Govt mulls tax hike on banks’ profits from securities

KARACHI: The government is mulling to increase tax rates on profit from investments in government securities by banking companies, keeping the interest rate hike under consideration, The News learnt on Monday.

The Tax Reforms Commission (TRC) proposed the government to slap 15 percent tax from the existing 10 percent on returns from government securities by banking companies.

The government constituted the TRC to guide it about means to rationalise direct and indirect taxation.

A TRC member, requesting anonymity, said the banks are making money out of depositors’ funds without making any efforts. Banks invest in market treasury bills (MTBs) and Pakistan Investment Bonds (PIBs) to lend money to the government for budget financing.

“The income generated by the banking companies in respect of investments made in excess of the minimum liquidity reserve under section 29 of the Banking Companies Ordinance 1962 in PIB and T-bills shall be subject to higher income contribution,” the TRC said in a report. “The rate of surcharge should be 15 percent on interest earned on such excess investment.”

The State Bank of Pakistan (SBP) raised its key benchmark interest rate by 150 basis points to 12.25 percent from 10.75 percent last year. The SBP has kept pushing up interest rate since January 2018. Higher interest rate attracted the risk-aversive banks to invest into government papers for higher returns.

The banks last month aggressively participated in the auction as the SBP accepted bids for sale of three and six months treasury bills at realised value of Rs3.1 trillion at face value of Rs3.19 trillion.

Banking experts said it was the highest ever funds generated through sale of government papers in a single auction.

Sources in the Federal Board of Revenue (FBR) said the revenue board also recommended the government to increase the tax rate for banking companies, especially returns from investment in government securities, to generate more revenue.

An official at the Large Taxpayers Unit Karachi said the unit discussed the issue with the FBR to increase the tax rate for banks on making investments.

The tax official said the existing rate on profits derived through investment in government securities is 10 percent. The FBR was asked to at least increase the rate up to 50 percent.

The official further said the pattern of lending by banks would be changed as the interest rates are rising and it would leave meager amount for the private sector credit and banks would be more attractive towards risk-free investment.