KARACHI - The Pakistan Banks’ Association (PBA) has submitted its recommendations for the Federal Budget 2017-2018 on the banking sector to the Federal Board of Revenue (FBR).

Pakistan’s banking sector, the largest contributor to the exchequer, paid more than Rs140 billion tax and collected and paid more than Rs134 billion withholding tax to the FBR in the year ended Dec 31, 2016. Therefore, the total contribution to the exchequer from members of the PBA was over Rs 274 billion.

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.

The PBA’s key recommendations for the Federal Budget 2017-18 are deletion of Section III (4) of ITO 2001 and amendment to the Pakistan Economic Reform Act (PERA 1992) by excluding all persons resident in Pakistan, as this section presently provides immunity to a taxpayer 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%. This recommendation of the PBA will help curb the practice of whitening of money under the umbrella of PERA.

While the government took a positive step by reducing income tax rates for business income of corporate sector from 35% to 34% for tax year 2014 that is now down to 30% 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% from tax year 2015.

The PBA has recommended that tax rates for banks should be reduced to 30% 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. The PBA suggests that Section 236P should be removed or exemption should be given to vulnerable groups and the threshold for transfers/transactions should be increased to Rs100,000.

In line with its earlier discussions with the FBR, the PBA has been consistently suggesting that Sections 165 and 165A of the Income Tax Ordinance, 2001, which is part of general law, cannot override special laws including Protection of Economic Reform Act (PERA), SBP Act, Banking Companies Ordinance and SBP 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 avoid unnecessary submission/disclosures of customer information.

The PBA has also recommended that to enable banks to comply with Section 165B, introduced via Finance Bill 2016–2017, special laws dealing with the banking secrecy matters i.e. 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 i.e. 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” organisations on profit on debt from scheduled banks should 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.