Income tax hike to hit banking growth, investment

KARACHI - If the federal government enacts the 2.5-5 per cent corporate tax increase recommended by the Federal Board of Revenue, there could be far-reaching negative consequences for the banking companies and foreign investment in Pakistan. The government is expected to amend the Income Tax Ordinance (ITO) 2001 by way of Finance Bill 2011-12 and the reason of this amendment being cited by the government is that the banking sector earns more profit then the other sectors of economy. Currently, corporate tax (income tax) on banks in Pakistan is at 35 per cent that is still one of the highest in the region. According to the sources in the banking industry, the cash-strapped government is mulling to increase the corporate tax from 35 per cent to 40 per cent in the upcoming budget 2011-12. This proposal was also being considered by some FBR officials in the past budget but this proposal had not materialised even further debated. Therefore, the corporate rate was maintained at 35 per cent in the budget FY11. Some changes in 7th Schedule in the form of an increase of tax admissible expenses from 1 per cent to 5 per cent of advances had been recommended by the government in the last budget. The financial experts believe if provisioning is less than 1per cent and 5 per cent as the case may be of the total advances, then actual provisioning for the year shall be allowed. Moreover, provision in excess of 1 per cent and 5 per cent as the case may be would be allowed in succeeding years Regarding sub-standard loan, the experts say since the amount of bad debts classified as sub standard under the prudential regulations issued by the State Bank of Pakistan shall not be allowed, it is good for banking industry if the amount of bad debts classified as sub-standards should be allowed an expense, as sub standard category is timing difference and in the subsequent period it will change its character. Currently , amount provided for tax year 2008 and prior to the said tax year for or against irrevocable or doubtful advance, which were neither claimed nor allowed as tax deductible in any tax year, in which such advances are actually written off against such provisions, in according with the provision of section 29 and 29A, through finance bill 2011-12 an amendment requires change in order to avoid misinterpretation and ambiguity stating by allowing deductible deduction in the tax year when there is reasonable ground to believe that the debt is irrecoverable. About the issue of transitory provisions, the experts say since the revenue authorities disallowed provisions for other expense including provisions pertaining to employees retirement benefits therefore, it is proposed that a new rule should be inserting allowing that such provision are allowed for tax year 2008 or before in the tax year in which these are actually paid or written off as the case may be. Since the charge for provision for bad debt in the financial statements are subject to external audit by auditors on the penal of SBP, who also examine the adherence to the prudential regulation, there proviso to Rule 1 is superfluous and should be deleted, they recommend. Pertaining to minimum tax rule 7A, the experts say through Finance Act, 2010 rate of minimum tax was enhanced from 0.5 per cent to 1 per cent of turnover of the bank, this increase further burdened the banks which are already in losses due to increase in non-performing advances, therefore, it is advised that previous minimum tax rate of 0.5 per cent should be brought. Currently, banks are required to pay advance tax on monthly basis i.e. on or before 15thof every month, in this regard banks incurred heavy cost for such kindly advances, it is proposed that banks should be given KIBOR based compensation on utilization of banks money in form of monthly advance tax, according to the experts. Regarding capital loss of listed companies rule 2(3), it is proposed that despite holding period shares, should be adjusted against business income in future years, if could not be set off in first year. It is practice of revenue authorities that order once amended may be amended many times by taxation authorities, in order to meet their targets, no order get finality, it order diminish this practice it is proposed that order once amended should not be re amended many times. Currently, payment from profit on debt payable to a non-resident person having no permanent establishment in Pakistan is 10 per cent of the gross amount paid, it is suggested if the government should bring the said scheme under the final tax regime to make the scheme from uncertainty and hassle free from local compliance such as filing return of income and other formalities, this change in fact bring incremental tax revenue to the FBR as presently the non-resident investors are not investing in government securities due to the uncertainty of the tax treatment.