Institutional income tax collection has declined over the first six months of the current fiscal year 2024/25. The half-yearly review of the budget for the fiscal year 2024/25 released recently by the Ministry of Finance shows income tax collection from institutional taxpayers fell by 11.9 percent to Rs 63.79bn. Such collection was Rs 69.04bn in the review period of the previous fiscal year. This is mainly due to reduced tax contributions from government-owned enterprises and public limited companies.

Institutional income tax refers to the tax paid by companies and institutions to the government. If these entities generate higher profits, their tax contributions typically increase and vice versa.  Total income tax collection over the first six months of  2024/25 increased by 2.47 percent to Rs 139.2bn.  Data shows although private limited companies have shown a significant increase in tax contributions, the decline in payments from government entities and public limited companies has impacted overall institutional tax collection.

According to the mid-term review of the fiscal budget, tax contributions by government companies fell by 18.15 percent to Rs 3.58bn, while those from public limited companies dropped by a whopping 35.29 percent to Rs 26.51. In the review period of the previous fiscal year, government companies and public limited companies had contributed Rs 4.38bn and Rs 40.51bn as income tax to state coffers. 

Income tax contribution by private limited companies, however, grew by 36.67 percent to Rs 26.46bn. Likewise, such contributions by other companies increased by 7.91 percent to Rs 7.53bn. Individual income tax collection increased by 21.18 percent to Rs 50.99bn, while income tax from investment also went up by 10.74 percent to Rs 27.37bn.  Finance ministry officials say the decline in institutional income tax collection is largely due to reduced revenues in the telecommunications sector. Additionally, the decrease in earnings of government institutions and public limited companies has also contributed to this trend. 

Revenue of telecom companies have been consistently on the decline over the past few years due mainly to reduction in revenue from international calling. Similarly, the net profit of banks decreased by 4.62 percent in the second quarter of the current fiscal year. Financial reports for the second quarter of 2024/25 shows that out of 20 commercial banks in the country, only 11 reported growth in profit. 

Despite high liquidity in banks, banks have not been struggling to extend credit. Slow credit growth and rising non-performing loan (NPL) levels have hit both revenue and profitability of banks. Interest income of Class ‘A’ banks, for example, fell by 14.7 percent in the first half of 2024/25.