Profit on Debt: Bankers’ body approaches minister for reduction in tax rate

ISLAMABAD: After announcement of federal budget (2021-22), the Pakistan Banks Association (PBA) has again approached Finance Minister Shaukat Tarin for reduction in the tax rate on ‘Profit on Debt’ to 15 percent; income tax on banking sector from 35 to 29 percent, and withdrawal of discriminatory four percent super tax on banks. In a communication to Finance Minister Tarin, the PBA requested to amend the Finance Bill 2021-22 for incorporation of key proposals of the banking industry in the amended Finance Bill 2021-22.

According to the PBA letter addressed to Tarin, the banking industry wishes to bring the urgent matters to the finance minister’s attention, pertaining to the Finance Bill 2021-2022, which the banks believe, if not urgently addressed, may inhibit the banks’ ability to support the broader national economic objectives of growth and availability of credit, especially to the strategically important sectors of housing and construction, agriculture, SMEs, and energy and infrastructural development.

The banking sector is presently adequately capitalised.

However, as private sector lending increases to, including but not limited to, the priority sectors and more risk weighted assets are put on banks’ balance sheets and the loans to deposit ratio increase, from the present level of around 45 percent, the banking sector, the Capital Adequacy Ratio will start to go down and will then require more capital injection.

It will, therefore, be important for the sectoral return on equity to be good enough to always attract additional bank capital, it said.

The two broad taxation matters are the tax rate for banks and bank deposit placement - at a tax disadvantage vs investment in stocks and mutual funds.

(I) Tax rate for banks: The imposition of the highest tax rate of 35 percent for banking sector viz-a-viz the corporate sector of 29 percent and continuation of super tax rate of four percent only on banks will, we believe, not send a positive signal to banks’ local and foreign investors/sponsors, in terms of an equitable tax treatment for all sectors of the economy.

It is, therefore, once again requested to bring down the banks’ tax rate to 29 percent, as is applicable for the other sectors of the economy. It is also requested that super tax at four percent for banks, being discriminatory, be abolished.

(II) Bank deposit placement - at a tax disadvantage vs investment in stocks and mutual funds: The tax incentives available to an individual who invests in shares listed on stock market and in units of mutual funds are very attractive and have a huge advantage, over those available to a person who invests/places funds in bank deposits.

As per the Finance Bill 2020-2021, profit from bank deposit received by individual, classified as ‘Profit on Debt’ is taxable at a rate of 15 percent to 35 percent depending on the amount of profit earned, whereas, return on investment by same individual in shares or units of mutual funds is taxable at 15 percent for dividend or at 10 percent for capital gains, irrespective of the amount of return/gain earned.

The PBA is of the view that the tax rate should not be a deciding factor for preferring placements of cash in banks or purchase of units in mutual hind or in shares.

This disparity in tax treatment serves as a disincentive for placing funds in bank deposits over investments in mutual funds and in shares, which will seriously hurt the banking industry.

To correct this disparity, the BPA has proposed that ‘Profit on Debt’ be taxed at 15 percent, i.e. at the same rate as for return on investment in shares or units of mutual funds.

The PBA is, therefore, extremely disappointed that not only has our proposal to reduce the tax rate on Profit on Debt to 15 percent been completely disregarded, but the annual profit limit of Rs36 million has been significantly reduced to Rs5 million, at which such profit would be taxed under the head “ income from other sources”, which can be as high as 35 percent, it said. “Pakistan’s Gross Saving Rate is under 10 percent, which is far below our neighbouring countries, whose rates range between 25 to 30 percent,” it stated.

To fund the growth of economy, the PBA believes incentives should be provided to serve as catalyst for banking sector deposits to grow strongly and to shift savers’ and investors preference from physical assets (mainly real estate) to financial assets (mainly deposits).

This disparity in tax treatment on profit on debts; therefore, needs to be immediately corrected.

The banking sector, which paid total taxes of Rs156 billion for year ended December 2020 and which collected and paid to the FBR, year ended December 2020, with total contribution to the withholding tax of Rs194 billion for the year ended December 2020, with total contribution to the exchequer of Rs350 billion, with continue to support the government efforts for a strong, growing and vibrant economy.

As always in the past, the banking sector stands ready to support the FBR and the government in the efforts to grow taxation base and revenue in a fair and equitable manner, the PBA added.

Copyright Business Recorder, 2021