The Pakistan Banks Association (PBA) in its federal budget proposals for the fiscal year 2023-24 (FY24) has requested the Federal Board of Revenue (FBR) to decrease the tax rate for banks from 39 percent to 29 percent.
The Association argued that the tax rate of 39 percent for banks is not only one of the highest in the region but too much compared to other business sectors in Pakistan, including the financial services sector which is taxable at a rate of 29 percent.
The banking industry representative recalled how the government offered a helping hand from 2014 onwards when it started lowering income tax rates for the corporate sector to 29 percent in 2019. Regrettably, no such incentive has been offered to banks since the tax rate on the sector was raised to 39 percent in FY23.
The PBA has recommended that banks be taxed at a steadily decreasing rate by first restoring it to 35 percent in the first year, then subsequently cutting the rate by 1 percent each year till 29 percent.
On another note, the association emphasized the disparity in tax rates between bank deposits and investments and pushed for a 15 percent tax rate on earnings on debt.
PBA opined that the tax rate should not be a decisive factor for cash placements in banks or the acquisition of units in mutual funds or shares. This kind of treatment serves as a deterrent for depositing funds in banks rather than investing in mutual funds or stocks, which harms the banking industry, and hence, this issue must be remedied, it added.
The Association has further proposed that banks should receive KIBOR-based payouts for the use of their funds as monthly advance tax.
PBA also recommended additions in regulations for highlighting Musharakah, Modaraba, Murabaha, Musawama, Ijarah, Istisna, Salam, and other Shariah-compliant transactions as financing transactions rather than trading activities, which would essentially remove uncertainty and prevent such transactions from being treated as activities which would normally involve the withholding of income tax.
The Association said it was mindful of the budgetary constraints the government was facing and reiterated that the banking sector was open to helping FBR in its efforts to increase the tax base.