SBP says low interest rates could erode banks profits in Jan-March

KARACHI: The State Bank of Pakistan (SBP) on Friday warned that soft interest rates scenario and a falling investment in the government papers could erode banks profits in the current quarter of 2017.

“In the current environment, the profitability (and key indicators, such as return on assets and return of equity) of the banking sector may come under pressure in the next quarter,” said the SBP quarterly performance review of the banking sector for the October-December 2016 period.  

“Low interest rates, receding investments in government securities and maturity of high yielding Pakistan investment bonds is already having an impact on the interest income of the banks and could keep their earnings in check in the first quarter of 2017.”

The State Bank said the dip in interest margins and reducing quantum of investment narrowed the year-to-date profitability of the banking sector. As a result, return on assets declined to 2.1 percent in the quarter under review as compared to 2.5 percent in October-December 2015, it said.

Banks’ investments fell 1.5 percent in the October-December period of 2016 mainly on account of decline in investment in government securities. The bank, however, said income from growing advances during 2016 may partially offset the decline in returns on investments.  

“Growth in advances to private sectors exceeds historical trend. The key highlight of the quarter is the impressive growth in advances to private sector; highest fourth quarter growth in the last 10 years,” it added. “The asset base of the banking sector expanded 4.6 percent in the fourth quarter of 2016. The key contribution came from demand for credit from private sector due to lag impact of monetary easing, better economic conditions, and improved liquidity.” 

Improved advances were observed in the textile sector, the largest borrower of the banking sector. Besides, sugar, energy, agribusiness, and cement are some other sectors, which availed major financing from the banking sector in the quarter under review. 

The asset quality of the banking sector improved with a decline in non-performing loans (NPLs) and corresponding ratios. Particularly, NPLs to loans ratio receded to 10.1 percent, the lowest level in the eight years. Recoveries in NPLs played a pivotal role in bringing the ratio down. The coverage ratio (provisions to NPLs), jumped up to 85 percent in the fourth quarter of 2016 as compared to 82.7 percent in the preceding quarter.

The central bank cautioned banks against the risks of growing corporate loans. “…the uptick in advances may lead to higher risk weighted assets,” it said. However, strong solvency remains intact as capital adequacy ratio of 16.17 percent as of December 31, 2016 was well above the minimum required level of 10.65 percent.

Besides, it said pressure on profitability may constrain the plough back of retained earnings to capital base. “As part of Basel-III implementation process, the regulatory capital adequacy requirements are set to increase in the future.”  

The Bank said the solvency of the banking sector remains robust and is expected to remain so in the first quarter of 2017. “Fund based liquidity is expected to remain comfortable, while market liquidity (and banks’ financial borrowing) will be largely driven by government’s institutional choice for borrowing (SBP vs. commercial banks).”

The solvency profile of the banking sector remains robust as capital adequacy ratio of 16.17 percent is well above the minimum required level of 10.65 percent. 

The Bank said deposit growth remained on steady path, “while fourth quarter’s profit has improved over last years’ though entire year’s profit slightly narrowed owing to low interest rate environment.”

Deposits – the key funding source of the banking sector – grew 6.4 percent in the October-December period of 2016 as against 13.6 percent growth in 2016. 

“The addition in the overall deposits has been contributed by non-remunerative current deposits followed by fixed deposits and saving deposits,” the SBP said. “The high deposit growth in the 4th quarter as well in the entire year is a welcome sign considering deceleration in deposit growth observed in the last couple of years.”

Published in The News, March 04^th, 2017

UBL Funds awarded

KARACHI: UBL Fund Managers Limited (UBL Funds), managing UBL Stock Advantage Fund (Equity Scheme), has received the Management Association of Pakistan’s (MAP) Corporate Excellence Award in the other financial services category, a statement said on Thursday. With this, UBL Funds holds its position as the first and only asset management company in Pakistan to win a Corporate Excellence Award, it added.

The award was received by Yasir Qadri, CEO of UBL Funds from Rasheed A Rizvi, president of the Supreme Court Bar Associations of Pakistan.

Published in The News, March 03^rd, 2017

SBP sells Rs387.4bln worth T-bills; yields remain flat

KARACHI: Treasury bills yields remained flat at an auction held on Wednesday, while dealers said the latest auction of came mostly in line with the market expectations.

The central bank sold Rs387.4 billion worth of short-term government papers. The cut-off yield on a three-month market treasury bill stood at 5.9463 percent, unchanged from the previous auction, held on February 15.

The yield on Pakistan’s six-month benchmark treasury bills remained flat at 5.9896 percent.

