ISLAMABAD, July 1: The government has levied income tax on income of commercial banks through dividend, bonus units or capital gains to be effective from July 1, 2003.

A senior official told Dawn on Tuesday the decision was announced through the finance bill 2003-04, which would be effective from the current tax year 2003-04.

According to the decision, the income received through dividend or bonus units or capital gains should be treated as the normal income of the banks on their holdings in mutual funds, which were set up exclusively for investment in terms finance certificates, government securities and other debt instruments and money market instruments.

These income would be taxed at the tax rates as provided in Division II of part I of the first schedule of the Income Tax Ordinance 2001.

It was observed that the commercial banks have started investing in these types of mutual funds to get undue tax benefits. Through this way, the official said, the banks investment was exempt and as well as their income from dividend was only taxed at 5 per cent and 10 per cent.

Under the amendment, the income including capital gains derived by banking companies from mutual funds registered with the Securities and Exchange Commission of Pakistan (SECP) and with the objectives of exclusively investing in term finance certificates, government securities and debt instruments and money market instruments, would now constitute the business income of the banks and taxed at the specified rates.

Banks tax rates were scaled down to 44 per cent in the budget 2003-04, which would be further reduced to 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 because of restructuring of banks and tax rates.