ISLAMABAD: The Pakistan Banks Association (PBA) has proposed amendment to Seventh (Banking) Schedule of the Income Tax Ordinance, 2001 to treat Musharakah, Modaraba, Murabaha, Musawama, Ijarah, Istisna and Salam as financing transactions and not trading activities, i.e sale/purchase transactions.
In its proposals for budget 2014-15, the PBA said that the State Bank of Pakistan (SBP) has approved Musharakah, Modaraba, Murabaha, Musawama, Ijarah, Istisna and Salam as Islamic Mode of Financing.
A new clause should be inserted in 7th schedule to treat Musharakah, Modaraba, Murabaha, Musawama, Ijarah, Istisna and Salam as financing transactions and not trading activity, i.e sale/purchase transactions. The introduction of new clause in 7th Schedule explaining/ stating Islamic mode of financings will remove ambiguity so as not to treat Islamic modes of financing as trading activity, i.e sale/purchase transaction which can attract implication of withholding of Income Tax.
The Islamic Financial Accounting Standard-II Ijarah issued by the Securities and Exchange Commission of Pakistan (SECP) also confirms that such transactions are financing transactions. This fact should also be mentioned in the 7th Schedule of Income Tax Ordinance, it added.
The PBA has also proposed amendment to definition of supply 5.2(33) of the Sales Tax Act, 1990. SRO 445 (1)12004 dated June 12, 2004 excludes Murabaha transactions from the definition of “Supply” for the purpose of Sales Tax. The exclusion from the ambit of sales tax should specifically be provided in law for all Islamic modes of financings specifically approved by SBP. In addition to Murabaha, the Islamic banks also use other mode of financings, ie Musharakah, Modaraba, Musawama, Istisna and Salam. In the absence of specific exemption in law, there is an ambiguity that tax officers may treat the Islamic mode of financings as trading activity ie sale/purchase transactions which may attract implication of Sales Tax, it added.
