Banks in Pakistan have called upon the government to restore the original tax treatment on bad debts as part of their proposals for the upcoming budget 2025–26.
According to documents submitted to the Federal Board of Revenue (FBR), the banking sector is requesting a re-evaluation of recent amendments that limit tax deductions related to loan losses and bad debts, particularly in the context of the implementation of IFRS 9.
Effective January 1, 2024, the State Bank of Pakistan (SBP) mandated the adoption of International Financial Reporting Standard 9 (IFRS 9) for all banks. This new framework introduced changes in how bad debts and credit losses are recognized. In response, the Finance Act 2024 made amendments to maintain the status quo by disallowing certain deductions.
Under the current tax law, provisions for bad debts classified as ‘sub-standard’ and ‘doubtful’ under SBP’s Prudential Regulations are not eligible for tax deductions until those debts are officially reclassified as ‘loss’. Furthermore, any provisions for advances, off-balance sheet items, or financial assets—whether performing or non-performing—classified under Stage I, II, or III of the Expected Credit Loss (ECL) model in IFRS 9 are not deductible.
The banks argue that this treatment creates a discrepancy between accounting standards and tax regulations. While IFRS 9 requires timely recognition of credit risk, the tax laws delay the recognition of bad debts for deduction purposes. Consequently, the banks propose that any loan losses recorded through the Profit and Loss account or directly in equity under IFRS 9 should be treated as allowable expenses for tax purposes.
The sector believes that aligning the tax treatment with the actual financial reporting of bad debts will reduce administrative hurdles and ongoing litigation. Given that the banking industry operates under a schedular tax regime based on audited financial statements prepared in line with SBP guidelines, the current system introduces unnecessary complexity and compliance burdens.
By restoring the original tax framework for bad debts, banks argue that they will be better positioned to reflect true financial health and efficiently manage risk, while also contributing more transparently to the national tax system. The proposal, if accepted, could lead to fewer disputes and a more predictable tax environment for the banking sector.