Prime Minister Shehbaz Sharif intervened on Thursday, directing authorities not to provide any relief to the banks, potentially leading to the continuation of the 15% additional income tax on banks. This decision is expected to be ratified as the government finalizes new tax proposals to be announced during the approval of the Budget 2024-25.
The intervention came in response to the government’s consideration of providing tax relief to banks, which sparked widespread backlash. The banking industry has seen significant profits due to the infusion of funds from a financially constrained finance ministry, prompting concerns about further alleviating tax burdens for the banks.
Deputy Prime Minister Ishaq Dar raised the issue with the prime minister, advising against the proposed 15% income tax relief to the banks. The government’s plan to borrow Rs24 trillion from commercial banks outside the budget to repay maturing loans has contributed to the ongoing debate. Additionally, concerns have been raised about the government’s intention to spend Rs9.8 trillion from the budget on interest payments to banks and foreign creditors.
Opposing the tax, banks argue that the 15% additional income tax on the amount they lend to the federal government is unjust. The potential abolition of this tax, as previously discussed, could have entailed approximately Rs60 billion in benefits to a sector that earned Rs960 billion in profits last year.
Pl watch video and subscribe to the channel.
The sources disclosed that the proposed move would have particularly benefited one Islamic bank, three larger conventional banks, and one small conventional bank. Furthermore, the tax relief issue, despite severe economic challenges, has also been a point of contention within the industry.
The government’s decision to uphold the 15% additional income tax on lending to the government is expected to prompt discussions on addressing loopholes exploited by banks to avoid the tax. The government may explore implementing measures to curb such practices, potentially through a Statutory Regulatory Order, as seen with the suspension of the ADR tax last year.
If retained, the tax would contribute to the broader discussion around the banks’ income tax rates, which are intricately tied to the Advances-to-Deposit Ratio (ADR). This ratio determines the income tax rate banks are subjected to based on their government debt investments. The current average ADR of banks stands at approximately 41.8%, implying a 10% income tax, and the specific ADRs of individual banks will be a crucial factor in assessing the impact of the potential tax retention.
