Pakistan Banking Association (PBA) has advised the government to cut down the tax rate to 30% and bring it at par with the corporate sector. PBA has made the suggestion to FBR (Federal Board of Revenue) in the light of the upcoming budget as it is an integral part of their budget proposal.
The government has shown support to the business community by reducing income tax rate for businesses from 35% to 34% during 2014. Later, the tax rate has been further slashed to 30% for the tax year 2018. In contrast, banking sector has not received any such tax relief. However, the tax rate on capital gains and dividend income of banks has been increased to a higher flat rate of 35% from 2015.
Also Read: Increase in taxes leads to decline in banking transactions in Pakistan
Suggestions by Pakistan Banking Association
The first suggestion made by Pakistan Banking Association is to eliminate Section III (4) of ITO 2001 and to amend Pakistan Economic Reform Act (PERA 1992) by excluding Pakistan residents. This section provides exemption on the source of the money remitted from any other country in the form of foreign exchange. Thus, this amount flows in from regular banking channels.
These policies are exploited by some businesses who bring in their undeclared income through illegal channels and then route it through regular banking channels in Pakistan. Since, undeclared income does not qualify for taxation under PERA so it becomes easy to launder the black money by incurring a cost of meager 3 to 4%.
Quick Read: Effects and influence of the withholding tax
Talking about advance taxation on non-cash transactions, PBA explained that vulnerable groups such as widows, pensioners, retirees, and students fall below taxable income and hence do no pay taxes. But deductions in the form of withholding tax on savings nullifies the benefit received from no income tax. This makes them more vulnerable as they cannot claim these deductions.
Therefore, these taxes give way the purpose of National Financial Inclusion Strategy. PBA has advised FBR to remove Section 236P or provide tax exemption to these groups and taxable amount of transactions/transfer should increase up to Rs100,000.
PBA stressed on the importance of special laws such as Protection of Economic Reform Act (PERA), the State Bank of Pakistan (SBP) Act, Banking Companies Ordinance and SBP’s regulations and mentioned that Section 165 and 165A of Income Tax Ordinance, 2001 should not supersede the above mentioned laws. This advice has been strongly proposed by PBA to FBR.
Pakistan Banking Association believes that these banking laws should be kept intact. Moreover, unnecessary disclosures of customer information may hamper customers’ confidence in the banking system.
Read More: Pakistan introduces tax exemption for investors in SEZs
It has also been suggested that the special laws dealing with banks’ secrecy, section 3 read with section 9 PERA, 1992, Section 33A of BCO need to be amended if banks are to abide by Section 165B in the Finance Bill 2016.
Propositions for Islamic and Micro Finance Banks
PBA has provided some recommendations for Islamic Finance Banks and has advised to include a sub-rule to Rule (3) of the seventh schedule. The rules will categorize Musharakah, Modaraba, Murabaha (including Commodity Murabaha), Musawama, Ijarah, Istisna and Salam and all Sharia complaint transactions as a financing transactions and not trading deals.
Tax exemption for “Not for Profit” organizations on profit on debt from scheduled banks should be applied on profit on debt from Micro Finance Banks (MFBs). This will encourage higher deposit mobilization into MFBs. Additionally, provident funds/gratuities should be encouraged to deposit their funds into MFBs along with conventional banks.
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