Cabinet removes 15% additional tax on banks

Islamabad:

The federal cabinet on Friday approved a decree to scrap the 15 percent surcharge on profits banks make by lending to the government, but raised their regular income tax to 44 percent to largely recoup tax losses.

Led by Prime Minister Shehbaz Sharif, the cabinet has given legal cover to the agreement reached between the Pakistan Bankers Association and the federal government on the issue of advance tax of up to 15%, according to cabinet members.

Deputy Prime Minister Ishaq Dar negotiated well and managed to recover most of the losses by increasing the tax rate to 44%. In June, the government was to scrap the 15% tax without getting anything in return.

The cabinet approved the promulgation of the Income Tax Amendment Ordinance 2024, four days before the closure of the financial year for banks. The decree protects past and closed transactions.

While Prime Minister Sharif approved the agreement with the banks, he did nothing to reduce the tax burden on the salaried class who paid a colossal amount of Rs 198 billion in just five months.

Under the changes, it has been proposed to abolish the additional income tax of 10-15% on banks. Banks were obliged to pay the tax if their lending to the state exceeded a certain limit.

In return, the standard income tax for banks has risen from 39% to 44% for the current tax year ending December 31. For tax year 2026, from January 1, the rate will drop to 43%. For tax year 2027 and beyond, the rate will be 42%, according to the draft decree.

The increase in the tax rate to 44% is expected to give Rs 65 billion to the government before Wednesday. The decree is expected to be issued by President Asif Ali Zardari within two days.

The Federal Board of Revenue (FBR) is facing a revenue shortfall and has collected Rs 5.08 trillion as of December 27. It is required to raise Rs 6.009 trillion by December 31 to meet an International Monetary Fund (IMF) condition. “It is a sensible deal and we want to encourage capital formation,” Finance Minister Ali Pervez Malik said. He added that the government did not want to lend directly to the private sector, hoping that banks would voluntarily do such lending.

The federal government had in June this year tried to waive the 15% tax, but the move was thwarted after a story appeared in The Express Tribune. After that, the banks went on an aggressive private lending spree to avoid the tax.

The government did not introduce legal changes through the Tax Laws Amendment Bill, which is currently being debated in the National Assembly.

To give relief to the banks, the government reached an agreement with the Pakistan Banks Association. Prime Minister Sharif formed a committee earlier this month to resolve the issue.

Ishaq Dar chaired the committee, which decided to scrap the 15% tax in exchange for raising the regular income tax to 44%. But banks would still get a bonus as a full recovery was estimated at more than 45 percent, government sources said.

The Government has made changes to Part One of the First Schedule and Rule 6c of the Seventh Schedule to the Income Tax Ordinance. It also gave legal cover to the waiver of additional income tax of 15% for the year 2022, which the government had earlier done through a notification. Amendment has been made to Article 6C to provide legal cover. The government had earlier suspended the additional tax for 2023, but it came back into effect in January 2024.

To abolish the 15% tax, two more provisions were added to the Seventh Schedule.

“Provided that from the tax year 2025 onwards, the profits and gains of a banking company shall be subject to rates of tax in accordance with Division II of Part 1 of the First Schedule and nothing contained in this sub-rule shall apply to the calculation of part or all of the tax liability of a banking company”, the draft decree states.

“For the avoidance of doubt, it is clarified that the term gross advances and deposits referred to in this sub-rule for the calculation of the ratio of gross advances to deposits is the amount of gross advances and deposits at the end of the accounting period and disclosed in the annual audited accounts,” according to another arrangement.

The additional income tax was introduced in 2022 to encourage banks to lend to industries instead of providing secured loans to the government. Banks often avoided the levy by rescheduling their loans to the government shortly before the December 31 tax payment deadline. The standard income tax rate for banks is 39%. However, if a bank’s gross ADR was up to 40%, the government charged a 55% tax on investments in government debt. For ADR 40-50%, the tax rate was 49% and if ADR exceeded 50%, the normal rate of 39% was to be applied.