This has enabled the banking industry to continue playing an integral role in the economic development of the country and supporting major initiatives of the government, the FBR and the SBP. Some of the PBA's key recommendations for Federal Budget 2017-18 are:
Deletion of Section III (4) of ITO 2001 and amendment of Pakistan Economic Reform Act (PERA 1992) by excluding all persons resident in Pakistan, as this section presently provides immunity to a tax payer on the source of an amount which has been remitted from outside Pakistan in foreign exchange through the banking channels. In PBA's view, the provisions are often misused as some businessmen may remit undeclared income through unofficial channels, which is then brought into Pakistan in foreign exchange through banking channels. While no taxes are paid on such (undeclared) income, it can be laundered into white money at a small cost of 3 to 4 percent. This recommendation of the PBA will help curb the practice of whitening of money under the umbrella of PERA.
While the Government took a very positive step by progressively reducing income tax rates for business income of corporate sector from 35 percent to 34 percent for tax year 2014 which is now down to 30 percent for tax year 2018, no such reduction has been provided for banks. In fact, the lower tax rate on capital gains and dividend income of banks has been raised to a uniform rate of 35 percent from tax year 2015.
PBA has recommended that the tax rates for banks should also be reduced to 30 percent for tax year 2018, in line with the corporate sector and the tax rate be made uniform and equitable.
As for Advance tax on banking transactions other than cash, under Section 236P, vulnerable groups such as widows, pensioners, retirees, students, etc, receive very low compensation/income that falls below the taxable threshold and they are not liable to pay tax. But withholding tax is deducted on their savings whenever they make withdrawals, which is unfair as they cannot claim credit for the deducted amount.
Such tax is also likely to adversely affect the National Financial Inclusion Strategy and lead to financial exclusion. PBA suggests that Section 236P should be removed or exemption should be provided to the vulnerable groups and the threshold of transfer/ transactions increased to Rs 100,000.
In line with its earlier discussions with FBR, PBA has been consistently suggesting that Sections 165 and 165A of Income Tax Ordinance, 2001, which is a part of general law, cannot override special laws including Protection of Economic Reform Act (PERA), SBP Act, Banking Companies Ordinance and SBP's regulations. It should, therefore, be dispensed with and the law amended.
PBA is of the view that the purpose of the provisions in Banking and other laws is to maintain confidence in the banking system and unnecessary submission/disclosures of customer information should be avoided. PBA has also recommended that to enable banks to comply with Section 165B, introduced via Finance Bill 2016-2017, the special laws dealing with banking secrecy matters ie section 3 read with section 9 PERA, 1992, Section 33A of BCO may be suitably amended.
For Islamic Banks, PBA has proposed to add a new sub-rule to Rule (3) of the seventh schedule, specifically mentioning Musharakah, Modaraba, Murabaha (including Commodity Murabaha), Musawama, Ijarah, Istisna and Salam and any other sharia compliant transaction as a financing transaction and not as trading activity ie sale/purchase transaction. A similar amendment is also required in Sales Tax Act 1990.
To encourage mobilisation of deposits for the Mirco Finance Banks (MFBs), tax exemption for "Not for Profit" organizations on profit on debt from scheduled banks should also be applicable on profit on debt from MFBs. Similarly, all Provident Funds/Gratuity may also be allowed to deposit funds with MFBs, as scheduled banks and MFBs are both regulated by SBP.
As per PBA, as always in the past, the banking sector is ready to support the FBR in its efforts to grow the taxation and revenue base in a fair and equitable manner. PBA's recommendations, if incorporated in the forthcoming Federal Budget, would help in achieving this objective.-PR
Copyright Business Recorder, 2017