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The dust seems to have settled on the implications of the second amendment in the Finance Bill 2018-19. The Finance Minister, in his speech in the National Assembly had decided to conveniently skip the increase in rate of super tax for banking companies. It took a while before the analyst community realized that the super tax at 4 percent is here to stay till at least tax year 2021 – instead of being gradually phased out.

The market analysts have varying opinions on the implications the super tax will have on the banking earning yields and fair values. Some term it a “non-event”, others “positive” and some “neutral”. It is hard to fathom how a 1 percentage point difference in effective tax rate, which is already on the higher side, could lead to such contrasting views.

For the government, this means more money, although by most estimates the additional tax collection on this front would not be more than Rs4 billion, should profits grow by 10 percent. The fact that the super tax has been extended to years 2020 and 2021 is indicative, the government is aware of the windfall gains that are set to be earned on government papers – taking a few bucks back would not hurt the cause. The Finance Minister, in a private meeting, pointed out the tax as a reminder for banks to start doing what they are supposed to do.

More uncertainty has been surrounding the impact that the relaxation in taxes on incremental advances for SME, housing and agriculture loans may have. As things stand today, credit to both the SME and agricultural financing have so far registered negative flows. Housing finance has also slowed down from yesteryear.

It remains to be seen, whether the incentives will draw more banks to entertain clientele in these categories. Recent evidence suggests, the demand side has been slow – with the number of applications for loans in the categories having reduced considerably. The jury is also out on who is to benefit more from the tax breaks – will it be those who have a bigger exposure – or those with a smaller one. On cue, most brokerage houses have contrasting opinions on this one too. The stock market though, seems to be taking a favourable view of the recent events, with the banking index outperforming the KSE-100 benchmark index by a considerable margin in last five trading sessions.

Copyright Business Recorder, 2019

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