SBP opposes increase in tax rate on banks and insurance firms
FBR expects revenue of Rs10b from the increased rate.
ISLAMABAD:
The State Bank of Pakistan (SBP) has opposed the government’s move to increase tax rate for banks and insurance companies from 35 per cent to 37.5 per cent despite the fact that banks are becoming fatter due to the central bank’s inability to ensure maximum returns to depositors.
The central bank opposed the proposal, arguing it would hurt profits of commercial banks and affect their efficiency, said sources privy to the discussions that took place in a meeting of the Economic Advisory Council (EAC).
The Federal Board of Revenue (FBR) has proposed increase in the tax rate on banks on the ground that banking spread – the difference between lending and deposit rates – has increased significantly. Currently, the average spread is 7.2 per cent and the maximum is over 10 per cent. Banks are not ready to offer big returns on investments, but are lending at rates ranging from 14 to 20 per cent.
Banks have been minting money without much effort, as the federal government is their biggest client, said an FBR official. Tax authorities have estimated generating additional revenue of over Rs10 billion through increasing the tax rate.
The Convener of both the EAC and Revenue Advisory Council (RAC), Dr Hafiz Pasha, said RAC has opposed levy of tax on foreign remittances, adding there is also no proposal to increase the tax rate on the highest income slab from 20 to 25 per cent.
EAC also took up the issue of imposition of Gross Asset Tax (GAT) from financial year 2011-12. Pasha said there is an ambiguity whether the federal government can levy tax on immoveable assets. He said if legal experts came up with the view that taxing the immovable asset is a provincial subject then the federal government may ask the provinces to work out a mechanism for imposing GAT.
“EAC should meet in provincial capitals to take the political leadership into confidence about the proposed taxes,” said Khyber-Pakhtunkhwa Finance Minister Humayun Khan. He said that at a time when the war against terror has been taking a heavy toll on the economy, the federal government should not levy new taxes.
Dr Pasha said if the federal government cannot levy tax on immovable property, then it would be useless to impose GAT, as it has to be a package. The government is considering levying GAT at the rate of one per cent from the next fiscal year and in return will withdraw minimum turnover tax that is fetching Rs13 billion annually.
Finance Minister Dr Abdul Hafeez Shaikh said the GAT proposal was under consideration but the basic idea is that the tax would be charged from only those who do not pay income tax.
There is a difference of opinion between the government and RAC on the issue of revenue target for the next fiscal year. The government has worked out a Rs1,952 billion target while RAC says it is over-stated by at least Rs100 billion.
The finance minister said his secretary and FBR chairman would convince RAC that Rs1,952 billion was a realistic number.
“For the last four years, the government has been missing revenue targets and yet it insists on setting an over-ambitious target for the next financial year,” said Pasha.
Published in The Express Tribune, May 8th, 2011.
The State Bank of Pakistan (SBP) has opposed the government’s move to increase tax rate for banks and insurance companies from 35 per cent to 37.5 per cent despite the fact that banks are becoming fatter due to the central bank’s inability to ensure maximum returns to depositors.
The central bank opposed the proposal, arguing it would hurt profits of commercial banks and affect their efficiency, said sources privy to the discussions that took place in a meeting of the Economic Advisory Council (EAC).
The Federal Board of Revenue (FBR) has proposed increase in the tax rate on banks on the ground that banking spread – the difference between lending and deposit rates – has increased significantly. Currently, the average spread is 7.2 per cent and the maximum is over 10 per cent. Banks are not ready to offer big returns on investments, but are lending at rates ranging from 14 to 20 per cent.
Banks have been minting money without much effort, as the federal government is their biggest client, said an FBR official. Tax authorities have estimated generating additional revenue of over Rs10 billion through increasing the tax rate.
The Convener of both the EAC and Revenue Advisory Council (RAC), Dr Hafiz Pasha, said RAC has opposed levy of tax on foreign remittances, adding there is also no proposal to increase the tax rate on the highest income slab from 20 to 25 per cent.
EAC also took up the issue of imposition of Gross Asset Tax (GAT) from financial year 2011-12. Pasha said there is an ambiguity whether the federal government can levy tax on immoveable assets. He said if legal experts came up with the view that taxing the immovable asset is a provincial subject then the federal government may ask the provinces to work out a mechanism for imposing GAT.
“EAC should meet in provincial capitals to take the political leadership into confidence about the proposed taxes,” said Khyber-Pakhtunkhwa Finance Minister Humayun Khan. He said that at a time when the war against terror has been taking a heavy toll on the economy, the federal government should not levy new taxes.
Dr Pasha said if the federal government cannot levy tax on immovable property, then it would be useless to impose GAT, as it has to be a package. The government is considering levying GAT at the rate of one per cent from the next fiscal year and in return will withdraw minimum turnover tax that is fetching Rs13 billion annually.
Finance Minister Dr Abdul Hafeez Shaikh said the GAT proposal was under consideration but the basic idea is that the tax would be charged from only those who do not pay income tax.
There is a difference of opinion between the government and RAC on the issue of revenue target for the next fiscal year. The government has worked out a Rs1,952 billion target while RAC says it is over-stated by at least Rs100 billion.
The finance minister said his secretary and FBR chairman would convince RAC that Rs1,952 billion was a realistic number.
“For the last four years, the government has been missing revenue targets and yet it insists on setting an over-ambitious target for the next financial year,” said Pasha.
Published in The Express Tribune, May 8th, 2011.