The State Bank of Pakistan (SBP) has proposed enhancement in the limit of Rs50,000 to Rs100,000 for collection of advance tax on cash withdrawals and online transfers by Small And Medium Enterprises (SMEs) and three-years tax holiday for women entrepreneurship and start-ups for small businesses in budget (2018-19).
According to the budget proposals of the SBP for 2018-19, in order to encourage women entrepreneurs and start-ups of small businesses (defined in SBP's prudential regulations, entities with up to 50 employees and annual sales up to Rs150 million), it is proposed to announce a tax holiday for at least three years for women entrepreneurs and start-ups. This will encourage women and entrepreneurs to get financially included and utilize formal banking channels to get credit.
The 'Policy for Promotion of SME Financing' was prepared after thorough consultation and coordination with relevant stakeholders to give impetus to SME sector through facilitative policy measures. One of the pillars of said policy is 'Simplifying Taxation Regime for SMEs'. Based on feedback received from stakeholders, following tax proposals have been prepared regarding SME financing:
Income of banks arising out of SME Finance: In order to make SME financing a viable solution for banks as well as for the SMEs, it is proposed that the federal government may consider providing tax relaxation on the income of the banks earned on SME portfolio by reducing the rate from 35% to 20%. This will encourage banks to improve their lending to SME sector which are considered to be growth engine of the economy. Its probable impact on current outstanding of SME finance in terms of tax collection will be around Rs3 billion.
Advance Tax on cash withdrawal and online transfers by SMEs: Many of the SMEs, especially small business, are avoiding banking channels for routing their transactions due to advance taxation. It is, therefore, proposed that considering the size of the SMEs and encouraging them to avail banking services, advance tax on cash withdrawals and online transfers by SMEs may be relaxed from Rs50,000 to Rs100,000.
Tax incentive for SMEs: Further, taxation rate on SMEs as defined for small companies is currently 25% in comparison to tax rate of 32% for large companies. This rate may further be reduced from 25% to 20% for SMEs, the SBP proposed.
Low Cost Housing Finance: State Bank of Pakistan is in the process of formulating a policy for promotion of low-cost housing finance in Pakistan. The policy focuses on the regulatory incentives, risk mitigation mechanism for financial institutions and mechanism to address the issue of affordability for low income borrowers. As a part of the above policy, the SBP has defined low-cost housing. To qualify under low-cost housing, purchase/ sale price of the housing unit/ apartment should be up to Rs2.5 million with monthly income of the borrower up to Rs50,000. The maximum loan-size under low-cost housing shall be Rs1.40 million.
In order to achieve desired objectives of the low-cost housing finance policy, it is proposed that the federal government may also announce the following tax incentives: Tax Exemption on Bank Income: The SBP in coordination with relevant stakeholders has long been pursuing to give impetus to housing finance though facilitative policy measures. Few institutions consider housing finance as financially unviable product due to longer maturity period and foreclosure related issues. In order to make it viable for the bank as well as for the low-income consumer, it is proposed that the federal government may consider giving tax holiday for five years on the income of banks/ DFIs earned on mortgages up to Rs1.4 million for tax purposes. This will stimulate the banks to venture into low-cost housing finance and cater to the housing needs of low-income groups.
Tax exemption to Low Cost Housing Builders/Developers: The large portion of the housing units' shortage has been estimated in low-income groups. With the passage of time, people are moving towards the urban areas for better opportunities, which is causing shortages of housing units in urban areas. The situation calls for the immediate actions by the government to encourage supply of low-cost housing. In view of the above, it is proposed that the government may announce tax exemption for housing builders/ developers for five years on their income earned from the low-cost housing projects. For a project to be considered low-cost housing, sale/ purchase price of a housing unit/apartment/flat, for the end-user, shall not exceed Rs2.5 million.
Tax incentive for general housing finance: With a view to encourage savings in Pakistan which are on very low side, it is suggested that markup amount of the mortgage installment may be allowed as tax-deductible expense, irrespective of the loan amount. This will channelize general public savings in creating long-term assets in the form of housing units.
Exemption of corporate income tax on debt securities (bonds and Sukuk) issued by Pakistan Mortgage Refinance Company (PMRC): In Pakistan, banks and development finance institutions are not providing long-term fixed rate funding options. Thus, they rely on short-term deposits and short-term bank borrowings to finance their mortgage portfolios. To minimize interest rate risk, Primary Mortgage Lenders (PMLs) offer only adjustable rate mortgages (ARM) with rates typically tied to 1-year KIBOR. These products pass the interest rate risk onto individual borrowers who are not equipped to handle it. In high interest rate/inflationary environments, upward adjustments in mortgage rates significantly increase borrower delinquencies. As a result, banks have adopted a cautious attitude towards mortgage lending. The lack of long-term funding has also resulted in the PMLs offering mortgage tenors/terms that are typically for 15 years instead of the 25-30 years' term needed to make housing finance more affordable for borrowers, particularly for the middle and low-income borrowers. Pakistan Mortgage Refinance Company (PMRC) is being established to provide long-term funding for housing sector. Therefore, it is proposed that following tax exemptions may be granted to PMRC, the SBP proposed.
Exemption of corporate income tax on the income and gains derived by investors from PMRC debt securities (bonds) and Sukuk (collectively referred to as "PMRC bonds") issued to refinance the residential mortgage market; and exemption of Capital Gains tax on the resale of PMRC bonds by the investors will encourage trading and develop the capital market, the SBP added.
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