FBR not to give special tax treatment to Islamic banking


KARACHI: The Federal Bureau of Revenue (FBR) has said it will not extend any special tax treatment to Sharia-compliant banking approved by the central bank.

Sources in the FBR said under the new banking schedule of the Income Tax Ordinance of 2001, the Islamic banks would not get any reduction or addition to income and tax liability.

The 7th Schedule was specially incorporated into the Income Tax Ordinance through the Finance Act.

The sources, however, added a statement, certified by the auditors of the bank, should be attached to the tax return of income to disclose the comparative position of transaction as per Islamic mode of financing and normal accounting principles.

The sources said the adjustment should be made to take into account treatment under normal accounting principles.

Foreign banks shall be allowed deduction for head office expenditure in the ratio of gross receipts of permanent establishment to world gross receipts, provided that expenditure is charged in the books of accounts of the permanent establishment.

A certificate from external auditors is provided to the effect that claim of such expenditure has been made in accordance with the provisions of this rule, and is reasonable in relation to the operation of permanent establishment in Pakistan.

The sources said adjustments made in the accounts due to application of international accounting standards Nos 39 and 40 and consequently any gain or loss arising should be excluded while computing the income of the banking companies and liabilities, against which deduction was allowed, if remained unpaid for three years should be added in the first tax year following the end of the three tax years. Payment of such liability should however be allowed as deduction in the year of the payment.

The sources said the gain and loss on sale of shares of listed securities should be dealt separately.

Loss on sale of shares of listed companies, disposed of within one year of the date of acquisition, shall be adjustable against business income of the tax year, where such loss is not fully set off against business income during the tax year, it shall be carried forward to the following tax year and set off against capital gains only and no loss shall be carried forward for more than six years immediately succeeding the tax year for which the loss was first computed.

The sources said the federal government had been empowered to amend or modify or omit any entry in the 7th schedule.

The sources said a bankís income as disclosed in the annual accounts furnished to the State Bank of Pakistan, subject to specified adjustments, should be taken as income from business, deductions for depreciation, initial allowance and amortization of intangibles should be available in accordance with the law, deduction should be inadmissible if covered under section 21 of the Income Tax Ordinance. The provision of classified advances and off-balance sheet items shall be allowed as claimed in the accounts, provided a certificate from external auditors is furnished by the bank to the effect that such provisions are in line with the requirements of prudential regulations of the central bank


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