Income tax collection from banking sector down 21 percent in July-March

KARACHI: Income tax collection from banking sector fell 21 percent to Rs43.50 billion during the first nine months of the current fiscal year as the second biggest revenue spinner for the Federal Board of Revenue (FBR) after the oil and gas sector saw a decline in investment in government securities, officials said on Monday.

FBR collected Rs55.4 billion on account of income taxes from the banking sector during the corresponding period of the last fiscal year. Industry officials said lower earnings of financial institutions and disparity in corporate tax rates affected revenue collection from the banking sector.

The official said banking sector is the second biggest revenue spinner for FBR in terms of direct taxes after the oil and gas sector. “Previously, banks were heavily parking funds into government papers,” an official said. “Income of the banks, however, declined under the head as the central bank kept the policy rates lower.”

The profitability of banking system came down 17 percent during the calendar year 2017 as banking system earned Rs158 billion during the January-December 2017 period as compared to Rs190 billion a year earlier.

Analysts said the major reasons for decline in earnings were lower non-interest income and higher administrative expenses. Profits banks generated in the last quarter of calendar year 2017 were lower as compared to the quarterly average of the last three years.

State Bank of Pakistan (SBP) said a substantial decline in gain on sale of securities (Pakistan Investment Bonds) was the major reason for fall in profitability in Q42017. “Continuous low interest rates have resulted in the stock of high yielding government bonds getting thinner and thinner,” the SBP said in a quarterly report.

Tax experts said higher corporate and super tax rates on the sector also contributed to lower profitability of the banking system. The corporate tax rate for banking companies is 35 percent for the tax year 2018 as against 30 percent for other corporate entities in the same tax year. Similarly, the government imposed super tax at four percent on the banking companies as against three percent on other than banking companies on income exceeding Rs500 million. Overseas Investor Chamber of Commerce and Industry, in its budget proposals, said the tax rates of the banking sector should be aligned with the corporate sector.