Budget 2007-08: IT exemption on banks' interest from agriculture loans likely

The federal government is expected to exempt income tax (IT) on interest income earned by commercial banks from agricultural loans. It was learnt here on Saturday that federal government is expected to take this decision in the forthcoming budget 2007-08.
Income tax will be exempted in order to ensure the credit availability up to 75 percent to 80 percent to the agricultural sector during the next three to five years. A senior tax official said that State Bank of Pakistan (SBP) has requested the federal government to exempt income tax on commercial bank's interest income from agriculture loans.
SBP's agriculture credit committee is preparing an agri-loan strategy in consultation with other stakeholders to ensure the credit availability up to 75 percent to 80 percent. At present the banking system is meeting credit requirements of 45 percent of agriculture sector, leaving rest of 55 percent to borrow from other expensive means.
Non-availability of agriculture credit to major portion of this important sector is depriving agriculture sector to perform up to the potential. The State Bank of Pakistan (SBP) has informed the federal government that SBP is working on a strategy, in consultation with stakeholders, to enhance the outreach of agriculture rural credit through banking system by targeting for annual disbursement of 75 percent to 80 percent of the estimated agriculture sector in next three to five years period.
The SBP's discussion on the proposed strategy with the commercial banks have resulted in certain proposals, which include a tax exemption or concession rate of tax for banks on interest income on agriculture credit for a three to five years period.
The impact of tax relief is estimated to be around Rs 2 billion per year based on estimates for the period ended June 30, 2006. SBP has supported its proposal by providing evidence that the suggested relief would facilitate commercial banks to invest in agriculture infrastructure, development of new products, awareness building campaign and other allied areas of agriculture or rural credit.
Such facilitation would encourage banks across the board to adopt agriculture as viable business line that will also achieve the objective of the government and SBP for growth of agriculture sector.
The SBP has said that this communication is the part of ongoing efforts for expanding agriculture credit reach at gross root level and accompanying positive impact on poverty reduction. Such facilitation in agriculture sector, a significant contributor to the country's GDP and employment, would be a credible effort towards poverty alleviation amongst rural population.
While the disbursement to agriculture sector have witnessed an appreciable rise from Rs 52 billion in financial year 2001-2002 to Rs 136 billion in financial year 2005-06 as a result of sector friendly policies of the government and facilitation role of the SBP, only 45 percent credit needs of this sector are currently being met through banking system.
At present the share of agriculture sector in GDP is estimated at 22 percent, once it was over 37 percent. The decrease in the share of GDP was mainly due to the unsuitable policies, non-availability of credit and other reforms, which were required to develop this sector on modern lines.
The government in the recent past has tried to facilitate this important sector to achieve its true potential not only to increase agriculture production but also to create employment opportunities in the rural areas of the country. These policies have started producing results even though this sector requires due attention of the government and banking system to come up to the expectations.