ISLAMABAD: In a move that is likely to hit the country’s banking industry, the government is considering withdrawing its special income tax regime in the new budget, aimed at drawing an additional Rs40 billion from the next fiscal year.
The Federal Board of Revenue (FBR) floated the proposal as a ‘big ticket item’ for the next financial year 2017-18, starting from July, said sources in the Finance and Revenue Ministry. Tax authorities want to delete Schedule Seventh from the Income Tax Ordinance 2001, which governs the income tax regime of banking companies.
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Due to its implications for the banking industry and subsequent pressure on the government, the proposal will have to be vetted by Prime Minister Nawaz Sharif before its inclusion in the Finance Bill 2017, said the sources. They said that if the PM did not allow getting rid of the special regime, the FBR would try to get back some of the benefits the banks were enjoying.
In 2007, the tax authorities had introduced the special regime relating to banking businesses. Since then, the banks’ income, profits and gains are computed in accordance with the rules in the Seventh Schedule of Income Tax Ordinance 2001.
This allowed gains to banks on account of depreciation, initial allowance, amortisation, provisioning of advances against bad debts and group relief. The FBR has estimated the cost of this relief to the tune of Rs40 billion to Rs45 billion, said the sources.
If the government decides to withdraw the special tax regime, it will be considered a major reform. The government had not touched the banking sector’s special tax regime during the three-year IMF programme when it had undertaken a major exercise to withdraw concessionary sales tax regimes.
However, the industry may not receive it well and its profits are likely to come under pressure.
Stock prices of commercial banks also took a hit on Tuesday at the Pakistan Stock Exchange. Habib Bank Limited’s share price dropped 1.8%, followed by 1.4% of MCB Bank and 0.3% of United Bank Limited.
Withdrawal of the Seventh Schedule from the Income Tax Ordinance could disturb the accounts of the banking companies, said Dr Ikramul Haq, a tax expert and lawyer at the Supreme Court of Pakistan. He said that the banking sector was already highly regulated by the State Bank of Pakistan.
Haq said that over-taxation might affect the banking industry, as it has happened in the case of the telecommunication sector.
Those who advocate withdrawing these benefits say that the banks have fattened over the years at the expense of their clients. The banking sector spread - the difference between lending and deposit rates - is relatively higher in Pakistan than other countries.
The Seventh Schedule allows the banks provisioning of 1% of the total advances, which significantly lowers their tax contributions. Similarly, banks are allowed to adjust loss on sale of shares of listed companies, disposed of within one year of the date of acquisition. In case of foreign banks, head office expenditure is allowed as deduction.
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The provisions relating to group relief as contained in section 59B of the Income Tax Ordinance are also available to the banking companies provided the holding and subsidiary companies are banking companies.
The holding and subsidiary companies of 100% owned group of banking companies can opt to be taxed as one fiscal unit as per the provisions of section 59AA relating to group taxation subject to the approval of the SBP.
The government-constituted Tax Reforms Commission had also proposed certain changes in the Seventh Schedule. It had proposed that a new provision should be inserted in the seventh schedule whereby banks are required to submit the information of taxpayers to the FBR in terms of the name of taxpayer, NTN, CNIC no, amount on which tax is deducted and amount of tax.
Although Section 165A of the Ordinance binds the banks to provide this information, the banks are not ready to share it. The SBP also supports the banks’ stance. The banks’ reluctance is not in line with international practices.
Published in The Express Tribune, April 19th, 2017.
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