Budgets by ordinances normally turn out to be totally opaque documents for the nation at large. Since the short and long term implications of budgetary measures announced through an ordinance do not get debated in a parliament with the opposition trying to find out the hidden surprises, even those of such measures which immediately impact adversely on the pocket book of the common man come into being without the victims getting proper warning.

The debate which is conducted in the media on budgets announced through ordinances tends to be largely one sided and short lived with the government controlled TV and Radio praising every measure sky high without explaining their implications and the print media more often than not dismissing the document as not worth serious comment or expressing half-baked opinions( for lack of access to information) on some very glaring aspects of the budget. Such a situation makes it impossible for the government to fine tune some of the measures which on the face of it appear economically logical but contain as well the potential to promote corruption.

One such measure in the current year’s budget is the tax concessions allowed to merging banking companies. The relevant measure has been incorporated ostensibly to promote a culture of corporate consolidation, both in the financial services and other sectors of business. Specifically, the new provision has been introduced to facilitate and promote the process of mergers. Under the repealed ordinance, the accumulated tax loss of a company being merged gets lapsed and is not available to the amalgamated company to reap the potential benefit of the same. This section would thus permit carrying forward for set-off, the loss of merging company against the business profits and gains of the amalgamated company and this right of set-off shall be available to the amalgamated company upto a period of six tax years immediately succeeding the tax year in which the loss was sustained by the amalgamating company or companies.

For this purpose, the provisions of sub-section(4) and (5) of section 57 of the new ordinance shall be applicable for the purpose of allowing unabsorbed depreciation of the amalgamating company or companies against the income of the amalgamated company. Sub-section (3) of this section further provides that in the event of any conditions of the scheme of amalgamation, as laid down by the State Bank of Pakistan, or the Securities and Exchange Commission of Pakistan, as the case may be, are not fulfilled, the amalgamated company shall not be entitled to avail the benefit of set-off of loss or allowance for depreciation made in any tax year and in consequence, the same shall be deemed to be income of the amalgamated company in which such default is determined.

Discussing this measure a company of chartered accountants (Sidat Hyder Qamar&Company) in its Budget Briefing 2002 Report (BBR) makes the following comments: In the context of aforesaid provisions, attention needs to be drawn to a new definition given in Clause (A) of Section 2 of the New Ordinance which defines the term” amalgamation”. In substance, the definition of amalgamation is couched with reference to merger of one or more banking companies or non-banking financial institutions (NBFI) or a company incorporated under any law, other than the Companies ordinance, 1984, to take over all assets and liabilities under a scheme of amalgamation to be approved by the State Bank of Pakistan or by the Securities and Exchange Commission of Pakistan , as the case may be. The Report further states, “ It is important to appreciate that having regard to the definition of the ‘amalgamation’ aforesaid, it would appear that the provisions of section 57A of the New Ordinance purportedly deal with only the banking companies and NBFIs and not all companies in general. Although, this confusion is prompted by the fact that the construction of Section 57A does not itself give the impression of a restricted application for purposes of carry forward and set-off of losses, the definition of amalgamation conveys such a restricted construction.”

There are no big mergers going on in the country. Nor has one seen any perceptible merger trends in the country over the last ten years. So, why this measure? And what is being desired to be achieved through this measure? In order to understand that one has to go back to sub-section(2A) of Section57 of the new ordinance. This sub-section provides that the unabsorbed losses of such banking company, as is wholly owned by the federal government on June 1, 2002, relating to assessment year commencing on or after July 1, 1995 and ending on June 30, 2001 shall be allowed to be carried forward for set-off for a period of ten years, as opposed to a six year’s limitation generally applicable in other situation. The sub-section further provides a condition of approval by the State Bank of Pakistan for the purposes of this sub-section. The underlying objective of this sub-section, according to the BBR, is to facilitate the process of privatization of public sector banks by providing incentives to strategic buyers of such banks to avail the potential benefit of unabsorbed losses. On the face of it no one should have any reservations against this underlying objective of the new measures which allow the Federally owned nationalized banks to carry forward unabsorbed losses for set-off for a ten year period and then let the private banks buying such a nationalized bank set off these losses against the buyers’ business profits and gains while merging the privatized banks with the mother bank. This would certainly encourage privatization of the nationalized banks which are at present incurring huge losses and appear to possess no attraction for the buyers. However, one should also see these measures for what they really mean in terms of the actual price the buyer would pay for buying the nationalized bank. Let us for the sake of argument say that for 51 per cent stake of a nationalized bank(NB) incurring losses of say Rs10 billion a private bank ‘X’ had offered to pay Rs10 billion. And if this offer turned out to be over or about 90 per cent of the reserved price of NB, and a deal is struck between the government and the bank ‘X’ which is making profits entailing taxes payable to the tune of Rs10 billion over a period of time, then by applying the tax breaks allowed in the merger measures, the bank ‘X’ can make good the entire price it has paid to buy the stakes in the NB by offsetting the NB’s losses against mother bank’s profits and thus reducing taxes payable to the government by as much as the price its has paid for buying the strategic stakes in the NB.

In effect bank ‘X’ would end up getting the stakes in the NB he had bought almost free!! Is that what those who had conceived this specific measure desire to see happen? Also, do they have a specific buyer in mind whom they want to oblige and in return for what? May be there is nothing ulterior behind the new merger measures and these are perhaps not aimed as well at benefiting one or the other specific buyer. But in order to make things clearer and for the sake of transparency which has been the password of this government, one would expect the finance ministry to explain its position on these merger measures before people start speculating and scandalizing the on going process of privatization of nationalized banks.