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Tax on financial institutions

Tax on financial institutions


There are serious reservations in some circles about the current rules and regulations dominating the banking system in the country. The multifaceted reservations include ideological and ethical aspects of the western banking system where interest and markup are the basic components of the financial management, low or least protection for the small depositors and introduction of sugar-coated products, which only ensure the accumulation of annual profits for the banks than bringing any good to the buyers. However, despite myriads of anomalies, banks play basic role not only in the financial management of a country, but also business to business transactions with other countries. A strong banking system means strong economy but the governments in developing countries opt for coercive methods to make profit from everything and Pakistan is not an exception. During the last one year, the local banking industry has been pressured by the government’s resolve to deduct 0.6 percent withholding tax on certain transactions made by non-taxpayers. This has severely curtailed the financial transactions through banks as the non-filers have started using other channels to avoid deduction.

In its budget proposals, the Pakistan Banks’ Association had demanded the government bring uniformity in the income tax rate for banking companies which is charged at 35 percent. The demand has been rejected and the government is also in no mood to rationalize the tax rate. It will further squeeze the profitability of the banks. Experts term the federal budget unpromising for the banking sector as its earning is likely to be lowered by 6 percent due to the additional tax. The government is also imposing one time super tax of 4 percent on the banks income to generate income and help rehabilitate internally displaced people in the tribal areas. The government finds it easy to tax everything under its control without realizing that small steps could have big and adverse repercussions.

As the economy of the country needs a road-map, the banks are also part of the economy and there is a need to streamline banking affairs. The products and services offered by the banks needs to be monitored and interest of the consumers should be protected. In the present situation, the government may be able to collect required amount not more than peanuts, but it will not only cost the banking system of its potential, but will also encourage conservation and investment of black money in offshore companies. So far the direction of the government is unclear and all roads go to oblivion. The banks needs to be encouraged to stimulate the economy whereas the interest of the consumers should also be ensured.