FBR disapproves Rs1.3bln penalties on banks as expenses

KARACHI: The Federal Board of Revenue (FBR) has disapproved at least Rs1.3 billion worth of penalties imposed on banks by the central bank as expenses, asking them to include the amount under pre-tax head in their books, sources said on Tuesday.

The sources said FBR disallowed the monetary penalties as expenses claimed by banks to reduce tax liability. The sources said the banks claimed the monetary penalties imposed by the State Bank of Pakistan (SBP) as expenses.

An official at Large Taxpayers Unit (LTU) confirmed that no deduction to reduce tax liability is allowed in case of any fine or penalty paid or payable by taxpayers for the violation of any law, rule or regulation, under a section (21(g)) of Income Tax Ordinance 2001.

The official said the same law is applicable on a domestic bank having a foreign branch and penalty imposed by authorities of that country where its branch is located.

The SBP has been making public the enforcement of monetary penalties on banks for violating rules and regulations since July 2019. SBP, during the past five months, imposed around Rs1.3 billion on various banks for violating rules and regulations related to anti-money laundering, customer due diligence and know-your-customer. The penalties have been imposed on both small and large banks following the central bank’s strict surveillance on money laundering and terror financing deficiencies.

The sources said any action against financial institutions or other entities where monetary penalty is involved would not be allowed as expenses under the law. Therefore, such amount should be treated as income and paid after tax profit / income of such financial institution or any other entity.

The official at the LTU Karachi said the unit would recover income tax in case any bank adds the monetary penalty to its expenses. The official said the banks pay advance tax in phases for a tax year on assumed profit/loss for that year. The official said all such claims of the banks had been rejected and any future penal action by the SBP would also not be allowed.

Another official said the FBR is also keenly monitoring the pattern of expenditures by the financial institutions, which would potentially be used for tax avoidance.

The official said LTU Karachi selected some banks for scrutiny expenses and found that some abnormal deductions were made by the financial institutions. These expenses were mainly related to payment made to individuals/entities operating outside Pakistan, the official added.