No Tax For Banks, Only for the Middle Class

Finance Minister to seek National Assembly approval on Friday; firm on not reversing the tax hike for salaried individuals.

6/27/20243 min read

No Tax For Banks, Only for the Middle Class.

Finance Minister to seek National Assembly approval on Friday; firm on not reversing the tax hike for salaried individuals.

The government may eliminate up to a 15% additional tax on bank profits by providing loans to the cash strapped finance ministry, despite serious economic constraints. This action could increase a sector that made Rs960 billion in profits last year by about Rs60 billion.

The federal government and commercial banks have agreed to eliminate the Advances-to-Deposit rate-based income tax, according to sources in the banking sector and senior government officials. It is probable that the Income Tax Ordinance would undergo these legal modifications via the Finance Act 2024.

The Finance Act is scheduled to be presented to the National Assembly for approval on Friday by Finance Minister Muhammad Aurangzeb, a former banker.
The government's relief of almost Rs60 billion to one of the wealthiest sectors is unprecedented, especially in light of the taxes it has imposed on almost all consumable goods, which disproportionately hit the poor and middle-class taxpayers. A net profit of about Rs960 billion was earned by 27 banks in 2023.

The government intends to remove the bank tax, but it is not prepared to undo the large tax hike for the salaried class, which will now likely pay over Rs435 billion in income tax.

According to sources, military authorities have also asked the finance minister to reevaluate the flat 15% capital gains tax on property sales as well as the anticipated tax rise for the salaried class.

In order to fix a loophole that allowed banks to evade the tax, the Federal Board of Revenue (FBR) first suggested tightening the supplementary income tax law for banks. In order to encourage banks to lend to the industry rather than the government, an extra income tax was implemented in 2022.

Readjusting their loans to the government right before the December 31 tax payment deadline allows banks to frequently dodge the charge. Instead of determining the tax liability on the last day of the year, the FBR suggested basing it on the average yearly lending to the government. With this modification, the government might have collected an extra Rs60 billion the next year.
But the government intends to totally eliminate the income tax rather than close the loophole.
According to sources, the banks and FBR came to an agreement wherein the banks would pay the advance income tax for the first quarter of the upcoming fiscal year by June 30. In addition, they will cover the super tax in 2023 and 2024. The government has consented to remove the extra tax in exchange.

Nevertheless, any advance or full payment cannot be used as a substitute for the 15% tax because the advance income tax, the super tax, and the ADR additional income tax of up to 15% are three separate taxes.
Banks earned a gross profit of Rs1.6 trillion and paid Rs960 billion in income taxes in the 2023 fiscal year.

Bank pressure forced the government to halt the additional tax for 2023, but in January 2024 it resumed. Banks typically pay an income tax rate of 39%. On the other hand, investments in government debt are subject to a 55% income tax by the government if a bank's gross Advances-to-Deposit Ratio (ADR) is up to 40%. The rate is 49% for ADRs between 40 and 50%, and it is 39% normally for ADRs over 50%.

Despite lower rates at the time, the FBR projected in June 2022 that the new tax would bring in an annual revenue of Rs25 billion.
With the average ADR of the banks being around to 42%, an income tax of 10% would be due.

The banking industry has opposed the ADR tax, claiming it is unfair because it does not compel borrowing by the government. The government intends to borrow Rs24 trillion from banks for the upcoming fiscal year in order to pay down its current debt.

Because direct borrowing from the State Bank of Pakistan was prohibited by the International Monetary Fund, the finance ministry now borrows the same amount through the banking industry, which results in an average interest rate that is 1.5% higher than what would have been paid to the central bank.

According to Pakistan Banks Association (PBA) Secretary General Muneer Kamal, up to 84% of bank balance sheets include government debt. Kamal made this claim in a letter to the FBR. The PBA contended that the ADR ought to stay under the jurisdiction of the SBP and not be utilised as a tax tool.

The 2022 statistics demonstrated that the ADR tax did not produce a durable increase in banking sector advances, contrary to the PBA's claim that it was only a revenue collection instrument. The government has set a tax collection target of Rs12.97 trillion for the upcoming fiscal year, which calls for an extraordinary 40% growth in just one year.