May 20, 2003	Tuesday	Rabi-ul-Awwal 17, 1424

ISLAMABAD, May 19: The Central Board of Revenue has proposed tax on the income received by the commercial banks in the shape of dividend, bonus units or capital gains in the budget for 2003-04.

Official sources told Dawn here on Monday that the Central Board of Revenue (CBR) has sent a proposal to the Ministry of Finance to tax the income of the commercial banks relating to dividend, bonus units or capital gains.

The proposal will soon be discussed with the officials of State Bank of Pakistan and Securities and Exchange Commission of Pakistan (SECP) for final approval.

According to the CBR summary, copy of which was obtained by Dawn, the income received by way of dividend or bonus units or capital gains by banks on their holdings in mutual funds which are set up exclusively for investment in Terms Finance Certificates (TFCs), government securities and other debt instruments and money market instruments should be treated as their normal income and be taxed at the tax rates as provided in Division II of Part I of the First Schedule of the Income Tax Ordinance, 2001.

The banks investing in these types of mutual funds, the proposal said, got undue tax benefits. One, the channel in which they invest is exempt, and two their income from dividend is only taxed at 5%-10%. If these banks invest directly in TFCs, government securities or money market instruments, their income from these channels is taxed at the normal rates as provided in the Income Tax Ordinance 2001. “Hence by investing in such “private label” mutual funds which are classified as income or money market funds and which has the objective of investing in TFCs, government securities, other debt instruments and money market instruments, the banks not only derive undue tax benefits but also reduce the tax collection in the hands of the government”, the proposal said.

Banks were previously subjected to tax rates of 58 per cent, which has been lowered to 44 per cent for tax year 2004, to attain an ultimate rate of tax at 35 per cent in tax year 2007. They contribute substantial tax revenue and their share shall remain significant even after reduction in tax rates due to enhanced profit on account of restructuring of banks and tax rates.

The CBR, according to the summary, maintains that banks derive income from profit (interest) on securities, advances/loans to customers and investment in TFCs and the applicable tax rate is 47 per cent for 2003 and 44 per cent for 2004. Dividends received by the banks are subjected to 10 per cent being the rate applicable to dividends received from the resident companies. Mutual funds are also treated as resident companies and their distribution is taxed at 10 per cent (as dividend) although income of mutual funds is at 10 per cent.