The Federal Board of Revenue (FBR) has refused to treat Rs. 1.3 billion worth of penalties imposed on banks by the State Bank as expenses.
According to the report by a local media house, the FBR is asking them to include the amount under pre-tax head in their books.
The report stated that the FBR has disallowed the monetary penalties to be mentioned as expenses by banks to reduce tax liability. The banks that were penalized are treating 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 section (21(g)) of Income Tax Ordinance 2001.
The official said that the law is applicable to a domestic bank with a foreign branch and the penalty is imposed by authorities of the country where the branch is located.
Overall, the central bank has imposed penalties of Rs. 1.34 billion since July 2019. Several banks were penalized multiple times. SBP has publicly enforced the monetary penalties on banks for violating rules and regulations since July 2019.
The central bank has enforced stringent rules and regulations regarding Customer Due Diligence/Know Your Customer as this ultimately caused the notorious Benami accounts in the banking system.
Bankers usually provide services to their customers without completing the requisite procedures including submissions of the required documents on the assurance of later submissions. This practice is common as bankers are supposed to reach massive targets from their management.
The report further stated that action against financial institutions or other entities where a monetary penalty is involved will not be allowed as expenses under the law. Therefore, this amount should be treated as income and paid after-tax profit/income of such a financial institution or any other entity.
Another official said the FBR is also keenly monitoring the pattern of expenditures by the financial institutions, which will potentially be used for tax avoidance.