Big boost for Islamic finance in Pakistan

Taking full advantage of rising popularity of Islamic financial system, Pakistan announced a two per cent tax cut for all Shariah-compliant companies.

The tax relief is expected to have multi-dimensional effect on the economy. More companies are likely to switch from conventional to Islamic banks and Islamic modes of financing, selling, or leasing, a report published in Khaleej Times on Monday said.

The Islamic banks will expand in size, volumes, spreads, profits and numbers. More individuals will turn to Islamic banking because their companies and associates will be working for these companies or their associates.

The tax rebate became effective from July 1, as the current fiscal year has just started, and the new national budget has just been approved by the parliament.

“In order 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 Ministry of Finance announced.

The Finance Act also covers the entire national budget for fiscal year 2017 which includes the period from July 1, 2016 to June 30, 2017.

“The tax rebate, decided upon on the suggestion of the Security and Exchange Commission of Pakistan (SECP) – is part of the reforms for promotion and development of Islamic capital market,” the official announcement said.

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 the country.

Further work on the two per cent tax rebate is currently being done by the SECP, SBP, and the Federal Board of Revenue (FBR), which are preparing a list of companies seeking to get the tax rebate after screening of their operations.

The Karachi-based Pakistan Stock Exchange (PSX) is currently in a constant boom mode and its shares are going up day by day, reflecting the strength of the economy.

The financial market regulators, according to the announcement, also hope that “the rebate decision will create vibrant primary and secondary markets”.

“At the same time, other companies, which are leveraged by conventional borrowings, may also avail the discount in corporate tax by structuring on Islamic modes,” an analyst said.

The SECP, alongside the SBP and FBR, is considering additional conditions for the companies to maintain a minimum of 25 per cent free-float, conduct business that is interest-free income and financing.