Tax cut for Shariah compliant business to bolster Islamic finance

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Amanullah Khan

Karachi—A two per cent tax cut announced for all Shariah-compliant companies, effective from July 1, 2016 is bound to give a big boost to Islamic Banking and Finance industry in Pakistan besides transforming the conventional businesses into Shariah based companies.
Resultantly, the tax relief expected to have multi-dimensional effect on the economy as the number of Islamic companies sure to attract to shifting their financial matters from conventional to Islamic banks and Islamic modes of financing. As a result of the relief in taxation Islamic banking industry is expected to have a multiplier effects in size, volumes, spreads, profits and numbers.
It may be mentioned that with a view to incentivise listed manufacturing companies, the federal government has introduced a two per cent rebate for Shariah-compliant companies through the Finance Act 2016. The Finance Act also covers the entire national budget for fiscal 2017 that includes the period from July 1 to June 30, 2017.
The tax rebate, decided upon on the suggestion of the Security and Exchange Commission of Pakistan (SECP-the financial market regulator) is part of the reforms being introduced for elimination of ‘Riba’ and for promotion and development of Islamic capital market,” the official announcement said. “In this connection, a new clause 18 (b) has been inserted in the Second Schedule Part-II of the Income Tax Ordinance, 2001 through the Finance a Act 2016,” it also explained.
The latest decision to expand the programme followed a report by the State Bank of Pakistan (SBP), which confirmed a continuing spread of the Islamic banking system in Pakistan. In a short span after its introduction, the Islamic banks by now have a 13 per cent share of the conventional banking in he country. “The spread of the Islamic banks is steady and fast,” a senior conventional banker said.
According to informed sources, the SBP and the Federal Board of Revenue (FBR), which are preparing a list of the companies, seeking to get the tax rebate after screening of their operations. The stock market-listed companies deriving their income from the manufacturing activities and having declared their taxable income for three consecutive years and which have had paid dividends for the past five consecutive years can qualify, and apply for the tax rebate.