Cabinet removes 15% additional tax on banks

The federal cabinet on Friday approved the promulgation of an ordinance to abolish 15% additional tax on profits banks make by giving loans to the government but increased their standard income tax to 44% to largely recoup tax losses.Headed by Prime Minister Shehbaz Sharif, the cabinet gave legal cover to an agreement reached between Pakistan Banks Association and the federal government on the issue of up to 15% advance-to-deposit tax, according to the cabinet members.Deputy PM Ishaq Dar negotiated well and managed to recover most of the losses by increasing the tax rate to 44%. In June, the government was going to abolish 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 fiscal year for banks. The ordinance protects the past and closed transactions.While PM Sharif approved the agreement with banks, he did not do anything to ease the tax burden of salaried class that paid a colossal amount of Rs198 billion in just five months.According to the changes, the 10-15% additional income tax on banks has been proposed to be abolished. Banks were required to pay the tax, if their lending to the government exceeded a certain threshold.In return, the standard income tax for banks has been increased from 39% to 44% for the current tax year ending on December 31. For tax year 2026, starting from January 1, the rate will go down to 43%. For tax year 2027 and onwards, the rate will be 42%, according to the draft ordinance.The increase in tax rate to 44% is expected to give Rs65 billion to the government before Wednesday. The ordinance is expected to be issued by President Asif Ali Zardari within a couple of days.The Federal Board of Revenue (FBR) is facing revenue shortfall and collected Rs5.08 trillion as of December 27. It is required to collect Rs6.009 trillion by December 31 to meet a condition of the International Monetary Fund (IMF). “It is a reasonable deal and we want to encourage capital formation,” said Minister of State for Finance Ali Pervaiz Malik. 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 frustrated when a story appeared in The Express Tribune. After that, banks went on an aggressive private lending spree to avoid the tax.The government did not bring legal changes through the Tax Laws Amendment Bill, currently under discussion in the National Assembly.To give relief to banks, the government reached an understanding with Pakistan Banks Association. PM Sharif constituted a committee earlier this month to resolve the issue.Ishaq Dar chaired the committee, which decided to abolish the 15% tax in return for increasing the standard income tax to 44%. However, banks would still get a bonanza, as the full recovery was estimated at over 45% rate, said government sources.The government made changes in Part One of the First Schedule and Rule 6c of the Seventh Schedule of the Income Tax Ordinance. It also provided legal cover to the waiver of 15% additional income tax for the year 2022, which the government had earlier done through a notification. The amendment has been made in Rule 6C to provide legal cover. The government had earlier suspended the additional tax for 2023, but it became effective again in January 2024.To abolish the 15% tax, two more provisions have been added to the Seventh Schedule.”Provided that from tax year 2025 and onwards, profits and gains of a banking company shall be subjected to tax rates under Division II of Part 1 to the First Schedule and nothing contained in this sub-rule shall apply to compute part or whole of the tax liability of a banking company,” said the draft ordinance.”For removal of doubt, it is clarified that the term gross advances and deposit referred to in this sub-rule for the purpose of computing gross advances-to-deposit ratio shall be the amount of gross advances and deposit at the end of the accounting period and disclosed in the annual audited accounts,” according to another provision.The additional income tax was introduced in 2022 to encourage banks to lend to industries instead of extending safe loans to the government. Banks often avoided the levy by readjusting their lending to the government just before the tax payment deadline of December 31. The normal income tax rate for banks is 39%. However, if a bank’s gross ADR was up to 40%, the government charged 55% tax on investment in government debt. For the ADR of 40-50%, the tax rate was 49% and if the ADR exceeds 50%, the normal 39% rate was to be applied.