LAHORE - The Federal Board of Revenue (FBR) has proposed an increase in corporate tax on for T-bills on banks to 50pc in the upcoming budget 212-13, it was learnt on Wednesday.
FBR is considering to raise tax to 50 per cent on T-bill income which is very difficult to be implemented as CGT rate on banks will remain higher even at 35 per cent if share sold within a year and 10 per cent if sold after 1 year, banking sector sources stated. They said that it is proposed to extend exemption limit of Withholding Tax on cash withdrawals, which is currently charged at 0.2 per cent from 25k to 50k.
However, experts are of the view that corporate tax in the upcoming budget on banks will remain at 35 per cent.
They said that govt borrowing target was Rs304 billion in FY12 whereas total borrowings during 1HFY12 stood at Rs286b. For FY13, govt plans to finance 86 per cent of its budget deficit through domestic sources of which major source will come from banking channel. Increase in cash withdrawal limit will slightly improve deposit base which is positive for the banks as deposit penetration rate is already low (approx.25 per cent of the adults have bank accounts in Pakistan). Higher govt borrowings will keep interest rates sticky which will lead to higher return on earnings assets on banks and insurance while affecting credit growth. Insurance firms will get benefit of higher interest rate and better performing stock market, while underwriting business will remain subdued due to economic slowdown.
Unlike 2011 where net interest income (NII) remained the major earnings trigger for banks, 2012 will see growth coming from lower provisioning and non interest income.
NII will remain under pressure in 2012 due to lower NIMs (amid decline in interest rates) and recent 100bps increase on minimum deposit rate. However, slowdown in NPL accretion amid restrictive lending and relatively improved borrowers capability after sharp decline in interest rates will keep provisions on the lower side.
Further, better dividends and positive stock market outlook will keep non-interest income on the higher side.
With better performance of capital markets, ample avenues for business penetration and higher interest rates, overall scenario looks relatively better for the insurance business.
Nurali Barkatali, a money market expert, observed that given uncertainty over foreign flows, government will be bound to rely on domestic sources for funding its fiscal operations; this will be skewed towards direct borrowing from SBP and banking institutions. In anticipation of an increase in discount rate, participation in bonds and treasury bills would remain skewed towards short-term tenors only.