KARACHI, April 29: The government is considering an option to increase the tax rate on banks to improve its deteriorating revenue collection, said industry sources.
Currently, the banks pay the same 35 per cent tax equal to corporate tax, however, the banking sector has been one of the highest tax payers before Shaukat Aziz took charge of the finance ministry.
The former finance minister, who later became prime minister, himself a carrier banker, drastically cut the tax rate on banks and eventually brought down the tax on banking sector at par with corporate sector.
Sources said the shortage of revenue has forced the government to consider every option for generating additional revenue to meet the ever-increasing fiscal deficit.
Sources said the option to increase the tax rate on banks could be a reality in next budget as the banking sector has been making good profits compared to other segments of the economy.
The growth rate of economy is expected to remain within 2-3 per cent for the current fiscal, which means low generation of revenue will persist.
The banks had been paying 58 per cent tax on income during late 1990s, which was slashed to 55 per cent and then was cut by 5 per cent each to year to match it with the tax on corporate sector.
When contacted bankers were not aware of any proposed increase in tax rate on banks but expressed fear that it (tax increase) might hurt the banking industry already facing global crisis.
The financial crisis, which badly hit the banking industry in the world, hardly touched the banking in Pakistan which continued to earn profits.
According to published data, the banking industry’s income in 2010 was about Rs107 billion (before tax). The earning rose by 25 per cent compared to the previous year.
After-tax-profits of the banks were Rs69 billion as it increased by 15 per cent.
The banks are beneficiary of the government borrowing as most of them have been investing in government papers, which offer return ranging up to 13.8 per cent and is risk free.
The sources said the proposed increase in tax could be around 3 to 5 per cent on banks which may yield additional Rs3 to Rs5 billion to the government.
The finance ministry is under immense pressure to find out new options to improve the revenue generation, which is also a demand from the IMF.
The IMF has been forcing Pakistan to increase revenue and expand the tax base but the low economic growth did not allow revenue to improve.
Independent economists as well as the government estimate that the fiscal deficit for the current financial year 2010-11 could be in the range of 5.5 per cent to 6 per cent. Though the government has drastically slashed development expenses it could not come out of the frightening fiscal gap that may continue during the next fiscal.
Sources said to minimise the fiscal deficit the government would use every option including higher tax rate on banks.