Karachi, December 29, 2024 – Pakistan’s banks face a pivotal moment as it navigates the fallout from recent tax reforms. Analysts at Arif Habib Limited highlighted on Sunday that while the removal of the Advance to Deposit Ratio (ADR) tax on income from government securities brings relief, it comes at the cost of a higher corporate tax burden.
The federal cabinet’s approval of a new ordinance has eliminated the ADR tax, previously levied at rates between 10-16%, but has simultaneously raised the corporate income tax rate for banks. This restructuring has far-reaching implications for the sector’s profitability and operational dynamics.
Corporate Tax Hike: A Double-Edged Sword
The elimination of the ADR tax marks a significant policy shift, sparing banks from additional levies tied to government securities. However, this relief is offset by a corporate tax increase from 39% to 44% for the fiscal year ending December 31, 2024. While the government plans a gradual reduction in the tax rate—dropping to 43% in 2026 and 42% in 2027—the immediate impact on banking profitability cannot be overlooked.
Sector analysts project a 10% decline in banking sector earnings for 2024, followed by an 8% reduction in 2025 and 6% in 2026. This adjustment translates to an estimated PKR 62-65 billion in additional revenue for the government, bolstering its tax collection efforts amid fiscal constraints.
Clarity Amidst Turbulence
Despite the financial strain posed by higher taxes, the removal of the ADR tax brings a sense of stability to the sector. For over two years, banks have grappled with fluctuating tax policies, often prioritizing ADR compliance to evade punitive taxes. With this obstacle removed, banks can now concentrate on their core operations and strategic growth.
This clarity is especially critical for investors, as it provides a foundation for more predictable earnings and financial trajectories. While the short-term impact on earnings per share (EPS) and return on equity (ROE) is negative—ROE estimates have been adjusted downward from 20% to 18.8%—analysts believe the sector is well-positioned to adapt.
A Roadmap for Optimism
The government’s phased reduction in corporate tax rates offers a glimmer of hope for the banking sector. Coupled with the elimination of ADR-related pressures, this reform could empower banks to optimize their lending portfolios and recalibrate their strategies for sustained growth.
As the sector adjusts to these changes, the focus will likely shift toward efficiency and innovation, ensuring resilience in the face of evolving fiscal policies. While challenges persist, the long-term outlook remains cautiously optimistic, supported by newfound regulatory clarity and a gradual easing of tax burdens.