Banks likely to pay higher tax on income from papers

KARACHI: Banks will be charged additional income tax on their investment in treasury papers as authorities want to increase revenue from the banking system amid significant rise in interest rates, sources said on Thursday.

The sources said the Federal Board of Revenue (FBR) directed all the commercial banks to pay 37.5 percent tax on income earned through investment in papers rather than the standard 35 percent.

The sources said Large Taxpayers Unit (LTU) Karachi – the leading revenue collection arm of the FBR – sent communication to financial institutions, informing them that the Finance Act 2019 made a change regarding implementation of tax on income earned from additional investment in federal government securities.

The sources said the banks would pay 37.5 percent tax on income earned from additional investment in federal government securities for the tax year 2020 and onwards. Since the financial year of banking companies runs through a calendar year income for the tax year 2020 would be calculated from January 1, 2019.

Sources said initially the proposed income tax on papers was around 50 percent. The government, however, in budget 2019/20, introduced 37.50 percent as income tax on investments in government securities by banking companies.

The FBR sources said the tax authorities are estimating huge earning by banks in the wake of continuous rise in policy rates by the State Bank of Pakistan (SBP). The central bank had adopted monetary tightening stance since May 25, 2018 and pushed up interest rates to 13.25 percent from 6 percent during the past eight consecutive policy announcements. The sources said investment in government securities is seen rising as the policy rate is moving upward. The government borrowed around Rs2.211 trillion through sale of market treasury bills in an auction last week.

Government borrowing from banks will further increase as the government decided not to take money from the central bank for budgetary financing under a bailout deal with the International Monetary Fund (IMF). Pakistan agreed to a $6 billion IMF loan program earlier this month to avert balance of payment crisis. A condition of the program for the government is to shed reliance on borrowing from the central bank. The government also set a challenging revenue target of Rs5.555 trillion for the current fiscal year of 2019/20 to reduce primary deficit to 0.6 percent of GDP.

The sources said LTU Karachi proposed the FBR to impose higher income tax on the banking companies as the banks are earning without any efforts by investment in government papers.

The LTU Karachi also informed the banks that they are also required to submit certificates from external auditor along with the accounts while e-filing income tax returns, certifying the amount invested in the government securities in a preceding tax year, additional investment made for the tax year and mark-up income earned from the additional investment for the tax year.