Proposed amendment in Seventh Schedule: FBR to suffer Rs 10 billion loss

The Federal Board of Revenue (FBR) would suffer a loss of Rs 10 billion due to the proposed amendment, relating to banking sector, in the Seventh Schedule of Income Tax Ordinance 2001 in 2009-10 budget. The Seventh Schedule to the Income Tax Ordinance was amended to restore the facility for banks to claim deduction on account of provisions of non-performing loans. However, the same has been proposed to be restricted to 1 percent of total advances made by the bank in a tax year.
According to the rationale behind the proposal, provision of NPLs is not allowable under the Income Tax Ordinance, 2001. However, in 2007, Seventh Schedule was added to the Income Tax Ordinance, whereby provisioning of bad debts as certified by the external auditors were made allowable from tax year 2009. Later on, the SBP made changes in the Prudential Regulations and the banks were allowed to provide for the bad debts without taking into consideration the Forced Sale Value (FSV) of the pledged assets. This amendment was detrimental to the revenue as huge provisioning of NPLs were apprehended for the year 2009. Therefore, Seventh Schedule was amended and NPLs were to be allowed as per section 29 of the Income Tax Ordinance, 2001.
The SBP has amended the Prudential Regulations 2007 vide BSD Circular NO.2 of 2009 dated January 27, 2009 to take the FSV into account for provisions of NPLs as certified by the External Auditors on the strength of the Prudential Regulations. However, provisioning made by the banks for the period ending on December 31, 2008 are at Rs 87 billion excluding Bank of the Punjab which has not provided the accounts to the SBP yet. Allowing the provision as per the certification of the external auditors cannot be considered to be justifiable. It is proposed that 1 percent of the advances be allowed as deduction of provisioning for bad debts. If in a case the provisioning is less than 1 percent then actual provisioning will be allowable.
Therefore, it was proposed that the provisions of Rule 1(c ) (d), (e) and (f) of Seventh Schedule be restored and a cap of 1 percent of advances be provided. In section 29A, the words "banking company" to be deleted as the provision is being allowed to banking sector under the Seventh Schedule of the Income Tax Ordinance, 2001.