Pakistan Banks Association (PBA) has sought five years tax exemption for new micro finance banks being established under Microfinance Institutions Ordinance, 2001 through Finance Act, 2015. According to the budget proposals of the PBA relating to the microfinance sector submitted to the FBR, tax exemption for micro finance banks is available under clause (66) (xviii) of Part I of Second Schedule of the Income Tax Ordinance 2001. Under the said provision, any income derived by: (66) (xviii) "Micro Finance Banks for a period of five years starting from first day of July 2007:
Provided such banks shall not issue dividends to their shareholders and their profit and gain (if any) shall be utilised for micro finance operations only, it added. It is suggested that exemption for the new banks established under MFI ordinance 2001 be given for 5 years or the exemption for the entire sector be extended for another five years till Financial year ended June 30, 2018.
The tax exemption to MFBs, which expired in 2012, was provided by the GoP for a period of five years starting from 1.7.2007 to encourage establishment of MFBs in Pakistan. As a result of this economic incentive, five new MFBs have received license from the SBP. To promote establishment of new MFBs and to provide a level playing field to all old and new MFBs, the exemption should be reinstated for a period of another five years, BPA said.
PBA has also submitted proposal pertaining to tax exemption for not for profit organisations placing deposits in MFBs. According to Clause (59) of Part 1 of Second Schedule of Income Tax Ordinance, 2001, mark up/ interest [profit on debt] from scheduled banks is exempt from tax for "not for profit" organisations. However, if these organisations invest or place deposits with MFBs, the profit from these deposits is taxable.
It is proposed that to provide level playing field to MFB and facilitate them in mobilising deposits, it is proposed that work on "Micro Finance Banks" inserted along with schedule bank in clause (59) part 1 of the Second Schedule to the ordinance.
In the last few years MFBs have had noteworthy success in mobilising deposits. This tax clause is detrimental for MFB's as it discourages mobilising of deposits and investments from not for profit organisations, it proposed.
Currently, MFBs are being charged minimum turnover tax at a rate of 1 percent. It is suggested that the percentage of turnover tax be reduced from 1 percent to 0.2 percent, which the lowest rate prescribed in the law for certain small sector to facilitate and assist growth of MFBs industry and to serve the lower income segment effectively, PBA added.
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