ISLAMABAD, June 12: The government has proposed a range of amendments in the income tax law for computing income, profits and gains of banking companies in a bid to streamline taxation of these companies.

Through the Finance Bill 2007 a new section 100-A together with the seventh schedule has been introduced, which would be effective from tax year 2008 - income year ending at any time between July 1, 2007 and June 30, 2008.

The seventh schedule prescribes the rules for the computation of profits and gains of a banking company and the tax payable thereon. The fundamental principle envisaged in the rules is that the profits and gains of a banking company for the purpose of taxation shall primarily be the pre-tax profits from all sources as computed in the annual financial statements that are submitted to the State Bank.

Such profits would, however, be subject to the following adjustments: the accounting depreciation and amortisation deduction, which have been charged to the profit and loss account, would be added back to the income and normal depreciation allowance, initial depreciation allowance and amortisation deduction would be allowed in accordance with the provisions of section 22, 23 and 24.

Ford Rhodes Sidat Hyder & Co. in its budget briefs said there is a major deviation from the past as it is provided that no allowance on account of depreciation or amortisation shall be admissible on assets that are leased by the bank to its customers under a finance lease arrangement.

Under a finance lease arrangement, the banking company treats the investment as a recoverable/loan and shows the finance charge only as its income. Consequently, the amount of lease instalments received, representing repayment of investment/loan, would not be taxed in the hands of the banking company.

The provisions for classified advances and off balance-sheet items, like provisions for guarantees etc. would be allowed as claimed in the accounts except for those provisions that are classified as “substandard” under the Prudential Regulations of the State Bank.

However, banks would be required to furnish a certificate from their external auditors, certifying that the provisions claimed in the accounts are in line with the requirements of the Prudential Regulations.

The schedule further provides that where a provision is added back in a tax year due to the fact that it has been classified as “substandard” and in the subsequent year it is reclassified as doubtful or loss or otherwise as recoverable by the bank, such provision added back to income would be allowed to be deducted from the income of the tax year in which it is reclassified.

It has further been provided that at the time of actual disposal of such financial instrument and investment property, adjustment would be made to the income recognized in the year of disposal to ensure that the exclusion from income in the previous tax years is accounted for when determining the gain on actual disposal.

The provisions of section 21 of the Ordinance, which enumerates certain deductions, which are not admissible in computing the income under the head “income from business” would equally apply while calculating the taxable income under the seventh schedule.

Similarly, the concept of fair market value provided in section 68 and the recognition of gain on disposal of business assets under section 22(8) shall be applicable in computing the taxable profits of the banking company.

Any expenditure (other than a charge for irrecoverable debt) which is allowed in a tax-year (on accrual basis) and the liability in respect of such expense remains unpaid for three years from the end of the tax-year in which the deduction was allowed, shall be taxed in the following tax year.

However, a subsequent payment against such added back liability would enable the bank to reclaim the expense in the tax-year in which it is paid.

Any loss sustained on sale of shares of a listed company shall be adjustable against the gain on sale of shares of the company. Any unadjusted loss on account of disposal of such shares shall be allowed to be carried forward for six years immediately succeeding the tax-year in which the loss was incurred, added the report.