Sigh of relief: Govt rules out any increase in income tax on banks

Tax on profits from investment in govt papers will also not be raised.

Shahbaz Rana April 06, 2012


The government has ruled out any increase in income tax on banks in the upcoming budget, saying such a move will single out the banking sector. At the same time, it has hinted at bringing few more politically pampered businesses in the tax net by withdrawing exemptions.

A senior official of the finance ministry told The Express Tribune that the government would not increase income tax rates on banks as such a step would discourage new investment in the sector. There would also be no increase in the tax on income made by investing in government securities, he said.

The disclosure will give rest to speculations that the government is planning to tax the “windfall profits” of banks.

The ministry official said if a windfall tax was levied on the income of banks from government papers, they would resultantly transfer the burden back to the state by increasing interest rates.

At present, five largest banks of the country have significant investments in government securities.

Top two banks have invested 65% of their total investments in government papers while the whole sector has injected almost half of total investments into these papers, said State Bank of Pakistan Governor Yaseen Anwar while talking to The Express Tribune.

He said the government has not discussed any proposal to increase tax rates on banks with the central bank.

Anwar said non-performing loans of banks have started “flattening out” because of heavy investments in the risk-free papers. This has also increased banks’ profits, he said.

The finance ministry official said there would not be any “wholesale increase in tax rates” in the upcoming budget. However, he did not rule out nominal increases and said some more sectors would be brought in the tax net.

This will be the second attempt by the government to try to catch the exempted sectors. Earlier, it imposed taxes on five major sectors. However, the possibility to touch some major sectors is not very high as the government will not like to enter into confrontation at a time when elections are just around the corner.

To a question about Prime Minister Yousaf Raza Gilani’s policy statement on next year’s budget that the government would neither levy new tax nor increase the rates, the official said it did not mean that there would not be any new levy or change in rates. “The spirit of the policy will remain intact but some changes may take place,” he added.

On the other hand, the tax regime will be simplified further with a reduction in customs duties. Finance Minister Dr Abdul Hafeez Shaikh said “they will like to simplify the tax system where few more items can be erased from the purview of federal excise duties.”

CNIC condition deferred again

In a related development, the finance ministry held consultations with the business community on broader parameters of the upcoming budget.

Caving in to the pressure from different lobbies, the ministry decided to defer the documentation campaign for one more month.

Under statutory regulatory order (SRO) 191, manufacturers and importers of goods are required to give details of buyers including computerised national identity card (CNIC) numbers, aimed at plugging tax leakages.

“The government has decided to defer implementation of SRO 191 to May 15,” said Haroon Farooki, Chairman of Ecko Group of Companies.

The plan was originally proposed to be implemented from July last year but the deadline has been extended time and again.

The finance minister has constituted a committee on the issue that will give a report in the next few days. “After the report, final decision will be taken,” he said.

The minister also constituted nine committees, comprising government officials and businessmen, to give suggestions on the budget within two weeks. These committees will work in areas of broadening the tax base, financial sector reforms, tariff rationalisation, regional trade, investment incentives, expenditure management, intellectual property rights, acceleration of tax refunds and tax relief package for Fata and Balochistan.

Published in The Express Tribune, April 6th, 2012.


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