The Securities and Exchange Commission of Pakistan (SECP) has proposed the Federal Board of Revenue (FBR) to introduce a new section in the Income Tax Ordinance 2001 to provide level playing field to the Non-Banking Finance Companies (NBFCs) vis-à-vis commercial banks.
According to the SECP budget proposals communicated to the FBR here on Monday the NBFC should have same provisioning treatment u/s-29a as provided to the banks under 7th Schedule of the Income Tax Ordinance 2001. A new section needs to be inserted section-29B of the Income Tax Ordinance 2001. The NBFCs are required under Non-Banking Finance Companies and Notified Entities Regulations 2008 to maintain provision against non-performing loans and advances. The commercial banks are allowed to create provisions for advances and off-balance sheet items upto a maximum of 1 percent of total advances; and provisions for advances and off-balance sheet items are allowed at 5 percent of total advances for consumers and SMEs (Ref clause 1(c ) of the 7th Schedule of Income Tax Ordinance 2001). The NBFCs like commercial banks also extend normal advances as well as advances to SMEs. The proposed section 29B shall provide a level playing field to the NBFCs vis-a-vis commercial banks, SECP added.
As per proposed new section ie 29 (B) in the Income Tax Ordinance 2001, (29B. Provision regarding non-performing loans). "Provisions created by Non-Banking Finance Companies against advances and off balance sheet items shall be allowed up to a maximum of 1 percent of total advances; and provisions for advances and off-balance sheet items shall be allowed at 5 percent of total advances for small and medium enterprises (SMEs) provided a certificate from the external auditor is furnished by the non-banking finance company to the effect that such provisions are based upon and are in line with the Non-Banking Finance Companies and Notified Entities Regulations 2008. Provisioning in excess of 1 percent would be allowed to be carried over to succeeding years: Provided that if provisioning is less than 1 percent of the advances, then actual provisioning for the year shall be allowed.
Explanation: "SME loans" means loans made by Non-Banking Finance Company or the House Building Finance Corporation to a Small and medium enterprise amounting to maximum Rs 300,000. Small and medium enterprise shall have the same meaning as defined in Companies Ordinance, 1984, the proposed section added.