ISLAMABAD: The Federal Board of Revenue (FBR), through Circular No 01 of 2017, explained interpretation of certain provisions of the Income Tax Ordinance, 2001 in the context of Islamic banking.
The circular says the Seventh Schedule, introduced in the Finance Act 2007, provides for the computation of the profit and gains for a banking company and the tax payable thereon. Rule 3(1) of the Seventh Schedule stipulates that Sharia compliant banking shall not be accorded any special treatment in terms of reduction of addition to income and tax liability of banking companies subject to fulfillment of the requirement of filling statement, certified by the auditors of the bank as per Rule 3(2), with the return of income tax.
- In order to ensure implementation of principle stipulated in Rule (3) of the Seventh Schedule in letter and spirit, clarification regarding tax treatment of various Islamic banking products is warranted so that judicious and non-discriminatory treatment can be meted out to such Islamic Banking products.
- It has been reported to the Board that receipts on account of Islamic financing product namely Murabaha, being a transaction of sale and purchase of underlying goods, is treated as gross receipts for the purpose of levying minimum tax under Section 113 of the Ordinance.
In the light of the principle of tax neutrality as espoused in Rule 3(1), net income (as opposed to gross receipts) from Islamic mode of financing namely Murabaha, Musawamah, Bai Muajjal, Bai Salam, Istisna, Tijarah, Istijrar financing and Tawarruq/Commodity Murabaha should be considered as turnover for the purpose of levying minimum tax under Section 113 of the Income Tax Ordinance, 2001 provided the condition in Rule 3(2) is met which is a statement, certified by the auditors of the bank to be attached with the return disclosing the comparative position.
