FBR eyes Rs100bln in revenue from banking sector in FY2021

KARACHI: The Federal Board of Revenue (FBR) is eyeing around Rs100 billion in revenues, during the next fiscal year of 2020/21, from bad debts that banking sector currently considers as expenses, sources said on Monday.

The sources said the FBR is planning to amend income tax treatment of bad debts in order to generate the additional revenue during the next fiscal year.

Currently, banks are availing bad debts as expenses, which reduce their income tax liability.

Sources said provisions for advances and off-balance sheet items have been allowed up to a maximum of 1 percent of total advances under the seventh schedule of the Income Tax Ordinance, 2001. Provisions for advances and off-balance sheet items have been allowed 5 percent of total advances for consumers and small and medium enterprises (SMEs) as defined under the State Bank of Pakistan’s prudential regulations. A certificate from the external auditor needs to be furnished by the banking company to the effect that such provisions are based upon and are in line with the prudential regulations.

Further, provisioning in excess of 1 percent of total advances for a banking company and 5 percent of total advances for consumers and SMEs are allowed to be carried over to succeeding years.

However, if provisioning is less than 1 percent of advances, for a banking company, then actual provisioning for the year would be allowed. If provisioning is less than 5 percent of advances for consumers and SMEs, then actual provisioning for the year would be allowed and this provisioning would be allowable from the first day of July 2010.

Large Taxpayers Unit (LTU) Karachi, which has jurisdiction over majority of banks operating in Pakistan for tax purposes, forwarded a budget proposal to the FBR to substitute the existing rules related to taxation on the advances.

The LTU Karachi suggested amendment to replace sub-rule (c) of Rule 1 of the seventh schedule.

“(C) Provisions, of whatsoever nomenclature or nature, shall be disallowed in terms of section 34(3) of the Income Tax Ordinance, 2001. Provided that reversal of provision may be allowed as deduction, if it is verified through supporting evidences that provision for the same was already disallowed and charged to tax,” a budget proposal document said.

The LTU Karachi further advised that bad debt should be allowed as deduction, if all the conditions under a section (29 of the Income Tax Ordinance, 2001) are fulfilled.

The sources said an individual would be allowed deduction expenses for bad debt in a tax year if it is believed that the debt is not recoverable after all efforts, under the section 29 of the Income Tax Ordinance, 2001.

The debt or part of the debt is written off in the accounts of the individual in the tax year.

The sources in the LTU Karachi said the proposed amendment would bring parity in treatment of provisions and bad debts for all classes of taxpayers. The tax unit believed that around Rs100 billion would likely to be generated if the amendment is incorporated into the law through an upcoming Finance Bill 2020, they said.

The government is facing a daunting challenge to meet the revenue collection target of Rs3.9 trillion for the current fiscal year, which was revised down from Rs4.8 trillion considering the shocking impact of two-month long lockdown after the coronavirus outbreak. The targets were revised down a number of times in the past as the slowdown in economic activities adversely hit the revenue collection efforts.

Now, the government wants the target to be lower for the next fiscal year, but it has to gear up efforts in any case to even meet the previous year’s levels with growth faltering badly.