Banking sector: Increase in income tax on the cards

‘Smaller banks will have a hard time meeting minimum capital requirement’.

KARACHI:

The government’s aggressive stance on increasing tax revenues points to a possible rise in taxes on the banking sector, according to BMA Capital.

Higher regional taxes on financial institutions have been cited as a reason for the move to rationalise taxes on the domestic banking industry, said BMA Capital analyst Omar Rafiq.

Top seven banks – National Bank of Pakistan, Habib Bank, MCB Bank, United Bank, Allied Bank, Faysal Bank and Bank Alfalah – contribute almost 85 to 90 per cent to the sector’s profit. A possible increase of five per cent in income tax on the banking sector is likely to impact the large banks by nearly 5 to 7%, estimates Rafiq.

The government expects to increase its revenue collection by Rs7.5 to Rs8.5 billion in the upcoming fiscal year as a result of the increased tax rate.

Implementing the decision will not be an issue as the banking sector is highly organised and regulated.

The country’s corporate sector is already one of the highly taxed areas in the region, however, an upward trend has been witnessed in regional markets as well.

Smaller banks are likely to find it harder to meet the minimum capital requirement (MCR) amid a higher taxation regime. The State Bank has set the MCR at Rs8 billion which banks have to meet by the end of December.

“Increasing direct taxes is a two-way street, hence when a bank reports a loss, it receives a higher tax loss carried forward,” said Rafiq.



Published in The Express Tribune, May 31^st, 2011.