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SBP for lowering Super Tax to 3 percent – Part 1 & 2

June 24, 2015



By: ASAD RIZVI (KARACHI)   Published on June 23, 2015
On Sunday, I came across a headline in Business Recorder “SBP for lowering Super Tax to three percent”. This proposal is quite shocking for me, as SBP in its monetary policy has been constantly arguing and demanding correction of administrative/fiscal side caused by revenue shortfall, which is the major factor that exerts pressure on fiscal deficit, forces government to borrow, which ultimately pushes debt (Domestic and Foreign) higher that causes high inflation and puts pressure on Pak Rupee.

Shortage of funds due to low revenue collection and unequal distribution of subsidy is the real cause of economic misery that constantly hampers growth, hinders employment opportunities that ultimately lead to high poverty. Since it’s a central bank’s proposal, it is not just a short note. SBP must have provided details of its working and advanced a professional argument in its statement based on calculation to explain why a reduction in Super Tax from 4 percent to 3 percent is viable and how does it makes positive contribution for the banking sector.

How SBP can defend its stance when it has been subsidising lending to banks for years through its open market operations (OMOs) and encouraging banks to invest a large part of their deposits in government securities at a 3 percent discount. SBP data suggests lending to banks comfortably averages over Rs 500 billion annually. In last fiscal year, lending to banks through OMOs ranged between rupees half a billion and rupees one trillion. This 21/2 percent to 3 percent subsidy is offered to banks through SBP’s open market operations, which is taxpayer’s money.

On Monday, SBP through OMOs injected Rs 660 billion @ 6.50 percent to feed banks that have invested in government securities. Whereas, lending to corporate entities is based on the strength of their balance sheets, which is always at a premium. The benchmark for lending to corporate sector is based on Kibor rates. Therefore, SBP’s argument does not carry enough weight, as Business Recorder quotes that the central bank has praised banks’ role towards revenue collection, which is a service, commonly provided by the banking community all over the world and in exchange of that ‘favour’ banks are paid service charges.

Copyright Business Recorder, 2015 

By: ASAD RIZVI (KARACHI)   Published on June 24, 2015
According to SBP, the country’s banking sector has shown a remarkable operating performance and resilience in the face of strenuous economic conditions. Resilience!! For over half-a-decade, the economy is in dire need of bank support in the shape of funding to private sector. Drop in banks lending ratio of advance/deposit further confirms banks’ unwillingness to support the cause. SBP policy of subsidised lending to banks through OMOs discourages banks to contribute towards growth and encourages them to buy lucrative and least risky government papers. In such favourable environment, all risks to banking sector will certainly take a nosedive.

In its second proposal, SBP has surprisingly come up with an idea to rescue the evil practice of our undocumented economy. It does not want government to impose a 0.6 percent withholding tax (WHT) for non-fliers, because SBP is of the view that it would dissuade customers.

Is this SBP proposal not to impose WHT is based on any calculation/logic or is it in sheer fear that currency in circulation has reached unmanageable and unacceptable levels? Hence, WHT for the non-filers would further aggravate and distort cash condition. Currency in circulation has surged to Rs 2.561 trillion or 29 percent of the bank deposit.

The big question is that by imposing a 4 percent Super Tax on banks for taking care of displaced persons, it will generate Rs 24 billion. So why is SBP insisting to reduce Super Tax to 3 percent that will reduce collection amount by mere Rs 6 billion. Similarly by imposing 0.6 percent withholding tax on all banking instruments, it will generate Rs 23 billion. More importantly, this measure will be the first step towards documentation of economy. Then why is SBP proposing withdrawal of 0.6 percent WHT?

However, as per international practice when a central bank sends a proposal to its government, it simultaneously provides a counter proposal to support its argument. Readers would appreciate to know SBP’s counter proposal and what better suggestion it has made to document economy, because the tax target of Rs 3.1 trillion is too formidable. Hence, if government agrees, then what has been proposed by SBP to cover an estimated Rs 29 billion tax shortfall, which will make SBP more creditable?

Copyright Business Recorder, 2015—i.html—ii.html

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