KARACHI: The Federal Board of Revenue (FBR) collected Rs923 million as withholding taxes on profit on debt in July, depicting a remarkable 28 percent year-on-year growth as drive to investment continued despite significant rate cuts, official data showed.
The withholding tax collection from profit on debt amounted to Rs721 million in the corresponding month of the last year.
The FBR officials said debt income includes profit on banking deposits and banking investment in government’s debt securities.
Banking investment remained intact in the government securities despite back-to-back rate cuts in the past couple of months to financially support the ailing economy further hurt by the coronavirus lockdown.
Since mid-March the State Bank of Pakistan (SBP) delivered a cumulative reduction of 650 basis points in the benchmark interest rate to 7 percent to rescue the faltering economic growth that contracted 0.4 percent last fiscal year from the revised 1.9 percent in the preceding fiscal year.
During the budget 2019/20, the government imposed 37.5 percent income tax on banks for making profits on their investment in government papers.
Banks were earning huge profits on account of incremental exposure to government securities, according to sources.
Profit from such government securities in excess of 20 percent of total profit before tax is now taxed separately at the rate of 37.5 percent, they said.
The officials said investment in government securities remained attractive and risk-free avenue for the banks due to higher policy rate before the outbreak of coronavirus.
The federal government also made heavy borrowing from commercial banks for budget financing during the current fiscal year after restraining itself to borrow from the SBP under a condition of the International Monetary Fund’s (IMF) loan program.
Pakistan agreed with the IMF to stop borrowing from the central bank for budget financing to introduce new monetary policy framework.
The IMF stressed the autonomy of the SBP and its operational independence to help in achieving inflation objective.
Last year, IMF agreed to lend $6 billion in installments to help Pakistan overcome its balance of payments crisis.
The loan program stalled in March and Pakistani authorities were asked to implement a revenue generation strategy.
In FY2020, total FBR’s revenue collection increased partly 3.9 percent to Rs3.9 trillion.
The FBR sources said the rate cut is likely to hamper revenue collection growth. The massive reduction in policy rate would redirect investment in banking deposits to other avenue that may result in decline in tax collection.
