Tax collection from govt papers climbs 47pc in July-January

KARACHI: The Federal Board of Revenue (FBR) collected Rs3.55 billion in income taxes from return on investments by banks in government papers during the first seven months of the current fiscal year of 2019/20, significantly up 47 percent year-on-year, as risk-averse banking sector enhanced their exposures to safe and profitable state securities, official data showed on Monday.

Tax collection from investment in treasury bills and investment bonds amounted to Rs2.41 billion in the July-January period of the last fiscal year. Tax collection under the head witnessed an unprecedented growth of 149 percent year-on-year in January. It increased to Rs1.6 billion compared to Rs466 million.

The government, in this fiscal year’s budget, introduced 37.5 percent income tax profits made by banks on their investment in government papers.

Officials at Large Taxpayers Units Karachi said banks are earning substantial profits on account of incremental exposure to government securities. Profit from government securities – in excess of 20 percent of total profit before tax – is taxed separately at the rate of 37.5 percent, they added.

The officials said banks are increasingly taking interest in investment in government securities as they are attractive due to higher interest rate and risk-free avenue for the banks compared with private sector’s advances.

The central bank’s benchmark interest rate is currently standing at a decade-high of 13.25 percent. Private sector finds the cost of borrowing too high to avail it for meeting the working capital needs amid sluggish industrial activities.

Besides, the federal government has resorted to heavy borrowing from banks to meet budgetary financing needs since it restrained itself to borrow from the State Bank of Pakistan (SBP) during the current fiscal year under an obligation of International Monetary Fund’s (IMF) loan program. Last year, IMF agreed to lend $6 billion to Pakistan under a 36-month extended fund facility (EFF).

The SBP’s monetary aggregate data showed that the federal government borrowed Rs765.78 billion from banks through sales of market treasury bills and Pakistan investment bonds during the July 1 – January 20, 2019/20. The government retired Rs2.9 trillion to banks during the same period of the last year.

The central bank, in its first quarter FY2020 report, said the government borrowed heavily from commercial banks this year to retire the SBP debt unlike last year when it had borrowed heavily from the SBP to retire commercial banks’ debt.

“This shift can be traced to two major factors. First, the government had committed not to borrow from the SBP to finance its deficit under the EFF program. This commitment was limited not just to achieving zero quarterly borrowings, but also to refrain from rolling over the maturing SBP debt,” it said.

“Second, the commercial banks’ own appetite for investing in government papers remained strong. In particular, their expectations of interest rates had peaked out, which led them to lock available liquidity in longer tenor government securities.”