Cabinet okays Rs70 billion tax on bank profits

The federal cabinet has granted approval to promulgation of an Income Tax Ordinance for bringing changes in Advance Deposit Ratio (ADR) of banks with expectation to generate an additional Rs70-75 billion by end of December 2024.

Sources have confirmed that the federal cabinet has approved an ordinance on income tax targeting the banking sector, although the President’s approval is still awaited for promulgation. Once signed, the ordinance will introduce key changes in the taxation of profits generated by banks from investments in government securities.

Under the proposed ordinance, the method of calculating profits based on the Advance to Deposit Ratio (ADR) will shift from a range of ratios to a fixed maximum slab. The tax rate for the banking sector will rise from 39% to 44%, with banks expected to contribute around Rs. 75 billion in taxes.

As of November 29, 2024, the ADR in the banking sector has reached nearly 48%. In the past, profits were taxed based on different slabs, but the new ordinance will establish a uniform 44% tax rate on profits derived from government securities.

Prime Minister Shehbaz Sharif had earlier set up a high-level committee, led by Deputy Prime Minister Ishaq Dar to explore taxation methods for bank profits from such investments. The committee includes the Minister for Finance, the Law Minister, and other key officials.

The committee’s tasks involve reviewing the existing fiscal measures for the banking sector, considering alternative tax schemes, engaging with the banking sector for consensus, and finalizing recommendations to secure government revenue collection by December 31, 2024. It is also responsible for suggesting non-fiscal measures to encourage increased private sector advances.

This ordinance represents a significant step in the government’s ongoing efforts to enhance revenue collection from the banking sector and improve the country’s fiscal health.