The central bank sold Rs197 billion of six-month paper. Moreover, the central bank sold Rs2.830 billion of a one-year paper and the cut-off yield held steady at 5.9935 percent, identical to the preceding auction.

“The raised amount in treasury bills was higher than the target of Rs350 billion set by the ministry of finance for the said auction, signaling that the government remained in a need for bank borrowing to finance the budget deficit.”

The budget problems are getting worse as tax collection continued to fall. Furthermore, the government is also facing slowdown in foreign inflows, the dealer added.

The auction target calendar for the sale of market treasury bills and Pakistan Investment Bonds (PIBs) issued by the  State Bank of Pakistan  for the period March to May 2017, also spelled out an increasing requirement for the domestic funding to meet budget-related spending.

The government has planned to raise a total of Rs2.1 trillion through the sale of T-bills and Pakistan Investment Bondss during March-May period.

Though, inflation numbers for the month of February are still awaited, the broad anticipation was for increased consumer price index inflation (CPI) on upward revision in fuel prices. Analysts are expecting CPI to clock in at 4.12 percent in February.

“The interest rates have bottomed out and we see some hike in the policy rate later this year on the possibility of imported inflation driven by high international oil prices, pressure on balance of payments, owing to lower foreign aid and decreasing exports and remittances,” an analyst said.        

Published in The News, March 02^nd, 2017

FBR issues Active Taxpaers List 2016

KARACHI: The Federal Board of Revenue (FBR) on Wednesday issued the first Active Taxpayers List (ATL) for tax year 2016, showing the number of non-filers has increased by 0.2 million as compared to ATL 2015.

The latest ATL contained names of 1.01 million taxpayers, whereas ATL 2015 issued on February 27 showed the names of 1.21 million return filers.

The taxpayers on the ATL are allowed to avail benefits of lower withholding tax rates applicable under several heads of Income Tax Ordinance, 2001.

Tax experts said fall in number of income tax return filers indicates the failure of FBR in pursuing taxpayers to fulfil their obligations, including declaring wealth.

Sources in the FBR, however, said the number in the latest Active Taxpayers List would be increased as several returns were not included to the database.

The FBR has issued guidelines regarding benefits for the active taxpayers, which include permission to import and export.

Besides sales tax input credit/adjustment would be allowed, only if purchases were made by active taxpayers.

In its statement, the FBR explained: “expenses for income tax will only be admissible if purchases are made from active taxpayers; only active taxpayers will be able to participate in the procurement tenders; only active taxpayers will be able to operate as Clearing Agent, Shipping Agent, etc; and only active taxpayers will be able to serve as consultant, advisor, etc.”

The FBR issues ATL on weekly basis to update the number of return filers. The FBR sources said the number of return filers would further increase in the upcoming weeks due to the ongoing drive against non-filers.

Published in The News, March 02^nd, 2017

Govt to reduce withholding tax on raw material imports

KARACHI: The government will give a 2.5 percent concession on withholding tax rate on import of raw materials in order to encourage manufacturing activities in the country, industry sources said on Wednesday. 

The sources said the National Assembly Standing Committee on Finance, Revenue and Privatisation, during a recent meeting, agreed to a proposal of the business community to reduce the withholding income tax rate on raw materials imported by commercial importers to four percent from the current 6.5 percent.

Member parliamentarians, representatives of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) and officials of the Federal Board of Revenue (FBR) attended the meeting.

Shakeel Dhingrah, chairman of the FPCCI standing committee on FBR, told the NA body that the government had agreed to provide relief to the industry, realising the importance of manufacturing activities for economic growth.

Dhingrah said the rate reduction would curb the malpractices as higher rate on commercial importers results in corruption.

Currently, the FBR categorised industrial and commercial importers for the purpose of levying taxes. The commercial importers are eligible to import everything under import policy. However, the industrial importers are restricted to import only those things that are required for manufacturing. The industrial importers have been allowed to import raw materials at reduced tax rates.

It was agreed that industrial imports would be subject to two percent withholding tax and they would needn’t exemption certificate. Industrial importers are also required to pay 1.5 percent minimum tax on their turnover.  The business community said the commercial importers are also importing various goods ultimately used for manufacturing purpose.

Dhingra said the implementation of reduced rate is subject to an approval from the parliament.  He further said reduced rate of withholding tax would only be available to commercial importers in case of importing raw materials falling under Chapter 25 - 55 of the Pakistan Customs Tariff. “On import of other goods, the withholding tax will remain at 6.5 percent,” he added.

Published in The News, March 02^nd, 2017

FBR officials helpless in face of influential tax evaders

LAHORE: The Federal Board of Revenue (FBR) is rapidly gathering data about the tax evaders, but it lacks the real authority to turn this data mine into gold, as forces that are supposed to facilitate the department, impede its efforts.

