Islamic bankers greet tax neutrality on financial instruments

KARACHI: Islamic banking industry on Friday commended the government’s move to consider Shariah-compliant financial institutions at par with conventional banking in terms of tax liability on inter-bank transactions and when it comes to taxation on their investment products.

“This move is likely to boost demand for Shariah-compliant financial products among customers,” said a senior banker. “It is also expected to give fair treatment to the banks and customers as well.”  The government, in the budget speech for the fiscal year of 2017/18, said tax neutrality for Islamic banking instruments, such as - Musharika, Ijarah, Murabaha as compared with conventional banking, “is proposed to be provided,” on the recommendation of the State Bank of Pakistan (SBP) and to promote Islamic mode of financing. 

Analysts said now withholding and turnover taxes should not be implemented on the transactions of the said Islamic banking instruments.

“I believe tax rate for the Islamic banks is now at par with conventional banks,” a banker said. “That’s also good since Islamic banks are already enjoying a higher spread.”

The government is also planning to introduce risk mitigation facility for small and medium enterprises through a Rs3.5 billion fund to be established in the SBP. The facility will cater to both Islamic and conventional banking products.

The government also exempted modaraba from a tax on profit. It imposed 10 percent, for tax year 2017 and onwards, on every public company other than a scheduled bank or a modaraba, which drives profit for a tax year but does not distribute at least 40 percent of its after tax profits within six months of the end of the tax year through cash or bonus shares.

Analysts said the impact on banking industry would, by and large, remain neutral.  

Corporate sector gets relief in the form of a 30 percent corporate tax rate effective for the tax year 2018. The government cut corporate tax from 35 percent to 34 percent for 2014. 

Pakistan Banks’ Association, in its budget recommendations, said banks were not provided with reduced corporate tax rate.

“In fact, the lower tax rate on capital gains and dividend income of banks has been raised to a uniform rate of 35 percent from tax year 2015,” the PBA said.

The association said the tax rates for banks should also be reduced to 30 percent for 2018, in line with the corporate sector and the tax rate be made uniform and equitable.

The finance minister, in his budget speech, said super tax would continue on banks to meet expenditures on security.

The government imposed this tax on big firms in 2015 to fund war on terror. 

Bankers said this move could increase income tax rate for banks to 40 percent.  This is also expected to slash the profitability of banks by 8 to 10 percent.  The Finance Bill 2017 proposed that branchless banking agents would be exempted from withholding tax on cash withdrawals.

Analysts said the measure would encourage branchless banking sector. 

Furthermore, the government hinted at reforms and introduction of new products in national savings.  

Bankers said digitising central directorate of national savings and new schemes would augur well with savings. “This will increase retail savings as well as help in flow of retail foreign deposits,” said a banker.