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Banks uneasy over reporting clients' profits to Revenue Board

KARACHI (July 05 2003) : State Bank's fresh instructions have created a kind of uneasiness among the banks as they will have to report detail about their clients' earning of profits or return in excess of Rs 10,000 per year.

The SBP, in a circular on last Saturday, directed all banks and DFIs (Development Financial Institutions) to provide information to CBR on biannual basis, with immediate effect, in respect of those accounts where bank and DFI pay any profit or return in excess of Rs 10,000 per annum in an account or on deposit maintained with the bank or DFI.

All banks will provide information regarding the name of Account, address of Account, NIC/NTN number and Amount of profit or return paid.

Bankers said that the CBR has tried to net small depositors who have about Rs 250,000 or above as the deposit.

It will affect those small depositors who are not under the tax net like hundreds of thousands of shopkeepers and small traders.

They don't pay income tax but their income is taxable or are liable to file tax return but do not.

On the basis of banks' report about the clients' earning on deposits, CBR will be able to probe the source of income.

Bankers said withholding tax is deducted on return on deposits so there is no question of double taxation.

Bankers said it will impact upon the black money deposits.

The CBR is trying to net big fish having large deposits in banks and not paying taxes.

Reports of banks regarding the return or profit of deposit holders will help CBR to detect the tax evaders.

“These funds will certainly come out from the banks and could go towards the unproductive sectors,” commented a senior banker.

Bankers observed that the State Bank asked this information for CBR just at the end of the fiscal year and now it will be open to CBR that how much money has been paid and to whom by the end of June 2003.

“This information could cause a harassment among the depositors and they may rightly think about a probe from CBR about the source of earning for the deposits,” said another banker of a large private commercial bank.

Most of the bankers agree that the deposits would come out from banks and they might turn towards either to stocks or real estate.

Some of the depositors may also opt for gold or currencies to keep them into their lockers.

Some bankers believe that the investment in real estate is a purely speculative investment that may be termed as unproductive investment generating no economic activity.

However, if money flows towards the real estate it will further escalate the prices and that could go against the government's effort to boost housing sector.

Higher land cost will make it impossible for the middle class to invest in the housing sector while the government believes that only the middle class could bring large scale economic activity into the housing sector.

Banks have no idea that how much black money is deposited with them but estimate it might be 40 to 50 percent.

They said the CBR will succeed to improve its collection through this new move but banks and specially small banks would suffer.

Large public sector and private sector banks might not face difficulty as they are already under pressure of excess liquidity.

Some bankers said that money might drain out of the system and finally out of the country after this new situation.

However, bankers admitted that it is a standard practice all over the world to provide detail about the profits to the tax department.

“This is not against the banking norms and is very much according to the international banking standard. It was due for a long time,” said a senior banker.

He said despite its negative impact, the circular of the State Bank was in time and in accordance with the international banking practice.

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