The low tax to GDP ratio of Pakistan is the most talked about topic among economic academics. They wonder what is stopping the apex revenue authority from bringing in millions of tax evaders whose wealth and income record is available with FBR.

The data enrichment started in 1999-2000 when the Musharraf regime conducted a countrywide tax survey. The authorities simply collected the data of the properties, stocks, power bills paid by households, luxury vehicles owned by them, the lifestyle, and properties of traders operating from large markets in all big cities.

Data on the fee paid by parents in most expensive schools was also collected to find out whether the guardians pay taxes or not. The data was collected from major cities only.

It was declared at the time that the record of over 1.1 million tax evaders was available with the tax authorities, and they would be brought into the tax net. Had the plan been implemented transparently, it would have doubled the tax base of the country from 1.1 million to 2.2 million tax fillers.

However, the culture of influence played its role and most of the evaders were not even touched. Not only that, the government thereafter announced numerous tax amnesty schemes. Nevertheless, the tax base instead of enlarging started shrinking.

Today we have less than one million tax filers. The least was to ensure that those whose wealth and income record was available with FBR were forced to avail the amnesty schemes or had been prosecuted.

When the present government assumed power it vowed to ensure tax compliance and increase the tax to GDP ratio from eight percent to over 15 percent. Though the tax to GDP ratio has increased by over two percent in the last four years, it is far from the target set by the present government.

This regime also lacks the will to confront tax evaders. Most of the revenues have increased because of enhanced tax rates and high rates of sales tax and excise on all products, particularly petroleum products.

Around 200,000 new tax fillers have been added during this period out of 1.1 million identified in 1999. Another million or two tax dodgers that are roaming scot-free continue amassing wealth through smuggling, under-invoicing, under-filing, stock trading and real estate.

Recently, the federal government imposed withholding tax on all school fees above Rs20,000 per month. Surprisingly, the number of students paying fee over this threshold runs into several hundred thousand.

The aim of this income tax levy was mainly to increase revenue than to confront the tax evaders. Those parents or guardians that pay their due taxes could claim adjustment on the withholding tax paid on school fee while tax evaders would not be able to avail this facility.

This is not enough, as the tax collected through school fee is peanut compared with the tax evaded. The non-filer parents of these students should be confronted by the authorities.

This again is unlikely to happen because of the influence these non-filers or under-filers have in the power corridors. Some of the parents are government servants that in some cases pay more monthly fee of their school going children than their monthly salaries.

There are some tax officials who do investigate the tax evasions systematically and gather irrefutable documentary proof. It was due to such officials that a large school chain of Lahore was confronted and the sponsors agreed to pay a sum of Rs250 million as evaded income tax.

This needs to be replicated to make other high fee charging school chains in the country to pay income tax.

Published in The News, March 01st, 2017

FBR vows undeterred actiona gainst defaulters, non-filers

KARACHI: The Federal Board of Revenue (FBR) will not bow down to the illegal demands of halting action against non-filers and defaulted taxpayers, a top tax official said on Tuesday.

“The FBR will continue to conduct raids against defaulted taxpayers on tangible evidences,” Rehmatullah Khan Wazir, Member Inland Revenue (Operations) told The News. “The action against non-filers will also continue and where it deems necessary bank accounts will also be attached for recovery,” he said.

A day earlier all chambers of commerce and association of the country had adopted a joint strategy to force the FBR to stop raids on business premises and avoid freezing bank accounts.

Wazir said compliant taxpayers should not be worried about an action. “Tax departments have been warned against harassment to taxpayers.” FBR sources said the board has directed the tax departments to take strict action against defaulters, especially the non-filers.

The sources said the FBR launched the drive across the board and business community is no exception.  An official at Regional Tax Office Karachi said despite repeated instructions to the business community for filing of annual returns the registered members of chambers or associations were unmoved.

The Section 114 of Income Tax Ordinance, 2001 made it mandatory for a person to file his annual return in case he is registered with a chamber of commerce and industry, trade association, market committee or professional body.

The section also explains the classes of persons required to file their annual returns along with wealth statement. The official said a meeting of Member Inland Revenue (Operations) With the Federation of Pakistan Chambers of Commerce and Industry was recently held at the Large Taxpayers Unit, Karachi and it was agreed that the FBR would not take any ‘punitive’ action against taxpayers without evidences.

The official said in the latest drive many business leaders, who defaulted on tax payment or failed to submit declaration, came under the FBR’s radar.

Published in The News, March 01st, 2017