordinance, 2001.
The Central Board of Revenue (CBR) has explained salient features of the separate schedule for banking companies through income tax circular 1 of 2007 issued on Monday.
According to a circular, any special treatment for 'Shariah Compliant Banking' shall not be provided for any reduction or addition to income and tax liability. A statement, certified by the auditors of the banking company, shall be attached to the return of income to disclose the comparative position of transaction as per Islamic mode of financing and normal accounting principles.
The adjustment shall be made to take into account treatment under normal accounting principles. Foreign banks shall be allowed deduction for head office expenditure in the ratio of gross receipts of permanent establishment to world gross receipts, provided that expenditure is charged in the books of accounts of the permanent establishment. A certificate from the external auditors is provided to the effect that the claim of such expenditure has been made in accordance with the provisions of this rule, and is reasonable in relation to the operation of permanent establishment in Pakistan.
The salient features of scheme as provided in the Seventh Schedule are as under: A banking company's income as disclosed in the annual accounts furnished to the State Bank of Pakistan, subject to specified adjustments, shall be taken as "Income from Business"; deductions for depreciation, initial allowance and amortisation of intangibles shall be available in accordance with the law; deductions shall be inadmissible if covered under section 21 of the Ordinance.
Under the schedule, the gain or loss on disposal of depreciable asset shall be computed in accordance with law and provisions of law relating to disposal and acquisition of asset shall be applied to make adjustments.
The provision for classified advances and off-balance sheet items shall be allowed as claimed in the accounts, provided a certificate from the external auditors is furnished by the banking company to the effect that such provisions are in line with the requirements of Prudential Regulations.
The expense charged in the accounts in respect of a debt classified, as 'substandard' under Prudential Regulations shall not be allowed as deduction. However, if such debt is re-classified as 'doubtful' or 'loss' subsequently, a deduction shall be allowed for the amount disallowed being 'substandard'. Further, reversal of provision in respect of a substandard debt, which was disallowed earlier, shall not be taken as income.
The circular said the adjustments made in the accounts due to application of International Accounting Standards 39 and 40 and consequently any gain or loss arising, shall be excluded while computing the income of the banking companies and liabilities, against which deduction was allowed, if remain unpaid for three years shall be added in the first tax year following the end of the three tax years. Payment of such liability shall, however, be allowed as deduction in the year of the payment.
The gain or loss on sale of shares of listed securities shall be dealt separately: Loss on sale of shares of listed companies, disposed of within one-year of the date of acquisition, shall be adjustable against business income of the tax year; where such loss is not fully set-off against business income during the tax year, it shall be carried forward to the following tax year and set-off against the capital gain only and no loss shall be carried forward for more than six years immediately succeeding the tax year for which the loss was first computed. The federal government has been empowered to amend or modify or omit any entry in this schedule, the circular added.