Proposals for fiscal year 2014 Budget: provision of advance IT for banks be restored: OICCI

Overseas Investors Chamber of Commerce & Industry (OICCI) has proposed amendment to Banking (Seventh Schedule) pertaining to the Income Tax Ordinance 2001 to restore original provision of Advance Income Tax for banks through which banks can file lower estimates of advance tax, if required.
Sources told Business Recorder here on Saturday that the OICCI has submitted viable proposals for the banking, leasing and insurance industry for budget (2013-14). According to the proposal, the FBR in June 2012 has issued a SRO 561(1)/2012 whereby the provisions of Seventh Schedule of the Income Tax Ordinance 2001 relating to the advance tax have been amended. Consequently, the provisions of section 147(6) relating to filing of lower estimate are no more applicable on banks even if the bank estimates that its tax payable for the relevant tax year is lower than the amount of advance income tax payable.
The original provision of Advance Income Tax should be restored for banks through which banks can file lower estimates, if required. The changes in the Seventh Schedule by virtue of SRO 561 has resulted in ending up banks paying more advance tax as compared to its 'tax charge' which is discriminatory as compared to other sectors. Furthermore, banks are also required to make monthly advance tax payments instead of quarterly facility available to other sectors.
It further proposed that the sub-rule 2 of Rule 8 of the Seventh Schedule pertaining to Group relief provides that if a subsidiary or holding company wishes to surrender its assessed losses for the tax year in favour of holding or subsidiary company, both entities should be banking companies. The provisions relating to group relief as contained in section 59B shall be available to the banking companies provided the holding and subsidiary companies are banking companies.
Under the normal banking business, one banking company cannot be a subsidiary of another banking company. Resultantly, Sub-Rule 2 of Rule 8 of the Seventh Schedule is redundant for banking companies since the benefit of surrendering of tax losses to another holding or subsidiary company is not available by virtue of above-mentioned condition.
The clause should be amended to remove the condition of both companies (holding and subsidiary) should be banking companies. Banking companies are aggrieved with the presence of said condition which has been mistakenly introduced to wrongly deprive the bank from the benefits of Section 59B, OICCI proposed.
Through another proposal, it said that the original provision of the Seventh Schedule should be restored whereby provision for bad debts falling under "lost" and "doubtful" category as per the Prudential Regulations of SBP and supported by a certificate of the auditor was allowable as a tax deduction to the banks. However, bad debts classified as "sub-standard" was required to be offered to tax by the banks.
Needless to mention that in the banking business it is imperative to take risk for earning income from advances as such bad debts are part and parcel of the banking business and therefore it is an expenditure incurred wholly and exclusively for conducting the banking business, OICCI added. It further proposed that the taxation officer is interpreting total advances as 'Advances' shown on the face of the balance sheet (net of provisions), therefore an explanation should be inserted in Rule 1(c) of the Seventh Schedule that total advances means 'Gross Advances' before provisions for Bad & Doubtful Debts.
The advances (net of provisions) appearing in the balance sheet excludes the debts against which the Bank has specifically created provisions (non-performing debts). Accordingly, it would be most illogical to exclude these advances from the statutory limit of 1 percent/5 percent as they actually represent a genuine loss in recoverability of income.
The banking companies have not adopted and applied the requirements of lAS 39 and 40 in the preparation of its annual accounts in view of the instructions issued by the SBP under BSD circulars. However, the taxation officer tends to amend the assessment on this account by subjecting to tax the MTM adjustment by taxing the unrealised losses.
Since the applicability of IASs 39 and 40 have specifically been deferred by the SBP, the financial assets and liabilities of the banks are classified, measured and reported under the SBP's BSD circulars. Accordingly additions made by the tax department on the plea that unrealised losses due to MTM are in accordance with IAS 39 and 40 are both factually and legally incorrect.
It said that the existing threshold of 1% of Total Advances (other than Consumer/ SME) should be increased to reasonable level, ie, 2 percent for corporate and other advances as tax deductible provision for bad debts for the year till the time original provisions for allowing bad debts are restored.
The OICCI proposed that the Rule 1 (c) should be amended as follows: Suggested change: "(c) Provisions for advances and off balance sheet items shall be allowed up to a maximum of 2 percent of total advances" The restriction on claim of provision for bad debt at 1 percent is too low in view of the Banking business. OICCI proposed that the State Bank of Pakistan (SBP) has approved Musharakah, Mudaraba, Murabaha, Musawama, Ijarah, Istisna And Salam As Islamic Mode Of Financing. This is also stated in the Islamic Financial Accounting Standard - II Ijarah issued by the Securities and Exchange Commission of Pakistan (SECP). This fact should also be mentioned in the 7th Schedule of Income Tax Ordinance.
A new clause should be inserted in the Seventh Schedule to treat Musharakah, Modaraba, Murabaha, Musawama, Ijarah, Istisna and Salam as financing transactions and not trading activity ie sale/purchase transactions, it proposed. The introduction of new clause in 7th Schedule explaining/ stating Islamic mode of financings will remove ambiguity so as not to treat Islamic modes of financing as trading activity ie sale/purchase transaction which can attract implication of withholding of Income Tax.
It said that the section 28 (1) (H) Of The Income Tax Ordinance, 2001 Allows Deduction to customers of the Islamic Banks In Respect Of Amount Paid By Them To A Banking Company Under Scheme Of Musharikah. However, complete tax neutrality is not available. It order to provide tax neutrality to customers of Islamic banks in respect of different modes of Islamic financings , we propose that following sub-clause (1A) be introduced in Section 32 of the Income Tax ordinance, 2001
"Any special treatment of Shariah compliant financing availed by a person from a bank or financial institution approved by the State Bank of Pakistan or the Securities and Exchange Commission of Pakistan, as the case may, shall not be provided for any reduction or addition to income and tax liability for the said Shariah compliant financings."
OICCI said that the S.R.O. 445(1)/2004 dated June 12, 2004 exclude Murabaha transactions from the definition of "Supply" for the purpose of sales tax. In addition to Murabaha, the Islamic banks also use other mode of financings ie Musharakah, Modaraba, Musawama, Istisna and Salam.
It said that the exclusion from the ambit of Sales Tax should specifically be provided in law for all Islamic modes of financings specifically approved by the SBP. Currently exemption from only Sales Tax is provided to Murabaha transactions vide S.R.O. 445(l)/2004 dated June 12, 2004. In the absence of specific exemption in law, there is an ambiguity that tax officers may treat the Islamic mode of financings as trading activity ie sale/purchase transactions which may attract implication of sales tax, OICCI added.