Banks have potential to contribute more tax revenue by expanding services: FBR research

KARACHI: Federal Board of Revenue (FBR) said that Pakistan’s financial system has potential to generate more revenue by expanding services. The banking system is making huge profit and bringing more customers the revenue for national exchequer will increase accordingly.
In a research conducted by FBR officials on banking system in Pakistan made available to customnews.pk, they said that in the last decade various policy reforms have been made and fresh financing services inducted for all income groups by the regulatory body of the banking sector, the State Bank of Pakistan (SBP). The middle income group can use consumer financing service for purchasing car, housing, air conditions, televisions and other luxurious items on installments. In this way, on every installments they will charge their fee and it may manifold there profit which must be duly taxed.
It has been reported that six micro-financial institutions are in operation at district, provincial and national level and their outreached has crossed half a million customers.
As per report, the new prudential regulations for SMEs do not require collateral but asset conversion cycle and cash flow generation as the basis for loan approval. In this regard, separate bank for small and medium enterprise (SME) has been established to provide new leadership in developing new products such as program loans, new credit appraisal, documentation techniques and nurturing new skills.
The government has already reduced the corporate tax rate on banks from 58 percent to 35 percent during the last six years and brought at par with the general corporate tax rate. This has made banking a highly profitable business and the banks have earned about $ 1 billion of profits in 2005 – a big jump from the huge losses incurred until a few years ago.
The banking sector capital base has strengthened, minimum paid-up capital requirements of the banks have been gradually raised from $10 million to reach $100 million by 2009. This resulted in mergers and consolidation of many financial institutions and weeding out of several weaker banks from the financial systems.
A number of incentives have been provided to encourage mortgage financing by the banks. The upper ceiling raised, tax deduction on interest payments on mortgage has been allowed, a new recovery law aimed at expediting repossession of property by the banks has been promulgated.
The payment system infrastructure is being strengthened to provide convenience in transfers of payments to the customers. The real-time gross settlement system will process large value and critical transaction on real time while electronic clearing system will b e established in all cities.
Through a variety of ways as mentioned above revenue can be generated including interest pays on deposits, credit cards, loans, and other sources of funds, transaction fees on services, and investment banks by their financial services and so on.
As of June 2010, the banking sector comprised of 36 commercial banks (including 25 local private banks, 4 public sector commercial banks and 7 foreign banks) and 4 specialized banks with a total number of 9,087 branches throughout the country.
Among the banks, there are 6 fully fledged Islamic banks as at end of June 2010. In particular, the predominantly state-owned banking system has been transformed into one that is predominantly under the control of the private sector.
The legislative framework and the State Bank of Pakistan’s supervisory capacity have been improved substantially. As a result, the financial sector is sounder and exhibits an increased resilience to shocks. Today, almost 80 percent of the banking assets are held by the private sector banks and the privatization of nationalized commercial banks has brought about a culture of professionalism and service orientation in place of bureaucracy and apathy.
Return on banking assets before taxes have grown to 2.6 percent (1.8 percent after tax) relative to 0.2 percent in CY00 and return on equity has been 25.4 percent. In quantitative terms, one percent rise in the real GDP growth tends to improve the profitability by 113 basis points. In addition, low interest rates and inflation for most of the period in the last four years also supported the financial sector profitability, as one percentage point increase in real interest rates and inflation tends to reduce the Return on Asset (ROA) by 27 basis points in each case.
As per the latest study conducted by the World Bank, Pakistan has been ranked second in performance and efficiency indicators India being the first among the South Asian countries. The average cost of resource mobilization for banks (deposits plus borrowings) has fallen from 6.6 percent in CY00 to 2.5 percent in CY05; and operating expenses to income declines from 106 percent in CY98 to 91 percent in CY00 and to further 51.2 percent in CY05 and total expense to income is in the range of 65 percent.

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