State Bank of Pakistan (SBP) has proposed amendments to the Seventh Schedule (Banking Schedule) of the Income Tax Ordinance 2001 in the upcoming budget (2018-19). According to the budget proposals of the SBP for 2018-19, the provisions for advances and off-balance sheet items shall be allowed up to a maximum of 1% of total advances. Provisions for advances and off-balance sheet items shall be allowed at 5% of total advances for consumers and small and medium enterprises.
An explanation should be inserted in Rule 1(c) of the Seventh Schedule that total advances means ''''gross advances'''' before excluding the provisions for bad & doubtful debts, the SBP proposed. The tax authorities misconstrued the word "total advances" as "net advances", shown on the face of the balance sheet in their tax assessments in order to increase their tax collections. However, the word total implies clearly that the amount of gross advance should be taken for the tax assessment. Therefore, it is recommended for the insertion of the proposed explanation, the SBP added.
The SBP has proposed that the provisions of the ordinance not specifically dealt with in the aforesaid rules shall apply, mutatis mutandis, to the banking company. This rule should be deleted.
The Rule 9 gives tax officers the power to make adjustments in the computation of tax liability, which are beyond the scope of the 7th Schedule. Whereas, adjustments can only be made under Rule 1(a) to 1(h) of Seventh Schedule and beyond that, no addition can be made. Such practices are negating the very purpose of 7th Schedule. Such rule does not exist in schedule for insurance companies; therefore, it is a discriminatory treatment with banks, the SBP added.
The SBP has proposed amendment relating to the profit on non-performing debts of a banking or development finance institutions. A new subsection (3) is proposed to be added in section 30 of the Ordinance as follows:
"(3) Deduction shall not be allowed to the borrower for markup! Interest (profit on debt) incurred on non-performing debts, if profit on debt is not paid within stipulated time and becomes overdue and is credited to suspense account by the banking company or development finance institution as per Prudential Regulations of the State Bank of Pakistan. However, borrower shall be allowed deduction for the amount paid in the year in which payment is made."
Proposed sub-section will specifically cover taxation of overdue profit on debt in the hands of borrower who is presently enjoying tax benefit by way of taxable deduction of financial charges and the government remains deprived of tax revenue.
Any benefit availed by way of waiver of markup/profit/interest on debts under any scheme issued by State Bank of Pakistan is taxable in hands of borrower as "income from business" under section 18 of the Ordinance. However, there is no treatment available in the Ordinance regarding overdue markup/interest/profit on debt, which remains unpaid by the borrower, who also claims this amount as tax-deductible expense. The amount of overdue markup/interest/profit on debt should be taxed in the hand of borrower, the SBP added.
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