KARACHI: Reduce the tax and get more revenue. This formula proved right at least in the case of banking sector which started paying off more with the reduction of tax rate. During the last five years the CBR succeeded to increase its revenue by over 100 per cent. The strategy adopted to raise the revenue collection is debatable as the share of indirect taxes has gone up much more than the direct taxes showing the government’s inability to widen the tax net. The major chunk of revenue coming into the pool of indirect taxes is from sales tax which played a key role in pushing the revenue collection to a level unthinkable five years ago.
However, independent economists have been suggesting to the government to reduce the tax burden to yield better results but the old-fashioned bureaucratic minds remained frightened of the idea. The then finance minister Shaukat Aziz (now the prime minister) played a vital role to experiment the idea to reduce taxes.
Banks were heavily burdened with taxes which were 55 per cent higher than the corporate sector. He took the bold decision to change the tax structure for the banking sector. When the decision to reduce the taxes on banking sector was taken, the banks were facing a tough time with huge losses. The default rate of loans was much higher and a stock of over Rs250 billon was in loss accounts of the banks.
While the banks were put in line for privatisation, their tax rates were also reduced at the same time which practically helped them to improve their balance sheet and come out of the losses. A formula was set to reduce the tax on banks from 55 per cent to 35 per cent by 2006-07. Currently the tax rate is 38 per cent and next year it will match with the tax on corporate sector which is 35 per cent. The decision proved vital for the banking sector in the country as the banks not only stopped the loss making business but their profits also went up as high as 100 per cent. This high growth in banking sector started yielding money in the government treasury. The growth in banking sector was not in isolation but it also accelerated the pace of economic growth which ultimately paved the way for more revenue collection from industrial and manufacturing sectors. The high economic growth of 8.4 per cent achieved last year resulted in more revenue collection for the government and the collections surpassed the target.
During the same year banks lending to the private sector broke all records and this huge credit certainly fuelled the speedy growth in industrial, agriculture and services sectors.
During the last couple of years, the banks earned about 100 per cent growth in their profits and contributed a significant amount as revenue for the government. Revenue collections from banks increased during the last five years despite reduction of tax rates.
Last year banks contributed a total of Rs30.248 billion as revenue to the government which was significantly higher than the year 2003-04, when they contributed a total of Rs17.012 billion. In the last three years the banks collectively paid an amount of Rs65.926 billion as taxes.
The above table shows that the highest amount of revenue is coming from the local banks; most of them are listed at the Karachi Stock Exchange, except the large Habib Bank. Foreign banks were equally good for revenue generation as their share in taxes increased to Rs3.5 billion. These banks have started increasing their operations in Pakistan and they have also involved in personal loans and SMEs which bring high returns to their profits. Bankers said the situation was attractive for the growth of banks in the country. The fastest growing portfolio is the consumer sector which has already captured 21 per cent share in the banking business. The consumer loans bring highest returns on advances which mean more money to come in banks accounts and more revenue for the exchequer.
