This blog is written by Mr. Hussain Mehmood, Senior Manager Taxation Advisory Services. Please read this blog and provide your valued comments.

REDUCED RATE OF TAX FOR ADDITIONAL LOANS (RULE 7D, 7E & 7F – SEVENTH SCHEDULE)

This is with reference to the introduction of new Rules 7D, 7E & 7D in Seventh Schedule. The same has provided for reduced rate of tax on additional advances for:

  • micro, small and medium enterprises;
  • low cost housing; and
  • farm credit.

Salient Common Features:

  • The rate of tax on interest earned on these additional loans is 20% for three years from tax year 2020 to 2023.
  • These will be the loans provided in addition to average loans provided in TY 2019.
  • There has been a condition to file the details of such advances with gross and net margin earned from such advances certified by the Auditor.
  • There has been described a formula to ascertain taxable income under these Rules:

A x B/C

Where

  1. is taxable income of the banking company;
  2. is the markup income earned from such additional advances for the tax year as declared in the annual accounts; and
  3. is total of the net mark-up and non-mark-up income of the banking company as per accounts.

This is a good step on the part of the Govt to encourage financing in these areas. The banks have been encouraged increase advances for development of micro, small and medium enterprises to help them to become an effective part of economy. A good structure and good economy having greater share of micro, small and medium enterprises is a good response to unemployment and can result in equal distribution of wealth. Likewise, low cost housing not only provides housing for lowere middle class mostly but mobilizes an important aspect of construction industry. Same way, farmers are suffering great deal of problems like great variations in weather, lower prices of crops and higher cost of production.

Keeping in view the problem faced by the above mentioned sectors and their importance in the economy, we should hope that the positives intended by the above mentioned relaxation may be achieved.

Hussain Mehmood Asif