Islamabad: Under which the 15% additional tax on the profits of banks earned by lending to the government will be abolished, while to compensate for the reduction in revenues, their standard income tax rate has been increased by 5% to 44%.
The federal cabinet, headed by Prime Minister Shehbaz Sharif, provided legal protection to the agreement reached between the Pakistan Banks Association and the federal government on the issue of 15% advance to deposit tax. It approved the issuance of the Income Tax Amendment Ordinance 2024 four days before the end of the financial year. The ordinance provides protection for past closed transactions.
While Prime Minister Shehbaz Sharif approved the deal with the banks, he did nothing to ease the tax burden on the salaried class, which paid Rs198 billion in income tax in just five months. Pakistan’s powerful commercial banks have been given bonuses and a free hand to lend 100 percent of their balance sheets to the government without fear of being penalized by additional taxes.
The changes propose eliminating the 10 to 15 percent additional income tax on banks. Banks were required to pay this tax if their debt to the government exceeded a certain threshold. In return, the standard income tax rate for banks has been increased from 39% to 44% for the tax year ending December 31. The bank rate will be reduced to 43% for the tax year 2026, starting January 1.
According to the draft ordinance, the tax rate for the tax year 2027 and beyond will be 42 percent. The 44 percent increase in the tax rate is expected to earn the government Rs65 billion in income tax before Wednesday. President Asif Zardari is expected to issue an ordinance in a day or two to secure the payments of Rs65 billion. It is worth noting that the FBR is facing a huge revenue shortfall and has collected Rs5.08 trillion by December 27.
To meet the IMF condition, Rs6.009 trillion needs to be collected by December 31. Minister of State for Finance Ali Pervez Malik claimed that this is a reasonable agreement and we want to encourage investment. The government does not want to give direct loans to the private sector, it is hoped that banks will voluntarily give private loans.
However, the situation tells a different story. The federal government had quietly tried to waive 15 percent tax in June this year, but it got into trouble when the news was published in the Express Tribune. Banks then tried to aggressively extend private loans to avoid the 15% tax. The government did not make these legal changes through the Tax Laws Amendment Bill, which is currently under discussion in the National Assembly.
The government moved at lightning speed to provide relief to commercial banks and reached an understanding with the Pakistan Banks Association to adjust the income tax rate. Prime Minister Shehbaz Sharif had earlier this month formed a committee to resolve the issue of the 15% additional income tax on banks. Deputy Prime Minister Ishaq Dar headed the committee, which decided to abolish the 15% tax in exchange for increasing the standard income tax rate to 44%.
According to government sources, banks will still get extraordinary profits as the full recovery was estimated at a rate of more than 45%. The government has made changes to Part I and Rule 6C of the First Schedule of the Seventh Schedule of the Income Tax Ordinance to adjust the rates. It has also provided legal cover to the 15% additional income tax exemption for 2022, which the government had earlier done through a notification. Rule 6C has been amended to provide legal protection.
The government had earlier suspended the additional tax for 2023 due to pressure from banks, but it was re-imposed in January 2024. “Provided that from and after the tax year 2025, the profits and gains of a banking company shall be subject to the rate of tax under Division II of Part 1 of the First Schedule and nothing contained in this sub-rule shall apply to the computation of any part or whole of the tax liability of any person.
According to the draft ordinance, a banking company. Another provision is made to clarify for the avoidance of doubt that the term gross advances and deposits given in this sub-rule, for the purpose of computing the gross advances to deposit ratio, shall be the amount of gross advances and deposits as at the end of the accounting period and shall be disclosed.
The additional income tax was introduced in 2022 to encourage banks to lend to industries instead of giving secured loans to the government. Banks often avoided the tax by re-adjusting their loans to the government before the tax payment deadline of December 31.
General income tax for banks The rate is 39%. However, if the bank’s overall ADR was up to 40%, the government imposed a 55% income tax on investment in government debt. For ADR of 40-50%, the tax rate was 49% and if the ADR was more than 50%, the normal 39% rate was to be applied.
Work on the balance sheets of banks by Tola Associates revealed that out of 27 institutions, at least 13 institutions were liable to pay an additional 15% income tax if they did not adjust their advances by December 31.
Their ADR ranged from 21.9% to 39.7%, making them liable to pay an additional 15% income tax. Tola Associates has determined the additional tax liability based on the banks’ published audited financial statements for the tax year 2024 and estimated their tax liabilities for 2025.
