According to the budget proposals of SBP for 2017-18, submitted to the Ministry of Finance, the taxation related proposals for the next fiscal year will rationalise the tax burden on the banking sector. The SBP proposed that the banking industry has time and again expressed reservations on section 236P of Income Tax Ordinance 2001 on the deposits base of the banks. It is a matter of concern that Pakistan has one of the lowest saving ratios among its peer countries, while imposition of advance tax on banking transactions is further discouraging the public from using banking channels for their financial transaction.
Moreover, this section along with section 231A and 231AA of Income Tax Ordinance 2001 are creating problems for the low-income groups and marginalised borrowers such as widows, pensioners, retirees, farmers and students, etc, which fall below the taxable threshold limit and remain non-filer during their life because of their peculiar circumstances. It is a matter of concern that withholding tax is deducted on their savings whenever they make withdrawals, which is unfair as they cannot claim credit for the deducted amount due to their lack of education and knowledge of tax filing. The sections should be exempted to these vulnerable groups or the threshold of transfer should be increased to Rs 100,000.
The SBP has also made recommendations to the Ministry of Finance for carrying out amendments in the "Policy on Import of Used Cars" to stop misuse of the scheme. The matter was also discussed with the secretary finance. The scheme is reportedly being misused by unscrupulous individuals and commercial car importers in Pakistan who are importing used cars in the name of overseas Pakistani workers. Payments for such imported cars are mainly made through informal channels which is creating distortions by widening the gap between kerb and interbank rates. Accordingly, appropriate policy modifications as suggested by SBP may be made to the scheme to prevent its misuse.
The SBP said that the tax proposals are related to the tax policy and administration of the banking sector along with the proposals for budgetary allocations during upcoming federal budget. The tax proposals focus on rectifying the issues faced by the banking sector while serving the general public and underserved sectors of the economy. Further, the proposed budgetary allocations are related to the priority sectors of the economy which would facilitate improved access of financial services to the masses and would augment the efforts of the government in these priority areas.
These proposals have been grouped into two categories ie amendments in the tax laws/rationalisation of certain tax provisions related to banks including Islamic and microfinance banks (MFBs) and the second category of proposals is related to the requests for budgetary allocations for improving access of marginalised credit to the priority sectors of the economy.
Tax proposals for 2017-18 envisage amendments in the tax laws through the Finance Bill 2017-2018 aimed at rationalisation of certain tax provisions related to the banking industry. These tax proposals and recommendations propose changes in Income Tax Ordinance, 2001, Federal Excise Act, 2005, Sales Tax Act, 2005.
The banking sector proposals pertain to the treatment of provisions of non-performing advances, waiver of advance tax on cash withdrawals & online transfers, changes in tax collection practices, etc. Tax proposals for Islamic banking have been devised to provide a level playing field aiming to provide tax neutrality to Islamic financial services. This policy initiative will help in making Islamic financial products more competitive against conventional banking products.
The tax concession proposals for MFBs are planned in a way to promote financial inclusion as this segment and its customers need some fiscal space to survive the initial phase, the SBP said. The proposals for SBP intend to capture the scope of the exemption available to SBP under the relevant tax provisions to its subsidiaries too through inclusion of their names in the applicable sections.
Proposals on Budgetary Allocations: The SBP has recommended some schemes for consideration of budgetary allocation in the upcoming budget.
Snapshots of key schemes are: Risk Sharing Guarantee for Low Income Housing: The federal government announced in its budget for fiscal year (2014-15) the development of low-cost housing in the country. Under the scheme, the government is to provide 40 per cent credit guarantee cover to the banks/DFIs for home financing up to Rs 1 million. The broader features of scheme have been worked out which have been approved by the Ministry of Finance. The scheme has yet to be formally launched by the Prime Minister of Pakistan. For the purpose, the government is proposed to allocate Rs 8 billion for providing 40 per cent credit guarantee cover to the lending banks against the financing for low-income housing as under:
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Calculation
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Expected number of units to be financed 25000
Average financing per unit Rs 800,000
Guarantee required @ 40% of principle Rs.8 billion
on first loss basis
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Budgetary Support for Crop Loan Insurance Premium Subsidy: The Crop Loan Insurance Scheme (CLIS) was launched in 2008 for subsistence farmers in order to mitigate the risk of losses to farmers due to natural calamities. Under the scheme, the amount for the premium, up to a maximum of 2 percent of the loan per crop, is being borne by GoP through budgetary support. The government enhanced the scope of CLIS up to 25 acres and all farmers obtaining loans for production of 5 major crops were made eligible to benefit from this scheme. Since the inception of this scheme, 3.882 million small farmers have benefited with the insurance premium claim of Rs 4.353 billion up to June 2016. The SBP successfully implemented the scheme on the parameter announcements in the budget. Therefore, in line with previous year practice, it is proposed that the government may continue budgetary premium subsidy support to small farmers by making the budgetary allocation of Rs 1.5 billion for FY 2017-18 on account of Crop Loan Insurance Scheme.
Strengthening Secured Transactions Framework: (Establishment of Registry for Movable Assets): Secured Transaction Reform calls for existence of a modern secured transaction law that provides for establishment of registry office in the country to register charge on assets especially moveable assets of the borrowers and hence facilitate smooth flow of credit from financial institutions to SME and agriculture sectors. The Financial Institutions (Secured Transactions) Act-2016 has been approved by the Parliament and notified in Official Gazette. The Ministry of Finance on the recommendations of SBP has approved way forward of this project wherein MoF shall appoint registrar during FY 2017-18 who will lead the project of establishing secured transactions registry including drafting of registry regulations and procurement of hardware and software through DFID, UK funding. In view of the above, MoF, the GOP, may earmark Rs 100 million in the federal budget 2017-18 to cover salary of registrar and other allied costs.
The SBP hopes that these proposals will be considered favourably for incorporation in the forthcoming budget. These proposals will rationalise the tax burden on the banking sector, the SBP added.
Copyright Business Recorder, 2017