Tax collection from debt investments surges 101% in July-April

KARACHI: The Federal Board of Revenue (FBR) collected taxes worth Rs4.07 billion from investment in government securities in the first 10 months of the current fiscal year of 2019/20, more than double over the corresponding period a year earlier, reported The News.

Sources attributed the significant jump in revenue collection compared to Rs2.02 billion in the July-April period of 2018/19 due to the imposition of the higher tax rate on the exposure of commercial banks in the government papers.

In the last budget, the government imposed a 37.5% income tax on banks for making profits on their investments in government papers.

Sources in the FBR said banks were earning substantial profits on account of incremental exposure to government securities. Therefore, profit from such government securities – in excess of 20% of total profit before tax – is taxed separately at the rate of 37.5%, they added.

Officials said the investment in government securities was an attractive and risk-free avenue for the banks due to a higher policy rate.

The key benchmark interest rate had remained at decades high at 13.25% for two years or so before the central bank started to ease its monetary policy stance to recently bring the interest rate down to 8%.

The federal government resorted to heavy borrowing from commercial banks for budget financing during the current fiscal year after restraining itself to borrow from the State Bank of Pakistan (SBP) under an International Monetary Fund’s (IMF) condition. IMF agreed to loan $6 billion last year to help Pakistan overcome its balance of payment crisis. The extended fund facility program spreads over three years.

The FBR sources said the SBP significantly reduced the policy rate in the wake of the lockdown related to the COVID-19 outbreak during the past two months. This would hamper revenue collection growth under the head, they said.

The SBP, during the past two months, eased monetary stance by 525 basis points to support the industry, which is facing serious financial problems owing to the adverse impact of the lockdown.

The government borrowed Rs1.92 trillion from the banking system from July 1 – May 8 of the current fiscal year as compared to the retirement of Rs3.74 trillion in the same period of the last fiscal year.

The substantial amount of lending towards government securities would help the tax authorities to bag more revenue from the banking system. However, the FBR sources said the existing policy rate of 8% would adversely affect revenue collection.

The decline is visible as the collection of profit on debt from investment in government securities by banks declined 29% in April 2020 to Rs112 million. That compared with Rs157 million in the same period of the last fiscal year.

Originally published in The News