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July 23, 2020

Tax collection on govt securities up 88pc

Business

July 23, 2020

KARACHI: The collection of income tax from investment in government securities has registered growth of 88 percent in fiscal year 2019/2020 due to higher tax during the period and safe investment avenue for commercial banks, sources said on Wednesday.

According to official data, tax collection on investment in government securities climbed up to Rs4.26 billion during 2019/2020 as compared with Rs2.27 billion in the preceding fiscal year. Sources in Federal Board of Revenue (FBR) said that during the last budget, the government imposed 37.5 percent income tax on banks for making profits on their investment in government papers.

They said that banks were earning huge profits on account of incremental exposure to government securities.

Therefore, profit from such government securities as is in excess of 20 percent of total profit before tax is now taxed separately at the rate of 37.5 percent, they added.

Officials said the investment in government securities for banks remained attractive due to higher policy rate till outbreak of the coronavirus.

The policy rate was 13.25 percent till March 2020; however, the central bank in its monetary policy in March 2020 cut the rate to facilitate businesses and borrowers following the COVID-19 pandemic, which had almost halted business and commercial activities.

The federal government borrowed heavily from commercial banks for budget financing during the current fiscal year after restraining itself to borrow from State Bank of Pakistan (SBP) under Fiscal Responsibilities and Debt Limitation Act 2005.

The FBR sources said that during the past four months, SBP significantly reduced policy rate in the wake of COVID-19 pandemic, which would hamper revenue collection growth under this head.

The SBP eased monetary stance by 625 basis points to support the industry, which was facing serious financial problems owing to the virus.

The federal government borrowed Rs2,413 billion from commercial banks during fiscal year 2019/2020 as against retirement of Rs771.6 billion in the preceding fiscal year.

Sources said the banks had derived huge profits on investments in government securities due to attractive returns. The government borrowed from commercial banks through auction of market treasury bills and Pakistan investment bonds.