Islamic banks concerned over levy of minimum tax

KARACHI: Islamic banks have raised concerns over imposition of one percent minimum turnover tax on loss-making Islamic mode of financing.

In a recent communication sent to the ministry of finance, the Islamic banking industry had raised concerns, considering murabaha transactions, including commodity murabaha as normal sales transaction.

Under Section 113 of the Income Tax Ordinance, 2001, the minimum turnover tax is required to be paid by those companies and banks, which are incurring losses.

Sources in the banking sector said the Federal Board of Revenue (FBR) issued notices to an Islamic bank for payment of one percent turnover tax, while treating gross value of murabaha transactions as sales turnover of the bank.

The sources informed the ministry that as per the Rule 3 of the Seventh Schedule of the Income Tax Ordinance, 2001, which is exclusively for the banking industry, the Islamic banking industry is to be treated at par with the conventional banks for the purposes of calculating income and tax liability.

“It implies that murabaha transactions conducted by an IBI will be considered as financing rather than sale of goods for the calculation of income and tax liability,” the communication added.

It was further informed that murabaha financing has been excluded from the definition of ‘supply’ under SRO 445 (I)/2004 issued on June 12, 2004. Besides, any murabaha arrangement by an Islamic banking entity had already been exempted from application of minimum turnover tax that was incorporated through the Finance Bill 2009. However, this exemption is not properly covered in the ordinance.

Moreover, the sources said such exemption was also needed for other Islamic modes of financing such as Musawamah, Bai Muajjal, Musharakah, etc. Considering the hardships, the Shariah compliant banks urged the ministry to intervene into the matter and direct the FBR officials concerned to issue instructions to adhere to the tax exemption and neutrality treatment available to the Islamic banking industry.

The Islamic banking industry proposed amendments to the ordinance and urged the ministry that such amendments should be incorporated in the upcoming budget to permanently resolve the issue. “This will prevent any potential discrimination against the Islamic financial institutions and ensure tax neutrality for them as required in the Income Tax Ordinance, 2001.”